Application of Fixed Interest Rate Protocols in Decentralized Finance

With the integration of global financial markets, the demand for a stable financial ecosystem is increasing day by day. As early as more than 20 years ago, the European Parliament recognized the necessity of enhancing price stability in a working document for the first time:

"The integration of global financial markets has increased the pressure of external factors in determining domestic monetary policy. Although there are differences among major central banks in the specific methods of implementing monetary policy, there is a broad consensus on the fundamentals of pursuing price stability and financial market stability."

The key word here is integration. Analogous to the cryptocurrency industry, this field has developed to a certain extent, with DeFi becoming the industry standard for protocols. Blockchain technology is often likened to financial Lego, allowing developers to integrate with other protocols to create innovative financial products. However, this has not changed the inherently highly volatile nature of the crypto industry.

Stable interest rates are an important aspect of the financial ecosystem. While the cryptocurrency industry has a large number of lending protocols and yield aggregators offering interest rates, fixed-rate products are relatively scarce.

With the popularity of yield farming and the growing demand for more stable interest rates, some DeFi protocols are attempting to address this issue and become representatives of reliability. This has given rise to a new class of protocols known as fixed interest rate protocol (FIRP).

Unlike traditional financial fixed deposits ( or bonds ), FIRP utilizes its token structure to provide different incentives to maintain the Intrerest Rate. The FIRP ecosystem can be roughly divided into two categories: lending/borrowing yield aggregators.

Even within this category, FIRP presents diversity. Each protocol has its own "fixed" interest rate method, leading to different use cases. Some offer "fixed rates" or "fixed interest yield", while others create an environment conducive to fixed rates.

The following introduces three examples:

1. Overview of Fixed Interest Rate Protocol

Yield

Yield is a decentralized lending system that uses a new type of token called "fyTokens" to provide fixed-rate lending and interest rate markets. The current version includes fyTokens of the DAI stablecoin, called "fyDai", which allows for fully collateralized fixed-rate lending of DAI.

fyDai is an ERC20 token based on Ethereum that can be redeemed for DAI after a predetermined maturity date. It is similar to a zero-coupon bond or a discount bond.

Minting or selling fyDai requires providing ETH collateral, following the same 150% collateral ratio as MakerDao. Lenders purchase fyDai, with pricing typically below DAI. The difference between the discounted value and the maturity value of 1 DAI( represents the lending rate or borrowing rate.

The value of fyDai reflects the borrowing Intrerest Rate and can also be traded separately as a bond instrument. This is possible because there are multiple "series" of fyDai, each with different maturity dates.

The system is closely integrated with Maker. Maker users can "migrate" the DAI vault to the fyDai vault, locking in a fixed Intrerest Rate for a certain period, and then return to the Maker vault upon expiration.

The interest rate is determined by the market valuation of fyDai. For lenders, the higher the fyDai valuation, the lower the interest rate earned at maturity. For borrowers, the higher the fyDai valuation, the lower the borrowing interest rate. Both parties can decide the interest rate based on the time of purchasing fyDai.

![])https://img-cdn.gateio.im/webp-social/moments-79c7c9d6c40d71045a04b3e82b338808.webp(

) Saffron.Finance

Saffron Finance is a decentralized yield aggregator protocol and one of the first protocols to utilize a tranching system. This system consists of components created by liquidity pools, categorized by characteristics such as risk and maturity time, to cater to different investors.

Users can choose different investment portfolios based on their risk preferences. Saffron Finance has created an internal insurance system where high-risk investors provide insurance for low-risk investors.

The native token SFI of Saffron Finance is mainly used to access high-yield tier A. SFI can also be used to earn liquidity pool rewards and for protocol governance voting.

The tiered system allows for the segmentation of returns, creating different interest rates for different liquidity pools. In Saffron Finance, the A tier return is 10 times that of the AA tier. The S tier is used to balance the interest rates between the A tier and the AA tier, maintaining a fixed interest rate difference of 10 times between the two.

