How do bonds work?
A bond is a financial instrument that represents debt. The government or a business can issue bonds, and their investors can buy them, making them debtholders to the issuers. Investors make money in the form of interest, and when the bonds expire, bond holders also get back their principal. There are different types of interest, which depends on the bond.
Bonds are among the most conservative ways of making money, if you pick the right ones they can be very low risk: their ROI is usually known beforehand, and depending on the type of bond, they are backed by the issuer’s assets.
There are actually several different types of bonds — but the two that are important for us to note are “Secured” bonds, and “Senior Secured” bonds. If a bond is not Secured, it means that the debt is not backed by assets from the issuer, and you are trusting them to pay at the end of the term. It is also important to note whether a bond is investment grade — which speaks to the creditworthiness of the issuer. As long as an issuer is rated between A and AAA the bond is generally considered investment grade, and credit agencies generally indicate that you can trust the company to keep their word even if there is no collateral or security.
When a bond is secured, the issuer pledges assets against the bond, which can be liquidated at maturity if the issuer is unable to make full payment to bondholders. It is important to verify the value of the assets pledged as security, because you have to allow for many factors that can actually result in the security being worth less than the amounts due to bondholders — in which case you could still lose some money. We recommend a 4:3 over collateralization of assets as security, or 75% Debt to Collateral ratio to ensure there is sufficient surplus value of assets to cover bondholders if it comes to a liquidation.
Secured bonds also don’t necessarily place the bondholders first in line of who gets paid when assets are liquidated — because the issuer may have other debts that have seniority over the bondholder, and those must be paid before the bondholders are settled. That is where “Senior Secured” bonds is a bond where the assets are pledged, but they are specifically allocated to first deal with settling payments to bondholders.
However, what if we bring that decentralised reserve management over to the stablecoins that use real-world reserves? That is exactly what the EURxb stablecoin does. All the issued coins are backed at a ratio of 4:3, not 1:1, thanks to the bond reserves being Investment Grade, and Senior Secured Green Bonds at a 133% overcollateralization ratio on top! The reserves have also been proven — they are legally bound and pledged through the creation of bonds in the security market, ensuring the protocol’s legitimate and actionable rights to these real-world assets, just like in any other regulated financial system. This guarantees that the token won’t lose its value, and its holders can utilize it like any other currency to yield them profits!
The high reliability and low risk are the reasons we chose investment grade, Over Collateralized Senior Secured bonds for our unique EURxb stablecoin!
