DeFi project aims to attract TradFi investors by lowering risks
Long-term investors who can solve the liquidity problem of decentralized finance are eagerly waiting for the cryptocurrency market to mature.
The decentralized finance (DeFi) projects offer attractive investment opportunities, but the cryptocurrency industry’s highly volatile nature causes investors to hesitate. Investors who tend to pick traditional platforms would like to have more clarity and stability on the return of their investments. The crypto market, on the other hand, favors speculation and short-term movements. When the market matures to the point where it offers predictable and low-risk return models, onboarding more traditional investors will follow.
DeFi platforms work with liquidity pools, which are collections of digital assets locked on blockchain by their owners, and offer a yield to investors depending on the accumulated asset. Users can use their tokens to profit from a share of the fees collected from trade activity in the pool. This financial model produces a local interest rate for each pool instead of a fixed one, alienating long-term investors who seek more stable yields. Changing this model can only happen through applying traditional financial market clearing mechanisms to the blockchain and offering new forms of transactions in the cryptocurrency market.
Supply and demand-based yield model
Secured Finance, an interbank-grade DeFi protocol for fixed-income markets developed by Swiss company Secured Finance AG, aims to provide a predictable and stable investment environment by offering an innovative order book system based on supply and demand in the market. It fully utilizes cryptocurrencies and overcomes traditional finance constraints. According to Masa Kikuchi, the founder and CEO of Secured Finance AG, using an order book instead of a pool-based system reflects the market's supply and demand more accurately. “This leads to market prices being based on the actual actions of market participants, resulting in a more efficient market," the firm’s CEO added.
Secured Finance's system applies traditional financial market clearing mechanisms to the blockchain. Placing a clearing counterparty between lenders and borrowers increases the transparency and efficiency of transactions and maintains liquidity in the secondary market. It also maintains liquidity in both the primary and secondary markets.
Secured Finance aims to create a new form of DeFi market based on Bitcoin (BTC), Ethereum (ETH), USDC, and Filecoin (FIL). It aims to solve the constraints of gas costs and processing capabilities using a novel approach called lazy evaluation. Secured Finance enables efficient operation of the order book while keeping costs down. Developers also monitor Ethereum's future upgrades and scaling solutions to optimize their system.
Reshaping the financial industry
The creators of Secured Finance stressed that they set out to overcome the constraints of traditional financial markets and fully realize the potential of cryptocurrencies. The firm's developers are building a Zero-coupon Discount Bond market based on order books and creating a yield curve to achieve this goal. A zero-coupon bond is an interest-free debt security instrument and provides a more stable investment environment.
"Our platform significantly enhances market stability by introducing a fixed interest rate market and bond settlement system to the cryptocurrency market,” the CEO explained. “This enables long-term investment strategies and increases the market's maturity.”
The concept of bond investment is a crucial step for onboarding traditional investors. It has the potential to attract institutional investors handling large sizes with price stability and low risks associated with interest rates. By creating a reliable trading environment, Secured Finance hopes to contribute to the rapid growth of the DeFi industry. The firm also expects its ideas to be accepted as a step toward reshaping the financial sector and creating new opportunities for everyone.