The D/Bond’s EIP-3475 Process Explained
This piece seeks to explain D/Bond’s ERC-3475 and its unique solution to bring bonds to the blockchain as well as invites you to a presentation of the nitty-gritty of the token standard by the D/Bond CEO, Yu Liu, to an Ethereum Foundation audience on July 19
In a growing decentralised finance (DeFi) sector, with more capital flowing into this developing concept of financial technology built on blockchain, one of the key traditional finance (TradFi) products that are yet to be replicated in the decentralised space are bonds.
Several factors preclude DeFi platforms —despite their smart contract programmability — from coming up with this financial instrument which is used mainly to raise money to invest in new projects or support existing ones, or any other beneficial cause.
A common reason for the struggle is the exclusivity of accessing bonds through institutions. Most individuals have relied on institutions and intermediary agents to access bonds. Interested individuals have to go through the hassle of finding a way to get their hands on bonds, paying huge commissions to third parties in the process.
Recreating this asset class on the blockchain would require leveraging the technology’s peer-to-peer and other capabilities to expose as many people to trade, invest, lend, and borrow bonds without any intermediary.
That’s a given, but there is more to it, and this is where many DeFi platforms get stuck.
A unique response to why DeFi platforms haven’t issued bonds
By buying a bond, the issuer — -which could be a company or government — -is being given a loan that its principal would have to be paid back at an agreed date while periodic interest is paid along the way.
Albeit simple, transposing this arrangement to the blockchain environment would require that the agreement be programmed into a smart contract with the appropriate token standard capabilities to manage such transactions.
It doesn’t exist so far.
DeFi projects back off at this juncture because the existing ERC-20 token standard (the ERC-721 standard, too) is limited to handle this complexity hence the need for an improved standard like D/Bond’s ERC-3475 (see invite below to our Ethereum Foundation presentation).
The ERC-20 token standard can only store a mapping from an address to a balance and store an array of integers like redemption conditions and different interest rates. It does not have the required data structure to allow more complex reward and redemption logic to be built.
It requires the deployment of a separate factory and token contracts per token type. In short, the need to issue bonds with multiple redemption data can’t be achieved with existing token standards.
By creating a structural layer on top of earlier versions of the ERC-20 liquidity pool (LP) tokens — -simple fungible proof of loans or the representation of the amount of an asset deposited into a smart contract, EIP-3475 helps improves their data structure and makes issuing and redeeming bonds easier.
ERC-3475 is exceptional
Bonds represent a loan from the buyer to the issuer, to be paid back at a specific time, and generally with a stated interest rate over time. Ramming all the necessary data to execute this agreement with the existing ERC-20 token structure is impossible.
Our ERC-3475 standard is unique for its clear-cut feature to define the date for repayment and a stated interest rate that has been missing in DeFi. regarding bonds issuance, there is so much to say about the innovation the new Ethereum Improvement Proposal (EIP) brings.
It enables the storing of more information for developers to build more sophisticated logic for the redemption and the reward system.
Unlike a typical ERC-20 or ERC-721 token standard, ERC-3475 is semi-fungible and multi-dimensional. It makes each bond class ID represent a new configurable token type, and for each bond nonce to represent an issuing date or any other forms of data.
The EIP comes with core protocol specifications, API, and a contract standard that helps to divide an LP into countless small sub-categories with each part representing a derivative contract.
Its API allows for the creation of any number of bond types in a single contract i.e. its contracts manage multiple callable bonds as the LP is used to sign a derivatives agreement between parties on certain repayment conditions and interest rates.
The interface allows any tokens on Solidity-compatible blockchains to create their bonds which can be packed into separate packages, divided, and exchanged in the secondary market as third-party wallet applications or exchanges are able to read the balance and the redemption conditions of these tokens.
Unlike a single contract that includes any given number of bond classes, bond nonce, and bond balance of an address, EIP-3475 provides independent functions to read, transfer any collection of bonds, and let bonds be redeemed from an issuer once certain conditions have been met.
Current existing fragmentation of LP or NFT uses ERC-20 token standard. It requires deploying a new smart contract each time which generates unnecessary gas expenses and limits the number of classes and sub-categories generated for multiple fragments.
Whereas ERC-3475 is gas-efficient as it can generate almost countless classes and sub-categories without the need to publish a new smart contract.
Our ERC–3475 standard will have its final review by the Ethereum Foundation on July 19 after which the standard will be finalised in two weeks. If you feel like joining our presentation, here is an invite:
Date/Time: Tuesday 19 Jul 2022 at 2:30 pm — 3:30 pm (Eastern Time — New York)
In all, the D/Bond’s EIP 3475 process is geared mainly towards introducing a decentralised securities solution to create bonds.
We argue that it is a better LP token standard for managing multiple bonds, storing much more data, and being gas efficient to build a more complex reward and redemption logic; a standard that makes every nonce of a bond class has its own metadata, supply, and other redemption conditions.
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