A new concept for zero-coupon cryptocurrency bonds has been published by a research partner from prominent crypto investment firm, Paradigm.
The project, named Yield Protocol, enables this by issuing tokens which settle on a specified future date, based on the value of a specific asset.
These tokens, dubbed “yTokens”, are based on the Ethereum network, and secured via over-collateralization with another asset.
yTokens have the potential to be issued for almost any Ethereum-based asset, with on-chain cash settlements. These will be freely tradable on the open market.
Robinson gives us an excellent example on Twitter, for how a yToken would be issued:
yTokens are like synthetics with expiration dates. For example, a yToken might entitle the holder to exactly 1 DAI on December 31, 2019, secured by ETH collateral.
To “borrow” DAI for that period, you deposit ETH, mint these yDAI, and sell them.
To “lend” DAI, you buy yDAI.
— Dan Robinson (@danrobinson) September 5, 2019
Further use cases
In addition to providing a novel way to obtain short or long exposure on an asset with a fixed timeframe, the project could be used as an interest rate oracle.
This rate can be derived from the difference between the price of a yToken and the target asset’s face value – a variance which arises from the time value of money.
Yield Protocol islready gathering steam
Despite only being published a few days ago, the concept has sparked discussion from the wider crypto community, including notable figures such as Vitalik Buterin – the founder of Ethereum – himself.
You can get perpetuity back by making a contract that automatically uses a Dutch auction to trade year N tokens for year N+1 tokens before year N ends.
— Vitalik Non-giver of Ether (@VitalikButerin) September 7, 2019