Building for a permissionless future

At Sense, we’re working towards a future where users can always protect themselves from interest rate volatility and operate with greater capital efficiency. To make that a reality, we’re building fully transparent, on-chain, hyperscalable infrastructure that enables a flourishing ecosystem of fixed income instruments atop all yield sources and DAO cash flows.

The first step towards this future is Sense v1, a soon-to-launch decentralized fixed income protocol on Ethereum L1. Below, we unveil its permissionless architecture, a design pattern instrumental to DeFi’s success.

For those short on time, here’s a tl;dr:

• Last month, we released our public testnet on Goerli.
• We’ve expanded Sense into a permissionless infra protocol for on-chain fixed income applications, such as Yield Stripping, Tranching, and DAO bond issuance.
• Our short-term roadmap focuses on yield stripping applications.
• If you’re planning to build fixed-income instruments, please reach out to us on Discord!
• Mainnet launch will be announced very soon. Join our community on Discord as we prepare for launch, and follow us on Twitter for updates!

Building the pillars of fixed income

We originally designed Sense around the stripping mechanism, where users decompose a yield-bearing asset into its principal and yield components and package them behind two fixed-term assets, a Principal Token (PT) and a Yield Token (YT). In our development, we discovered the following problems:

1. Excess demand for fixed-rate support. Numerous protocol teams have inquired about bringing fixed rates and future yield trading to their ecosystems.
2. Lack of fixed-income public infrastructure. Although most stripping and tranche protocols (Element, Pendle, Barnbridge, Ondo, Swivel, etc) share the same core functionality, no generalized infrastructure exists for the simple action of dividing value between two or more tokens.

Solving these pain points is a prerequisite to our goal of enhancing the long tail of yield-bearing assets. Thus, instead of waiting for Sense-v2, we rolled up our sleeves, pushed application-specific logic into adapters, and generalized the Sense core to support any mechanism where two tokens receive an arbitrary share of some Target asset (e.g. yield-bearing asset).

Addressing each pain point, the flexibility and permissionlessness of Sense allow:

1. Any team with a yield-bearing token to easily enable fixed rates and future yield trading in their ecosystems
2. Fixed income teams/builders to reduce development costs & deploy faster with less risk.

In conclusion, Sense is now an ecosystem protocol for new fixed income applications, including but not limited to:

• Stripping — enables fixed rates in the underlying terms on some yield-bearing asset (like fixed yield in ETH on stETH). Related protocols include Element, Pendle, Tempus, etc.
• Tranching — enables fixed rates in non-underlying terms on some yield-bearing asset (like fixed yield in DAI on the Uniswap V2 ETH-DAI LP share). Related protocols include Barnbridge, Saffron, Ondo, etc.
• DAO debt issuances — allows DAOs to raise working capital without selling their native token. Related protocols include Porter, Solv, etc.

The Sense Core team is focused on developing the stripping ecosystem in the short term, dogfooding Sense’s infrastructure, because interest rate discovery is the foundation for all other yield primitives. Without it, we lack a baseline for the time value of money and risk in DeFi.

That said, we’re in early conversations with numerous teams, interested in building atop Sense, so if you’re looking to build a tranching / DAO bond application or to bring stripping primitives to your ecosystem, please reach out to us!

The road to permissive infrastructure

With the recent adjustment, Sense offers the components necessary to a well-functioning market for fixed income instruments, such as issuance, redemption, exchange, and in some cases, lending. As a result, DAOs and builders can focus entirely on their fixed income application, go to market faster, and benefit from Sense’s network effects.

Crucially, it’s Sense’s permissionless feature that offers the greatest value to both builders and users. In Web3, the term “permissionless” was first introduced to help differentiate public vs private blockchains. After the launch of Uniswap in 2018, however, it’s become a common design pattern in DeFi:

• Exchanges: Coinbase → Uniswap, Balancer
• Borrowing/Lending: Compound, Aave → Fuse, Euler
• Perps: Bitmex → Perpetual (Private Markets)
• Index: Bitwise → Set Protocol
• NFT Marketplaces: Opensea → Zora

Especially those serving a market long-tail, protocols built with a permissive design are rewarded with the following benefits:

1. Scale. Onboarding is not limited by protocol core teams.
2. Innovation. Less groupthink and fewer guardrails around integrations, leading to greater (parallel) experimentation.

Because of these qualities, I subscribe to the thesis that hyperstructure-like infrastructure will grow larger and have greater network effects than permissioned protocols and their centralized equivalents.

For every financial utility, I’d posit we’ll likely see a singular hyperstructure emerge: exchanges, marketplaces, lending pools, options and so on. — Jacob Horne

We’ve already begun to see the effects of permissive design. Uniswap, one of the oldest DeFi protocols, is now the “king” of ETH/USD spot trading, attracting the most volume of any centralized/decentralized crypto exchange. It has the best shot at becoming the first hyperstructure for exchange. For borrowing/lending, Rari Capital’s Fuse, known for its massive growth in TVL in 2021, is a top contender for the title.

If this future plays out, Sense will be the hyperstructure for fixed income.

Next Steps

In this post, we unveil Sense’s shift from a stripping protocol to a positive-sum infrastructure protocol for fixed income applications. We unpack the benefits of the permissionless design pattern, and I end with a future where Sense is a part of most on-chain fixed-income applications.

Mainnet launch will be announced very soon. Join our community on Discord as we prepare for launch, and follow us on Twitter for updates!

Thanks to Steven Becker, Jai Bhavnani, Kia Mosayeri, Jacob Horne, Tom Schmidt, Jordan Meyer, and the Sense core team for conversations that contributed to this post.

Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This post reflects the current opinions of the authors and is not made on behalf of Sense Finance or its affiliates and does not necessarily reflect the opinions of Sense Finance, its affiliates or individuals associated with Sense Finance. The opinions reflected herein are subject to change without being updated.