What is dBonds protocol?

dBonds is an open source and free standard for creating virtual debt instruments which may or may not have collateral inside and can represent a traditional (not collateralized bond); a bond, collateralized by an off-chain asset (e.g. real fiat-nominated bond), or a bond collateralized by on-chain collateral locked in dBonds smart contract.

Another interesting implication of dBonds protocol is constructing instruments similar to traditional derivatives (call and put options). dBonds standard doesn’t have any margin call or liquidation mechanics, all incentives are based on risk-profit profile.

dBonds will offer a decentralized lending market. We believe, there is no more fair and efficient pricing than the one provided by the market equilibrium, so any price or interest rate inside the protocol is decided entirely by the market agents, not by any third party. As traditional bonds, dbond must be paid off or can be defaulted which makes collateral (if exists) available to a bond holder.

Dbond is constructed by a dbond issuer (emitent) with main parameters such as redemption price (amount to be paid back upon dbond expiration) nominated in EOS, stablecoin or other on-chain token; maturity date; collateral and other. Then, dbond is offered to the market at the ask price specified by dbond issuer and could be purchased at that price by somebody ready to provide the loan.

dBonds protocol step by step overview

1. Emitent creates a token via dBonds smart contract, adjusting all necessary configs such as: maturity time, redemption price, initial ask price, collaterization etc.
2. Emitent lists created token to a dBonds DEX, having the opportunity to change the offer price according to the market demand.
3. If not sold, emitent can cancel the offer. If sold, emitent receives crypto assets on his wallet according to price, the dbond token is transferred to a buyer.
4. dbond token is traded on secondary market, emitent can pay back for the dbond acording to established rules.
5. When maturity time comes, dbond is either paid back (redeemed) or defaulted. In case of redemption, everybody gets what should, otherwise scenario depends on collaterization type.
   If not collaterized, then it depends on the jurisdiction under which it was issued and dbond was issued under a corresponding jurisdiction, bankruptcy may be triggered, assets converted to crypto and delivered.
   If collaterized with fiat bond, there is a liquidation agent responsible for the original bond selling and providing this value to the dbond holders. This value (which can be nothing is case of bond emitent default) is converted to crypto and then distributed. Of course, to issue such a dbond emitent must have an agreement with the custodian about all these procedures.
   If collaterized with crypto, which is the widely available case, dbond holder can exchange it for the collateral.

All actions besides fiat-collateralized bond liquidation are made on-chain.

dBonds protocol has the following advantages:

1. Fair market risk-reward interest rate
   Nobody but the market equilibrium provides current rates and prices.
2. Flexible customized conditions of loan/lending
   Protocol gives you full freedom. You can choose any on-chain collateral, choose the most liquid or stable on-chain currency to borrow, you can choose maturity time, early pay-off rules etc.
3. Diversified risk-reward market to invest
   While dbond emitents may enjoy customized loans (once they found a buyer), lenders and fixed income investors can diversify their investment portfolio with multiple instruments with clear risk and reward.
4. Secondary debt market possible
   Since dbond is nothing else than tokenized debt with risk-reward profile, once issued and initially sold, it acquires a market price and can be traded on secondary debt market as it usually happens with fiat secuirities.
5. Money can be borrowed against not liquid on-chain collateral
   For example, against tokenized with dGoods protocol valuable assets with poor market activity.

We see following use cases for the protocol:

1. Issuing a classical bond by a trustworthy emitent
   Just like in the fiat world, an entity or in our case any trustworthy EOS account may want to borrow crypto from the market. Using this standard, an emitent can issue and offer a bond, which, if priced wisely, can be sold on the market to other agents. If a company or a team with good credit reputation (say, Block.One) would want to borrow crypto at fair market conditions, they can issue a dbond and attract needed amount at fair market rate. Upon maturity, this dbond will be either paid by an issuer or not, and in that case is defaulted.
   This usecase gains new opportunities with recently announced Voice social network, which values reputation and can essentially track users/companies credit history.
2. Issuing dbond collateralized by traditional fiat bonds or other real assets
   Dbond can be collateralized by a real security (say, a bond of high quality emitent deposited in a custodian). In this case a dbond issuer provides real off-chain asset as a collateral, though dbond itself and provided loan is nominated in a cryptocurrency. In our view, this use case has a huge potential as it enables to create quite stable in value on-chain assets backed by real assets and real businesses. This approach is a cornerstone of our main project — Depos, a decentralized bank, which creates stable cryptocurrencies using among other things real fiat bonds as a collateral. You can read more about Depos in our whitepaper and visit Depos page
3. Issuing dbond collateralized by valuable on-chain assets
   As in other decentralized protocols, you can borrow, say, stablecoins (using dBonds you can borrow any on-chain crypto) by overcollaterizing your debt. The difference here is flexibility and absence of liquidation. You can choose the overcollateralization ratio and interest rate.
   For example, if you issue a bond for a week and put 2x collateral in EOS, market would agree on 5–10% annual interest or even less, because the chance that EOS loses half of value in a week is miserable.
   On the other hand, if you put 1x collateral in EOS for a two year loan, the risk is high and the interest rate would be much higher.
4. Issuing dbond collateralized by valuable not liquid asset.
   Imagine you have tokenized an asset, say, with dGoods protocol. You like it, asset has value but lacks liquidity, so selling and buying back would cost you a lot. It happened you accidentally need money, so you issue dbond with dgood asset as collateral and borrow money, say, stablecoins of your choice, from the market. As far as dBonds protocol doesn’t imply any margin call mechanism, low liquidity of a collateral is not a problem (if dbond buyer believes the collateral is valuable enough).
5. Constructing decentralized derivatives (call and put options)
   We consider this use case separately in the next article.

Conclusion

dBonds protocol is just a very flexible tool to build what you want in order to borrow from market or to lend. Since debt itself might be of very defferent nature and terms, we expect several different standardized conditions to appear in order to aggregate users into couple but not dozens of markets. At the same time, nothing constrains a user to issue customized bond if he is capable of finding customers for that particular instrument.

If you are interested in technical details, please visit our github repo.

The Depos.io project is interested in development and maintenance of dBonds protocol and will support it also in liquidity providing manner.
We are very interested in your feedback. Please, fell free to leave a comment and tell us how dbonds can be valuable for you or how to make it better. You are also welcome to join the discussion in social media or simply leave a feedback using our page www.dbonds.org .