A new concept for zero-coupon cryptocurrency bonds has been published by a research partner from prominent crypto investment firm, Paradigm.
The project, named Yield Protocol, enables this by issuing tokens which settle on a specified future date, based on the value of a specific asset.
These tokens, dubbed “yTokens”, are based on the Ethereum network, and secured via over-collateralization with another asset.
By buying or selling these tokens, users can effectively lend or borrow the target asset, for a fixed period of time (determined by the maturity date).
yTokens have the potential to be issued for almost any Ethereum-based asset, with on-chain cash settlements. These will be freely tradable on the open market.
Robinson gives us an excellent example on Twitter, for how a yToken would be issued:
yTokens are like synthetics with expiration dates. For example, a yToken might entitle the holder to exactly 1 DAI on December 31, 2019, secured by ETH collateral.
To “borrow” DAI for that period, you deposit ETH, mint these yDAI, and sell them.
To “lend” DAI, you buy yDAI.
— Dan Robinson (@danrobinson) September 5, 2019
Further use cases
In addition to providing a novel way to obtain short or long exposure on an asset with a fixed timeframe, the project could be used as an interest rate oracle.
This rate can be derived from the difference between the price of a yToken and the target asset’s face value – a variance which arises from the time value of money.
These rates could be leveraged by existing DeFi platforms such as MakerDAO and Compound Finance, which may benefit from using an on-chain oracle rather than calculating their own interest rates.
Yield Protocol islready gathering steam
Despite only being published a few days ago, the concept has sparked discussion from the wider crypto community, including notable figures such as Vitalik Buterin – the founder of Ethereum – himself.
You can get perpetuity back by making a contract that automatically uses a Dutch auction to trade year N tokens for year N+1 tokens before year N ends.
— Vitalik Non-giver of Ether (@VitalikButerin) September 7, 2019
