Why we’re building Porter
A bond protocol and marketplace for DAOs
The amount of creditworthy DAOs is growing rapidly
According to CoinMarketCap, there are now ten DAOs who have circulating governance token market caps over $1B — all of which crossed the $1B mark in the last year. In addition to large treasuries, these DAOs have no debt and strong cash flows, with SushiSwap and MakerDao making ~$70M in annual protocol revenue. This makes them ideal borrowers in the eyes of lenders.
Selling debt is an attractive way for DAOs to raise capital, as explained in this article, but there are currently no debt instruments built for them.
Shortcomings of current DeFi credit offerings
Currently, there are two established sources of under collateralized debt in the DeFi ecosystem — Maple and TrueFi.
Short term lengths
These protocols allow borrowers to take out loans with a term limit maximum of 90 days for TrueFi and 180 days for Maple. These term limits are too short for a DAO looking to use the capital to invest in long term objectives which could take a year or longer to pay for themselves.
Limited loan size
Maple and TrueFi loans are issued out of pools of capital supplied by lenders. This guarantees liquidity for borrowers on the platform but limits the amount of liquidity available to what is in the pool.
Limited collateralization options
TrueFi doesn’t allow borrowers to put up collateral, preventing them from reducing risk to the lender and consequently, their interest rate. On the other hand, Maple allows collateral, but only allows borrowers to put up collateral in WBTC or USDC which may not be favorable for a DAO that wants to use their native token. These problems can be solved by the introduction of bonds to DeFi.
Advantages of bonds for DAOs
A bond is a fixed income instrument that represents a loan made by an investor to a borrower. Bonds provide a flexible, long term credit option which offers advantages over loans.
Longer term lengths
Term lengths for bonds are typically on the scale of years, giving borrowers much more flexibility in how the funds can be used.
Large amount of capital can be raised
With bonds, the maximum amount available to borrow is not limited by the size of a lending protocol’s assets or determined by an underwriter as is done with Maple and TrueFi. Instead, it is determined by the market demand for the debt, allowing strong borrowers to gain more credit than they otherwise would be able to with existing lending protocols.
Diverse collateral options
Many collateral options can be provided with the bond sale to reduce investor risk and consequently reduce the borrowing cost. In addition to the aforementioned benefits, which apply to the DAOs issuing the bonds, investors will also benefit from this new opportunity.
Bonds are attractive investments
Fixed income assets with upside
From an investment perspective, bonds issued by DAOs provide an opportunity not currently available in the crypto asset market — a fixed income asset whose value is tied to the success of the issuing organization. This exposure comes from two attributes of bonds — credit risk, and convertibility.
Credit Risk
Credit risk is the ability of a borrower to repay a loan. A higher credit risk results in a borrower paying a higher interest rate and vice versa. Because of the inverse correlation between bond value and interest rate, a decrease in interest rate leads to an increase in bond value. This means, if a DAO’s credit risk is reduced, any bonds they had previously issued will go up in value.
Credit Risk — Example
The easiest way to communicate the relationship between bond value and interest rate is through zero coupon bonds, colloquially referred to as “zeros”. Zeros do not payout periodically, instead, they promise a lump sum payment at maturity, called “face value”, and trade at a discount to that lump sum which depends on the market-determined interest rate. The equation for zero coupon bond value is below.
If DAO X issues a zero with a face value of $1000, a rate of 10%, and a time to maturity of 10 years, according to the equation above, that bond is worth $386. If, after a year of growth, the DAO’s credit risk drops and consequently the market-determined interest rate for their bonds falls from 10% to 5%, the bond value would increase to $645.
Convertibility
Convertibility is a feature of convertible bonds. It allows the purchaser the option to exchange their bond for an asset, a token in this case, at a premium over the price of the asset at the time of bond issuance. Therefore, if the value of the borrower’s token increases by a value greater than the premium, the bond holder would profit by exchanging the bond for the token at below market price and selling it on the open market.
Convertibility — Example
DAO Y sells a bond for $1000 which is convertible to 8 of their tokens, which are each worth $100 on the open market at the time of issuance. Because the $1000 bond is convertible to 8 tokens, the cost of tokens to the bond owner is $125 per token ($1000 / 8 tokens). Meaning, there is a 25% premium associated with the conversion. If the token value appreciates to $150, the bond holder may choose to convert their bond into 8 tokens valued at $1200 ($150 * 8 tokens) and sell them on the open market — profiting $200 ($1200 — $1000) plus any interest that was collected.
Low Default Risk
The successes of Maple and TrueFi have proved that under collateralized debt has a place within DeFi. Neither protocol has had a single default on a loan given. Their borrowers are crypto native companies who are low risk due to their strong balance sheets and positive cash flows. As mentioned before, there are many DAOs that share these same low risk traits, making tens of millions of dollars yearly in revenues, having no debt, and possessing strong treasuries. This allows them to offer superior returns to traditional bonds.
Attractive interest rate/risk ratios
High risk, high yield corporate bonds in traditional finance pay ~4% interest while Maple and TrueFi borrowers are paying ~10%. Lending to DAOs has a higher risk profile than the lending to institutions that is done on Maple and TrueFi, so it’s safe to assume bonds issued by DAOs will sit above existing DeFi lending protocol rates. This will provide a higher return for traditional fixed income investors who are willing to purchase DAO bonds.
Projected Market size
US bond market size
There are ~$10T of US corporate bonds outstanding as of 2Q 2021 and the total market cap of US public companies is ~$50T. Let’s assume the total US corporate market cap of public and private companies is $100T — a rough assumption but necessary to estimate the DAO bond market size. This means that the bond market is roughly one tenth of the corporate market cap.
Estimated DAO bond market size
The total circulating market cap of all DAO governance tokens is ~$50B according to CoinMarketCap. Using the same one tenth bond/equity ratio as the US would give an estimated $5B DAO bond market.
Estimated DAO bond market growth
The total circulating market cap of the top ten DAO governance tokens is ~$33B. One year ago, the total market cap for these tokens was ~$3.3B. The market cap of the top ten DAOs grew 10x in one year! If DAOs continue to grow at a high rate, their bond market will too — providing a massive opportunity for those making it possible.
Enter Porter Finance
At Porter, we are building out the first bond protocol and marketplace to serve the estimated $5B DAO bond market. If you’re interested in learning more and getting involved before our launch, join our Discord community and follow us on Twitter.
