Introducing Benchmark, an on-chain yield swapping protocol

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We’re introducing Benchmark, an on-chain yield asset aggregator enabling the separation and trading of future yield.

Introduction

After DeFi’s breakout summer, we’ve seen the creation of real economic value in the form of lending platforms (e.g. Aave, Compound), smart pools (e.g. Curve, Balancer) and on-chain strategies (e.g. Yearn, Harvest). All serve different purposes in the ecosystem, but the focus on yield-capture is a common thread binding everyone together. While it brings benefits, yield is fickle and volatile, especially in a young and evolving ecosystem.

Benchmark is a protocol that incentivizes the pooling of yield generating assets and the creation of yield markets across DeFi platforms. Interest rate swaps are an integral part of a functioning fixed income market, allowing for two parties to exchange streams of interest payments over a set period of time. This gives participants an outlet to directly hedge and speculate on pure yield exposure, allowing for the formation of a new DeFi building block.

Overview

At a high level, Benchmark enables the separation (stripping) of yield from yield generating assets and allows it to be traded. In doing so, Benchmark enables holders of such assets to sell their rights to the yield for a fixed period of time, thus locking in their profits and receiving upfront cash.

Buyers of these rights gain exposure to the fluctuating rates in a capital efficient manner as they do not have to purchase and stake the core underlying assets. This is potentially very powerful, as a form of leverage that is not currently available, without having to worry about collateralization and liquidation risk.

In turn, this will allow for greater price discovery in the interest rate markets. Lenders and liquidity providers can lock in interest rates when they are high, borrowers can hedge borrowing rates when they are low, and speculators can express views on future interest rates. With the rise of fixed borrowing/lending protocols such as Yield, Notional, etc, we expect a lot of arbitrage opportunities to take form using Benchmark as a key building block.

Collectively, Benchmark and its community will result in a more mature market, where we have greater control, composability and visibility.

Trading tokens with time decay

Benchmark is focused on being fully on-chain and allowing the native yield tokens to be traded on Automated Market Makers (AMMs). We strongly believe that these are important prerequisites to be integrated as part of the greater DeFi ecosystem.

This approach has required us to develop a new AMM variant catered to tokens with theta (time decay). As the yield tokens are designed to decay and expire worthless after the contracted yield has been distributed, utilizing a Uniswap style constant product function AMM would result in guaranteed Permanent Loss for liquidity providers.

The details of the Benchmark AMM variant are outside the scope of this introductory post, but it is designed to counteract the time-dependent impermanent loss specific to such token classes. We hypothesize that it will be relevant for other on-chain derivatives affected by theta as well, such as American style options, credit default swaps and other forms of bond instruments.

Let’s build the future of yield trading together

We’re excited to build Benchmark to expand the DeFi ecosystem with novel new building blocks, asset classes and the introduction of structured yield products.

If you’d like to stay updated, follow Benchmark on Twitter or join our Discord group. More details are also available here.