Yield, a fintech startup is developing a new protocol for the Ethereum network on the issuance of fixed-rate lending and borrowing. In traditional finance, such issuance is called a zero-coupon bond, where the buyer can only cash out once the bond reaches its maturity stage and they are guaranteed to receive a higher amount than what they invested.
Yield’s first product would be called yTokens or yDAI, an ERC-20 token which would be used to issue tokenized zero-coupon bonds. Yield’s CEO Allen Niemerg believes zero-coupon bonds is the need of the hour for Ethereum and it would be a novel primitive which can be further implemented in other systems too.
The Defi ecosystem has emerged as a viable lending and borrowing option for many where people put their crypto in collateral using smart contracts and withdraw loans in stablecoins. The borrower can always take out their collectivized crypto asset, but they are required to return the borrowed loan along with the interest rates. As the popularity and demand for the collectivized loan in defi soared, so did the interest rates.
For example, MakerDAO’s stability fee was at 0.5%at the start of the year and it has peaked to 20.5% by now. Thus, something like fixed-rate borrowing and lending would really help the ecosystem become more accessible and viable.
The zero-coupon bonds would provide the exact future projection about the cost of capital for investors. Niemerg described Yield as,
“a standard for a token that settles based on the value of a target asset on a specified future date, and which is backed by some quantity of a collateral asset.”
Yield became the first company to be incubated by blockchain research firm Paradigm and they also announced a seed funding which will be utilized by the startup to develop their first product called YTokens.
How Do yTokens Work?
yTokens will be an ERC-20 token which would act as a bridge currency for people to access zero-coupon bonds. Users can deposit their collateral in a vault governed by smart contracts and in return mint the yTokens. During the starting phase, users can deposit Ether as collateral and the borrowers can issue these tokens with different redeemable time periods ranging from a week to a month and even a year. These tokens will be fungible and would trade at a floating price.
Once the maturity period of the bond expires the collateralized ETH would be automatically transferred to the vault of the user. The CEO also revealed that they are developing a mechanism that can liquidate uncollateralized vault which could occur due to a sudden drop in the price of the collateralized asset.