![]###https://img-cdn.gateio.im/webp-social/moments-07565e392e191bfd7306890399b2f510.webp(

) Horizon Finance

Horizon allows users to create their own markets based on game theory principles. Users can submit collateral to the liquidity pool and then lend it to lending protocols such as Compound.

To provide a fixed Intrerest Rate, Horizon invites users to submit sealed bids for a fixed Intrerest Rate ### as the yield cap ( or a floating rate in each round. Bids are disclosed after each round, forming a bidding order book. The protocol will sort the bids from lowest to highest Intrerest Rate, with the variable yields of the lending protocol allocated from low to high, and excess income flowing into the floating pool.

All bids will be publicly displayed on the Horizon website, allowing users to actively compete and determine the most popular Intrerest Rate. Users are free to modify their bids, including switching to a floating Intrerest Rate. Horizon is essentially an Intrerest Rate prediction protocol.

![])https://img-cdn.gateio.im/webp-social/moments-a3450c22124801f1548116c65c8bd545.webp(

2. How to choose FIRP?

FIRP cannot be simply classified for comparison. There is a significant difference between lending protocols and yield aggregation protocols.

Before studying indicators such as interest rate competitiveness, one should first examine the ability of FIRP to maintain a "fixed rate." The operation of FIRP has three decisive characteristics:

1. Commitment Type: Different protocols make different commitments. Understanding the commitment types can help users choose the right products.

2. Methods to Maintain Commitments: Different commitments require different maintenance methods. Understanding the maintenance methods can determine the reliability of the protocol.

3. Degree of dependence on external factors: Developing mechanisms that influence user behavior is important for all FIRP. Identifying these characteristics can help understand the extent to which the protocol's commitments are affected by external factors.

Considering these criteria, there is no absolute best choice. Ultimately, it depends on individual risk preference, the type of financial instruments required, and confidence in the protocol mechanisms. This industry is still in its early stages, and many protocols have yet to be tested by the market.

![])https://img-cdn.gateio.im/webp-social/moments-3ab7a901e9edac5e41e34ae1d5b81c94.webp(

3. Related Risks

One of the most important risks is the ability of FIRP to provide a fixed Intrerest Rate. These protocols mostly rely on external agents or other users actively participating to drive market functionality.

If the community is not active, or if the user structure and liquidity are unbalanced ), such as when there are more lenders than borrowers in Yield, or when there are more participants in the A tranche than in the AA tranche of Saffron Finance (, FIRP may not be able to maintain a fixed Intrerest Rate.

![])https://img-cdn.gateio.im/webp-social/moments-b45602fcc0ff638d079d724df4954c47.webp(

4. Other protocols worth paying attention to

• Notional: Provide fixed interest rate and fixed term lending for crypto assets, creating a zero-coupon bond system through fCash.

• BarnBridge: Utilizes a tiered system to implement yield-based products and also offers volatility derivatives.

• 88mph: A yield aggregator that maintains a fixed interest rate by introducing floating interest rate bonds and a unique tokenomic structure.

• Pendle: Allows users to tokenize future yield and sell it in the form of prepaid cash, effectively locking in the Intrerest Rate.

![])https://img-cdn.gateio.im/webp-social/moments-00b15519c51cf9d30d6a7a5d4370e9af.webp(

5. Summary

FIRP is a new type of protocol that will become an important force in the Decentralized Finance field. They demonstrate the potential for the combination of DeFi with traditional fixed income instruments.

This field is thriving, offering unique products and services. We have seen protocols that combine price prediction and interest rate aggregation; future protocols for yield tokenization will allow anyone to create and sell their own bonds.

As the field develops, it is expected that more institutions will be interested in FIRP products. Fixed income instruments are common in traditional finance. However, against the backdrop of rising debt levels and inflation, as well as the declining value of the dollar, FIRP may offer more reliable yields.

![])https://img-cdn.gateio.im/webp-social/moments-e5f2bba9bf594a31498a045e756f66dc.webp(