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Enabling Permissionless Debt Financing in DeFi

Initial Debt Financing Offering(IDFOs) to change the landscape of early stage financing and fair launches


Crypto Financing So Far

To understand the model of financing used by most companies, we have to know the Weighted Average Cost of Capital model.

Debt financing in a decentralized ecosystem

The current size of the DeFi ecosystem measured by TVL is over $200 billion. This is a more than sufficient size to need a completely decentralized money market where participants can form their own lending / borrowing pools.

Source: defillama.com

Shortcomings in DeFi money markets

However, nearly all these money markets have a few deficiencies that make them unsuitable for the decentralized vision we are pursuing.

  1. Permissioned borrowing — Most of these protocols are only permissionless insofar as they allow borrowers to interact with any pool. For actually setting up a pool, a complex governance mechanism must be followed. Thus, it is not permissionless for all parties, leaving out crucial stakeholders in any money market.
  2. Reliance on oracles — Most of these protocols rely on oracles to make sure their parameters are within acceptable limits. This leaves a crucial vulnerability on their design and an external dependency that cannot be moderated by the project. This can lead to hacks that drain funds and cause a massive loss.
  3. Liquidation risk — Most of these protocols operate with liquidations as a feature. In a volatile environment like the crypto market, this exposes borrowers to unnecessary risk and impedes their ability to plan long term.

Timeswap Decentralizes Debt Financing

The addressable market for debt securities itself is huge and presents a novel opportunity for DeFi to capitalize on. Right now, the way to secure debt financing in most jurisdictions is cumbersome and filled with major compliance burdens and ICOs have been stymied in the face of major legal opposition and the possibility of being classified as securities. Instead, projects could opt for an IDFO (Initial Debt Finance Offering) to make the token launch fair, while still gaining funding.

Initial Debt Financing Offerings(IDFOs)

Despite the market maturing to include debt instruments, many early-stage projects still elect for equity financing, even when they have investor backing. This is because, without a working product to show for, major funding is hard to secure. And in a space like DeFi, where products are built around financial metrics, being able to seed enough liquidity into the system is crucial for success.

The community can now self-organise with the help of decentralized protocols like Timeswap, trade on Uniswap and form a DAO to decide the future of the project they are invested in.

In terms of community, this allows for a wider appeal because there is no vesting schedule from early investors and no strictures to be followed by the team. This leads to an organic growth approach that is more sustainable for the long term.

Advantages of Debt Financing

Bringing debt financing to the crypto landscape is not only the introduction of a new primitive but also one that comes with its unique advantages.

  1. The most significant advantage of debt financing versus equity financing is the ability to retain ownership. In comparison to equity financing, debt financing is only transitory. When the loan is paid off, the borrower is no longer obligated to the lender. Unlike equity financing, there is no dilution of ownership.
  2. Obtaining and effectively repaying debt funding can assist improve a project’s credit rating and make it simpler to acquire loans in the future.
  3. Because credit conditions and payments are known in advance, debt financing can assist a firm in estimating its future cash flows.
  4. Interest payments for debt financing may be considered a tax-deductible business cost. This means that debt finance interest payments may reduce the amount of tax due by a firm.
  5. Fair launches are important for trust in a project. Timeswap enables projects to choose a different route (IDFOs), instead of opting for dilutive equity financing.



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