Tempus Takes #3
At Tempus, we are focused on yields, yet it is incomplete to talk about yields without also discussing inflation.
What do we mean by Yield and Inflation?
Yield is the return one achieves via depositing their assets. Inflation is the general increase/decrease in purchasing power. Let’s think about buying a new TV with some United States Dollars (“USD”).
Say you deposited USD$1,000 for 1 year @ 5% yield, and received USD$1,050 at the end.
At the time of the deposit, a new TV cost USD$1,000, but during the year its price rose to USD$1,110 due to inflation.
If you were planning to buy the TV, although you have enough initially, now you are short by USD$60, so your real return is actually negative. Not good.
In TradFi terminology, the nominal return is 5%, inflation is 11%, so the real return is -6%.
Inflation-Linked Token
In the latest DeFi development, Frax has introduced a new inflation-linked token called FPI and a governance coin for it called FPIS. The FPI price has been set to 1 FRAX in December 2021 and, from then on, it accrues the US CPI for All Urban Consumers rate sourced via Chainlink. Such premium will be paid from Frax’s yields. In essence, FPI is long inflation whereas FPIS is long Frax’s yield and short inflation.
Given the simple structure, we expect to see mimics in different protocols and other low inflation currencies, possibly extending into other non-inflation-linked indices. Since this is a synthetic product, it can trade on pretty much anything.
Opportunities
We welcome this new yield product to the DeFi world, as it allows people to bet/hedge against inflation, especially if they live in the US.
Given the yield accrual nature, it has the advantage of continuous accrual even when staked or lent. But on the flip side, a borrower would prefer to borrow a non-inflation-linked product. Hence, interest rates are expected to be lower than lending/borrowing non-inflation-linked stable coins.
As inflation numbers are delayed figures with set publication frequency (in this case monthly), we also see trading opportunities during these times, favoring institutions with macro research teams.
Market Move
Compared to our last Tempus Takes two weeks ago, stable coin yields were lower on Yearn, but higher on Aave and Compound. YFI yields continue to be volatile.
Tempus’ fixed APRs were slightly lower versus previous as more people took the opportunity to lock in an attractive fixed rate. The fixed rates are still higher than the street’s variable rate.
Thanks for reading and keep an eye out for some exciting updates coming soon!
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Disclaimer
The information provided in this article is provided for informational purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation to buy, sell, or otherwise transact in any investment, including any products or services, or an invitation, offer, or solicitation to engage in any investment activity. You alone are responsible for determining whether any investment, investment strategy, or related transaction is appropriate for you based on your personal investment objectives, financial circumstances, and risk tolerance. In addition, nothing in this article shall, or is intended to, constitute financial, legal, accounting, or tax advice. We recommend that you seek independent advice if you are in any doubt.
