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Huobi Research Institute: Changes in DeFi Fixed Rate Products are needed

The fixed-rate deposit products available in the Decentralized Finance (DeFi) industry are an important component of the financial derivatives market; However, it still exists quite a few limitations for investors such as low interest rates, stiff competition rates and lower overall appeal. An improvement that includes integration of multiple lending protocols offering higher interest rates is needed for fixed-rate DeFi products to remain relevant to investors, according to a report in partnership with Huobi Research Institute. with Huobi Tech and EmergentX announced.

Titled “Fixed Rate DeFi Protocols: An Opportunity in a Bear Market?”, the report notes that fixed-rate products have a very important role to play, especially during a downtrend, by way that allows investors to hedge risks. However, there is an almost predictable conclusion to the challenge that comes in times of market volatility, which is that one side will gain while the other side loses. The report also points to an improbable dilemma in the design of a typical DeFi product: the balance between risk, interest, and stability (Figure 1).

Huobi Research Institute: Changes in DeFi Fixed Rate Products are needed 1
Figure 1: The triangle paradox of DeFi products (Source: Huobi Research Institute)

The report goes on to look at the three most commonly adopted fixed-rate protocols in the DeFi market today: zero-coupon bonds, segregated principal and interest, and tiered earnings.

According to the report, Notional, an example of a zero-coupon bond that operates on simple supply and demand curves, where interest rates are fixed at the time of borrowing, shows notable disadvantages in the form of low interest rates. due to insufficient working capital and inflexible tenor, with terms of only three months and six months, may not be enough for both lenders and borrowers.

In a segregated principal and interest model, the Principal Token (PT) is sold at a discount while the Yield Token (YT) functions to widen the earnings differential while remaining below the liquidation line. Pricing is a significant downside to this protocol, the report notes due to challenges associated with market prediction. The report also notes that pricing is a major drawback of this protocol because of the challenges associated with predicting the market.

The hierarchical model that categorizes funds into different tiers with varying degrees of risk aversion is commonly used in traditional financial markets; is essentially shifting the added risk from investors who prefer a steady income to those willing to take on the increased risk.

According to the report, despite the downsides, Notional is standing out among TVL-wise lending protocols. However, the demise of Terra and the prediction of an impending bear market have not gained traction because of the systemic risk posed by large fluctuations in the crypto market; Liquidation risk for loan-type fixed-rate products and how investors will need more time to figure out their investment strategy, given the variety of fixed-rate product structures now available.

Fixed interest products are facing stiff competition from professional investors and reputable financial institutions,” said Hugo Hou, researcher at Huobi Research Institute and co-author fake of the report said. “Low interest rates remain a headache for fixed-rate products in DeFi and hamper industry growth.”

Yeyan Wei, a researcher at Huobi Research Institute and co-author of the report, also shared: “The increase in interest rates can only be achieved by fair pricing, redistribution of profits to participants, and increased growth profits from the underlying assets. We expect new generation products with fixed interest rates to appear soon.

About Huobi Research Institute

Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016.

Since March 2018, Huobi Research Institute has been committed to comprehensively expanding the research and exploration of various fields of Blockchain, thereby contributing to accelerating the research and development of Blockchain technology, promoting Blockchain application and optimization of Blockchain ecosystem.

Huobi Research Institute will focus on researching industry trends, technology development trends, application innovation in the Blockchain field, etc. At the same time, Huobi Research Institute will also work with governments, businesses, universities and other institutions to build a complete Blockchain research platform.