A new DeFi project aims to bring new value to the blockchain industry by combining the functionality of cryptocurrencies with the stability of bonds.
It’s natural for investors to seek a safe haven to minimize risk and protect their capital —especially in times of financial uncertainty. In such times, investors approach opportunities more cautiously and look for assets that have a track record of stability, including commodities like precious metals or stocks of large-scale companies.
Bonds are a good pick for investors who want to keep risks low while diversifying their investment portfolio. A bond is a debt instrument representing the loan the investor gives the debtor. Bonds can be issued by companies, governments, and even individuals. However, bonds may not be a practical solution for everyday investors because they require advanced financial knowledge. This is where blockchain-based digital bonds come to aid investors who want predictability in their portfolio.
A more accessible bond market
Blockchain can be used to tokenize virtually all financial instruments, enabling previously inaccessible financial products to become digitized and tradeable through tokens. However, the volatility of the crypto market poses a barrier for investors coming from stable traditional finance markets.
Decentralized finance (DeFi) protocol Secured Finance aims to bring the best of both worlds by combining the functionality of cryptocurrencies with the stability of digital bonds.
Bonds are a new financial instrument for the blockchain ecosystem, and they can attract retail and institutional investors. However, traditional bond trading doesn’t occur on a global market like equities. The lack of a worldwide bond exchange presents several challenges, including standardization, price discovery, transparency, liquidity, and counterparty risks. This makes it difficult for institutional investors to participate in the market. Blockchain-based bonds, on the other hand, can provide more accessibility to participants. Secured Finance’s crypto bonds address global bond and loan market challenges, unlocking the potential for more accessible capital markets.
For the blockchain to keep working, a “gas fee” is paid for each transaction. Users can not transact without paying, as determined by on-chain rules. Secured Finance uses a zero-coupon standard that reduces gas costs by simplifying settlement and calculations. Interim interest doesn’t accrue on the zero-coupon bond standard. Instead, it offers a significant discount on the face value scale, the amount the investor will receive when the bond matures.
Predicting future returns
Because of market uncertainty, blockchain-based investment models struggle to attract traditional investors. Unlike speculators who prefer short-term trading, traditional investors wish to know their earnings at the end of maturity. Secured Finance wants to break down the biases of traditional investors by providing a stable environment suitable for long-term investment strategies.
Secured Finance offers a new way to manage the volatility of cryptos through yield curves, which display interest rate movements across different periods. This way, investors can predict future market trends smoothly. The yield curve also allows investors to assess market risks and develop appropriate risk management strategies more accurately. Masa Kikuchi, the founder and CEO of Secured Finance AG, explains that providing stable returns in the highly volatile crypto market would attract new investors. “Investors can utilize real-time market data and predictable yield curves for more effective investment decisions,” he added. Secured Finance AG is the developer of the Secured Finance protocol, which is operated by a decentralized autonomous organization (DAO).
DeFi innovations have the potential to have a significant impact not only on the crypto world but also on traditional finance. Secured Finance aims not just to provide new technology but to change the very nature of finance, and believes this project will bring a new light to the world’s financial markets.