- The digital bonds hold the potential for significant advancement and contribute to the ongoing maturation of the cryptocurrency ecosystem.
The Time Value of Money (TVM) depends on the concept of a dollar today being worth more than a dollar in the future. The idea is that money changes over time due to interest, inflation, and the potential for earning a return on investment.
Applying the TVM concept to the crypto markets has proved challenging due to the high volatility of the latter. Even Bitcoin, often called digital gold, is far from being a reliable investment instrument because of notable price ups and downs.
Fortunately, the advent of the fixed interest rate market enables TVM to be applied to crypto. With digital bonds, achieving a long-term return on investment is no longer considered a challenging prospect in the crypto industry.
A fixed interest rate market is characterized by rates remaining constant for a predetermined period, encompassing financial instruments such as bonds or loans. In this market, the interest rate remains unaffected by the state of the economy or other external variables. Incorporating fixed interest rates into the crypto market represents a significant advancement and contributes to its ongoing maturation.
Predicting future returns with crypto bonds
The interbank-grade DeFi protocol, Secured Finance, aims to establish a predictable and stable investment environment. The protocol achieves a stable investment environment by introducing an innovative order book system based on market supply and demand dynamics. This approach fully leverages cryptos and overcomes limitations inherent in traditional finance.
Masa Kikuchi, the founder and CEO of Secured Finance AG, noted that prevailing projects primarily concentrate on variable interest rates within liquidity pools. In a pool-based system, the responsibility falls on users, as interest rates hinge on the volume of locked funds, making it challenging for users to attain a fixed interest rate. Using an order book instead of a pool-based system accurately reflects market supply and demand.
The CEO claimed that the fixed interest rate market allows investors to predict future returns more accurately. “The system achieves open and fair price formation, solving the problem of local interest rates seen in pool-based systems and enabling more transparent and fair transactions,” he added. Furthermore, it sustains liquidity in primary and secondary markets, fosters longer-term investment perspectives, and stimulates new capital inflows.
Gas fees are no longer an issue
While the blockchain-based bond market represents a remarkable evolution, transferring this model via traditional methods comes with costs. For instance, the most popular blockchain network for DeFi projects, Ethereum, is infamous for high fees. Blockchain networks require a payment, known as the gas fee, to sustain the system. Consequently, the primary challenge for DeFi projects lies in the constraints posed by Ethereum’s gas costs and processing capabilities. Secured Finance solves this by applying lazy evaluation technology in computer science that allows the system to manage the order book efficiently by performing calculations only when necessary.
Secured Finance’s CEO claimed that their technology addresses the gas cost and processing capacity issues traditional order book systems face. “Our approach efficiently processes only the necessary parts of computations, enhancing the system’s overall performance,” he added. They aim to shape the future of finance in the cryptocurrency industry by providing investors with new opportunities through this innovative market.
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