DeFi catching up with $100trn capital market makes decentralized bonds irresistible
The likelihood for decentralized finance (DeFi) to gain on the capital market, particularly with asset tokenization is making the need for decentralized bonds a growing niche, some market insiders have said as they share in the market’s growth opportunity for related projects like D/Bond which seeks to bring bonds to the blockchain space.
The DeFi market’s total value may currently be fluctuating between $200 billion and $300 billion, it can begin a catch up to the over $100 trillion capital market, says Abdullah Jadoon, an engineer and analyst specializing in various aspects of the technology industry including cyber security, DevOps, fintech, blockchain/cryptocurrency, and DeFi. He adds that the opportunity will enable D/Bond to provide securitized digital assets as well as a way to trade them on the secondary market.
“This has never been done successfully before,” Jadoon says, talking about D/Bond’s decentralized bonds to be made possible by using a pioneered ERC-3475 token standard. “It will enable a whole host of use cases for billions of users around the world to put their assets and money to work, and escape the heavily centralized and controlled TradFi ecosystem.”
A decentralized bond is a digital IOU (I Owe You or an acknowledged debt) created on the blockchain and traded openly without the need for any intermediaries thus making the process of issuing and transacting derivatives faster to complete and less expensive. Unlike in the traditional setting, decentralized bonds allow crypto investors to participate in a firm’s success without risks.
DeFi needs bonds products today because there are no bond investment vehicles or exchange tradeable tokens. They do not exist because of DeFi’s lack of a fixed-rate functionality feature. Without an unchanging rate charged during the entire life of a loan when issuing bonds, certain contractual terms such as the date for repayment and a stated interest rate cannot be defined.
D/Bond’s unique feature: ERC-3475
For Alexis Sheikh, a financier and a certified investment adviser, D/Bond’s creation of a system to securitize any digital asset is what is most unique about the project. Sheikh says creating a new standard for DeFi will make D/Bond a “leading player in the decentralized marketplace” as it “offers a huge diversity of financial products.”
D/Bond’s EIP-3475’s Multiple Callable Bonds Standard is designed to provide liquidity providers (LPs) a way to make contractual agreements with a derivatives issuer on repayment conditions and interest rates before being sold on a secondary market. It is a standard interface for contracts to manage multiple callable bonds by providing independent functions to read, transfer and allow any collection of bonds to be redeemed from the issuer if certain conditions are met. Its smart contracts will allow LPs and borrowers to have a customizable agreement over loans/debts to manage the redemption conditions and price ranges as new financial derivatives are introduced to DeFi.
Jadoon shares that the ERC-3475 “can truly change the game of trading bonds and derivatives on our secondary market” as D/Bond “will be able to provide fixed-rate interests and guaranteed repayment, and bring together much of DeFi potential to the TradFi market.”
“Asset tokenization is a no-brainer for me going forward,” notes Stephane Marrache, the VP of Business and Corporate Development at Coinhouse, a leading French brokerage and custodian services for crypto-assets registered as a Virtual Asset Service Provider by the French stock market regulator, AMF, on how the increasing need for the use case and growing market opportunities in the DeFi space make decentralized bonds worth given attention.
Marrache describes the new ERC-3475 standard as “almost unique and a significant improvement” that will allow “a better accessibility and sorting functionalities on the bonds contracts” compared to competitors or what TradFi players offer.
“The question is only when it will come and not if it will come,” Marrache said. “This ‘when’ question is mainly driven by regulatory milestones rather than technology constraints. D/Bond will add a lot of transparency and will cut costs in the bond industry compared to TradFi. Given the huge size of this market in the TradFi world, the opportunity for D/Bond appears massive.”
The project is moving from the development phase of its plan to change how bonds and derivatives are traded on the secondary market. It recently started its private B funding round which entails a 130,000 token sale to raise $4.55 million to tap into opportunities (see pitch deck) and expand its ecosystem within a broader DeFi and capital markets.
“2022 will be a big year for D/Bond, with its contract development, IDO, and launch being the main focuses to bring forth… I am particularly excited to see the D/Bond community grow alongside the platform, product, and token,” says Jadoon. “I think 2022 will be the first year that we see users begin to interact with and extract value from D/Bond’s products and features.”
“In the longer term, D/Bond will create the much-needed link between various digital and TradFi financial products such as NFTs, bonds, and derivatives,” he adds, noting that transparency and trust will be the key forces driving the project. “I believe it will give the much-needed opportunity to bring DeFi to the mainstream and give users a whole host of opportunities to put their money to use.”
Marrache thinks D/Bond will become the reference platform for the issuance and the secondary sale of the bonds market. “It will become the main marketplace for the bondholders bringing to this market more transparency, quicker execution, and a lower cost structure for the issuance or secondary sale market compared to what is currently proposed by TradFi players,” he said.