I’m excited to announce Yield, a company bringing fixed-term, fixed-rate lending and interest-rate markets to decentralized finance.
— Allan (@niemerg) May 7, 2020
Incubated by Paradigm, Yield is building yTokens – a new DeFi money lego – on Ethereum. yTokens will enable fixed-term, fixed-rate borrowing and lending for major cryptocurrencies. The protocol is initially launching with yDAI, allowing users to borrow and lend out Maker’s crypto-native stablecoin with fixed rates while using ETH as collateral.
The introduction of Yield brings a new building block for decentralized finance. Since yDAI effectively act as zero-coupon bonds, the prices on the interest-bearing tokens will allow us to construct a yield curve for the DeFi ecosystem.
What’s a Yield Curve?
A yield curve is a line that plots the returns where the horizontal axis represents the age of maturity (time) and the vertical axis represents the yield. The slope of the yield curve provides insights on the future of interest rate changes, economic output, and growth.
Generally speaking, there are three types of yield curves: normal, inverted, and flat.
A normal yield curve is where yields are higher in the long-term than the short term, meaning economic outlook is positive. An inverted yield curve is one where the short-term yields are higher than long-term yields. When the yield curve is inverted, it usually indicates a recession or poor economic outlook. A flat yield curve generally translates to a transitionary period in the economy.
Why It’s Important
In the lens of DeFi, a robust set of liquid yTokens will allow users to have a better understanding of the state of DeFi and future expectations of market conditions. Having more tools like yield curves – which act as a critical tool in evaluating economic conditions in traditional finance – will eventually translate to more efficient markets and a maturing open financial ecosystem at large.
While yield curves may be a long-term application for yTokens – as they would require sufficiently liquid markets across different maturities – having this new financial primitive for DeFi developers to build with will open up new possibilities for the DeFi ecosystem. This further builds on the notion of composability and the principle of new open-source token wrappers becoming available for other protocols to bake into the application layer.
The announcement of Yield Protocol further validates our belief that 2020 will see a strong trend in fixed lending – a market that is historically multiples larger in capacity than what we are currently seeing with the predominantly variable-first nature of cryptocurrency lending today.
It’s also worth noting that yTokens on Yield are different from yTokens on iEarn, and that while they share similar principles of being interesting-earning, they are inherently different wrappers built on different foundations. Multicoin analyst Ben Sparango said it best:
may the best yToken win
— ₿en Sparango (@bennybitcoins) May 7, 2020
If you’re interested in reading about some of these applications in-depth, you can read up on the Yield Protocol whitepaper here.
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Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.