El Salvador’s Crypto Bonds, DeFi and Mainstream Financial System
The previous weeks have seen discussions on crypto-backed bonds hitting another trending milestone. Online searches point to eyes being fixed on El Salvador as it finalises plans to issue its first-ever $1 billion Bitcoin-backed bonds. Slated tentatively for a March 20 sales date, the 10-year bonds nicknamed Volcano Bonds by the small Central American country which made Bitcoin its legal tender last June will come with a 6.5% coupon. It will mark another feat as the blockchain community continues the effort to build bridges between traditional finance (TradFi) and decentralised finance (DeFi) space.
DeFi’s growth into the mainstream
The burgeoning DeFi ecosystem has been incorporating different worlds — the fractured world of cryptocurrencies, non-fungible tokens (NFTs), Metaverses, banking, insurance etc — as it grows to reach an all-time high of $174 billion by mid-November 2021. Coupled with its interconnectedness with the growing Web 3.0’s decentralised internet, the DeFi market stands to be worth even more in hundreds of billions in coming years.
Market insiders attribute the huge DeFi uptake, in part, to many factors. Top among them are its efficiency, openness and transparency. From not being able to track money deposited in a bank to brokerage frauds, the lack of transparency in TradFi strongly necessitates the need for the DeFi sector to grow, suggests Comdex’s Abhishek Singh in a chat with Fool.com.
DeFi is also a growth industry with significantly higher yields. As a result, the space is attracting a new wave of serious crypto investors, like Forge, the subsidiary of the French banking group Société Générale, which last October proposed a bond token for use on MakerDAO in one of the first cases of TradFi and DeFi interaction.
Key highlights of El Salvador crypto bonds sale
These perspectives add to making the unfolding bonds sales plan in El Salvador even more significant. The El Salvadorian bonds, to be sold in a $100-tranch structure, is meant to not only democratise access to allow both institutional and retail investors to participate in yet another developing trend and use case for Bitcoin as well as other crypto-assets. It also adds credence to how these (assets) are truly emerging — against all odds — as a class that’s gradually becoming part of the mainstream financial system.
The size notwithstanding, El Salvador is a sovereign state with the capability to interact with every international instrument due to it including in the financial sector. While its push for crypto-backed bonds may not be as popular among nations, and the extent to which the trend would be followed by other countries or organisations may be indeterminate as yet, it is worth recognising the mainstreamness of the approach in itself. The proposed bonds sale, among other things, will open the door to initiatives that seek to add value in the market, widen public access to derivatives in a decentralised setting and enable the building of a more complex reward and redemption logic.
Bringing decentralised bonds to DeFi
One of the innovative systems that seek to bring a financial tool that securitises any form of digital debt or asset into a bond class — and benefit from the exposure moves like El Salvador’s brings — is D/Bond. The project serves to be a decentralised bonds system that is based on trust-less smart contracts, and derivatives that can be used to hedge against the risk of DeFi — as a new kind of alternative to traditional banking — with its being one of the most volatile markets.
D/Bond pioneered the EIP-3475 as a standard interface for contracts that 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. The project, now valued at $12.5m, has so far garnered support and commendations from investors — like Bixin Ventures, Exnetwork, Wave Capital, Crypto Dorm Fund, F12 Capital, Collinstar Capital, etc- as well as advisors.
Aside from the token standard, D/Bond is also an open-ended platform by design. It will function as a decentralised investment bank by issuing bonds for its customers and providing customised derivatives to hedge against risks. The Paris-based startup provides D/Bond wallet, decentralized bond exchange and an open and functional market for securities as part of its ecosystem.
Advisors’ take on new DeFi/bonds system
“By proposing and focusing on a new ERC 3475 standard, I believe the D/Bond founders have found a way to improve UX and safety for many different types of gas-inefficient transactions that currently rely on unaudited or untested smart contracts,” says Rasheed Saleuddin, a crypto angel investor and academic who is interested in the timely entry and significance of the decentralised bonds market system — implemented using ERC 3475 — to the Web 3.0 era of decentralised internet along with the growing DeFi ecosystem.
“I often look for protocols where founders have developed a diamond in the rough that, however genius, needs a great deal of polishing to be ready for MVP and beyond,” Saleuddin said, noting the pleasure to work with the “giga-brained multi-national team” on their journey to the final product. He adds:
“Notwithstanding the 2008–9 global financial crisis, as an ex-securitised product hedge fund manager, I know that there are many legitimate use cases for asset-backed Debonds, and I am looking forward to seeing those use cases in action. Pooling assets to obtain leverage, for example, is generally safer than on an asset-by-asset basis. I see no reason why pooling complex token cash flows should not be regularly executed as one token with the ERC 3475 standard. Multi-party borrowing and lending with pooled collateral is a use case I expect to see dominated by D/Bond. Less gas, more safety, more liquidity.”
For Jason Hung, a co-founder of the International Consensus Association and an advisor to the decentralised bonds project, that D/Bond is focused on bonds which are “always one of the investment tools in the financial space” strikes him as its most unique feature. Hung believes the project would become part of the fintech component in the crypto space going by the “proven capability” of its team, product, institutional support and active community to deliver the service.
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