Copra: Docs


Propositions for Internet Corporate Bonds

The Rise of 'The Internet Bond' Asset Class

Generalised mapping of asset classes across TradFi and DeFi
As The Internet Bond (first coined by Collin Myers and Mara Schmiedt), staked ETH is the sovereign bond of DeFi establishing its ‘risk-free’ yield anchor. It is the first organic yield of DeFi and will lead the wave of other DeFi yield product development.
In TradFi, corporate bonds broaden the risk-reward spectrum of fixed-income asset class beyond government bonds. In comparison, in DeFi, the spectrum remains narrow with only staked ETH and few other PoS yield mechanisms. So, what would intuitively be next as the spectrum of DeFi organic yield product widens?
The answer: 'The Internet Corporate Bond', or in other words, debt for protocols. If in TradFi we can purchase both McDonald's stocks and bonds, why can we only purchase Uniswap tokens but not Uniswap 'bonds'?
One might argue that LP-ing on Uniswap pools is that 'bond.' However, LP-ing offers siloed pool-level exposure analogous to purchasing a specific McDonald's branch franchise, with variable yield based on that branch performance. LPing does not provide the institutional-level exposure that a Uniswap 'bond' should offer.
Valued at $300T, the TradFi bond market is 3x the size of the TradFi equity market. If DeFi is the new global financial system to mirror TradFi, it should see many more debt products particularly its version of corporate bonds, especially given that from the $50B DeFi has captured, minimal organic debt yield products are present.

The Case for Protocol-Managed Liquidity

Typical quick decay of TVL post liquidity mining program
To sufficiently incentivize LPs to deposit into each of their pools to grow overall TVL, protocols frequently have offer excessive liquidity mining programs involving direct native token incentives. However, these primarily draw 'mercenary capital,' experienced degen farmers who dump the token rewards and leave with their liquidity immediately after the flow of incentives has dried up.
The consequent sharp downfall in overall TVL and native token prices often does lasting damage to the protocol's reputation and ability to achieve sustainable growth.
In attempts to overcome this issue, projects have resorted to designing their tokenomics in anticipation of 'mercenary capital,' using some variation of extended token locking mechanisms or vesting schedules, rather than focusing on a design that would encourage sustainable protocol growth.
DeFi needs an entirely new and proper way, that is efficient and sustainable, for protocols to raise their much-needed liquidity.
In TradFi, financial institutions shore up liquidity that they can manage themselves mainly by securing debt in their balance sheets. This enables them to increase both user transaction fluidity and their profit margin. A bank secures fixed deposits (liabilities) from its users to be able to instantly disburse loans to borrowers whenever there is an opportunity and takes the interest margin. A payment processor would maintain a certain liquidity buffer to ensure transaction speed on every payment corridor and take a cut for providing this service.
Protocols have very similar needs. However, DeFi is missing an equivalent on-chain vehicle that would finance liquidity that is managed by the protocols themselves and therefore promote growth as well as income efficiently and sustainably.

Existing Issues in Ubiquitous Liquidity Provision Deals

Typical liquidity pool composition dominated by whales who have made liquidity provision deals with a protocol
Liquidity provision deals are known to be commonplace between protocols and whales. However, these deals are plagued with issues.
Firstly, incentives of the deal can generally only be paid in the project's native tokens, limiting the types of whales that would participate. Those who are not keen on equity exposure to the project would not value the native token reward and would either demand a large number of tokens, which they would then be encouraged to sell, or stay away from the deal altogether. Even though many venture capital funds participate in liquidity provision deals, they are generally not preferred as they are not part of their fundamental mandate.
Secondly, there is no way for protocols to self-serve in rearranging liquidity. To be non-custodial, liquidity providers would typically allocate their funds directly to pools as per the protocol's instructions. When protocols need to rearrange the liquidity among their pools, as is often the case, they need to request for the liquidity providers to do this manually.
Finally, some specific deal terms, such as the tenor and the covenant conditions, have to resort to off-chain agreements instead of being enforced in a trustless manner. In some cases, this resulted in a dispute between the parties. Moreover, some protocols have proper on-chain governance and therefore generally can't engage in any off-chain agreement structures.
Given the ubiquity and importance of liquidity provision deals, a smart-contract-based mechanism is needed to solve key issues surrounding them, including the three mentioned above.

Last modified 1mo ago