Mint Ventures: A "Native Bond Market" vision for the crypto world

Mint Ventures

23-03-31 10:51

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Original Title: A Vision of the "Native Bond Market" in the Crypto World

Original article by Colin Li, Mint Ventures

Supply: The cycle is against long-term, low-risk investors

In the traditional financial sector, bond investors generally have lower risk appetite than stock investors. Taking relatively low risk for more robust returns is the goal of bond investors.

The Crypto market has grown into a huge market with a total market value of more than $1 trillion. However, against the backdrop of BTC's "half in four years" and the rapid birth and death of bubbles caused by the brutal growth of the industry, the market showed extreme volatility. In Bitcoin, for example, the bull market has seen gains of tens or even hundreds of times at its peak, only to be quickly followed by declines of 80% or more. Other currencies have had more dramatic performances in bull and bear markets. This high volatility leads to approximately90% of tradersExit the market at a loss. Perhaps for this reason, what we have seen is that mark-to-market leverage, such as perpetual contracts, is more popular, and long duration (simply understood as term, time) leverage is almost absent.

Source: Coinstats

Other low-risk investment opportunities that exist in the market are also more cyclical. Take the capital rate of the longest lasting BTC perpetual contract as an example, the market yield in the bull market is significantly higher than the bear market. Even if investors with long-term liabilities want to invest in lower-risk "bond-like" opportunities, it is difficult to find high-risk investors who can withstand higher funding costs for a long time.

Demand: The narrative of institutional mass entry and DAO Treasury has yet to materialize

"Institutional" entry and DAO Treasury have been recurring themes in this latest bull market, which is why some programs were set up in the first place, such as the DeFi program for market makers. However, with the Luna debacle in May 2022 and the subsequent impact on Three Arrows and FTX, a large number of institutional investors were hit. This not only affects the use of the stock of funds in the market, but also leads to more attention to the supervision of the crypto field. Coupled with the recent failures or exits of a handful of crypto-friendly US banks, the mass entry of institutional money may take longer and confidence restored.

There is a lot of discussion in the market about DAO Treasuy's financial management narrative. But,HasuThe distribution of funds in Treasury was analyzed in 2021. Most of the assets are tokens of the project itself. And even now, good projects, likeLidoMakerDAOtreasury is still based on its own token.

Source: Uncommon Core

Source: DeepDao

Even if we look beyond the current situation and into the future of the DAO, it may not be possible for most projects to have enough other assets stored in Treasury. This may be related to the crypto industry's own attributes. Because the crypto industry is trans-global development, the supervision between countries has not been unified or even has not appeared, so that the crypto industry has a very strong Matthew effect situation. This phenomenon is evident in the most mature decentralized trading platform (DEX) and lending industry among DeFi at this stage. The reason why there is such a situation, because the crypto market is linked to global liquidity and supervision is not enough of a market.

DeFi is a kind of finance, and it also has some inherent attributes of finance. For example, investors expect the project with the lowest cost, highest return and the best safety. Because there is no customer management involved, only differentiation in the product dimension, but it is an open source project, it is not difficult to copy codes or product functions from each other. However, since DeFi has a natural preference for liquidity, transaction costs, etc., user liquidity cannot be copied. So the Matthew effect is stronger, and the project that starts first has a greater chance of becoming the leader.

In traditional markets, some regulatory policies have the purpose of anti-monopoly, hoping that there are enough market participants, they will also review mergers and reorganizations among each other, in a sense, to suppress the Matthew effect. Looking back at DeFi, there was little regulation, no customer service, no artificial suppression of monopoly issues from the regulatory level, so the Matthew effect is a little bit stronger than in the traditional sector.

So, will many of today's DeFi projects still exist in the future? It may be difficult, or even if there are many DEFIs, most of them will probably be small, and the TOP3 market share may be 95% or higher. The DAO Treasury of the head project has more assets, so the narrative that many DAO have a large amount of Treasury may not be true, and only a few DAO heads in each track have enough money to do Treasury management.

Source: Token Terminal

Source: Marcus Wang

In the long run, most DeFi segments may have an oligopoly with a market share of 90% due to the advantages of leading projects in liquidity and transaction costs. For DAOs, then, there may not be many money scenarios to manage.

Token has dual characteristics of stock and bond

Back to the token itself, the token itself has dual attributes of stock and bond:

From the perspective of equity, token holders can participate in community voting, deeply participate in project governance, and share commission fees earned by the project itself due to the value capture attribute. From a debt perspective, tokens are special. In the traditional business world, companies can get cash if they raise equity when they expand. In order to gain a larger market share, the funds will be used for marketing, such as advertising, rewards in kind, discounts and so on. At this point, the firm gives equity in exchange for cash.

In crypto markets, after a project is established, part of its token is used as an "incentive". When the user meets the requirements of the project, he has the qualification to participate in the project incentive allocation. In general, when tokens are allocated as incentives, they are settled at a certain point in time, such as per block, daily, or weekly. Since the user's behavior occurs before the distribution of token incentive, each time before the distribution of token incentive is the "arrears" of the project to the user, which is similar to the "expected liabilities" of sales rebates in traditional accounting accounts. If the founding team wants to expand its debt, it can do so by setting aside more tokens as an "incentive" after the project runs. The advantage of the existence of new liabilities such as "incentive", rather than directly applying for loans or issuing bonds, is that traditional loans and bonds are rigid debts denominated in legal currency, which is a great pressure for any founding team. If they cannot be repaid, they will face legal and other problems. However, the issuing right of the token is in the project side itself, and there is no expected coin price requirement, only the plan of predicting the number of tokens, so this new debt is more friendly to the project side. Just because of the emergence of the token as a new value medium and financing method, the project side's demand for traditional debt financing is greatly reduced.

Future development forecast

As can be seen from the above three points, no matter from the strong cyclical market itself, or from the supply side and demand side of fixed income products, there is no development soil similar to the traditional bond market for the time being. What kind of bond market might be more suitable for the development of crypto industry?

From the benchmark of interest rates

Public chain based POS yield is probably the best option. This rate of return is based on a larger ecological presence, and the degree of business development tends to be less volatile than for a single Dapp project. Second, this rate of return anchors ecological growth and is more acceptable to participants in that chain. Moreover, a Dapp's control over user incentives is in the hands of the project side, so not every user has to buy the token of the Dapp; For public chain, as long as users need to carry out substantive activities on the chain, they need to buy public chain Token to pay fees. Relatively speaking, public chain Token may be more dispersed. Moreover, under the influence of fat protocol theory, a large number of investors are inclined to buy public chain tokens to earn beta income. Therefore, PoS rate of return is not affected by a single Dapp project party over a long period of time, and is more stable.

From the perspective of audience

Participants in the bond market are positioned more appropriately between high-risk speculators and low-risk arbitrageurs. There's a dearth of long-term investors in the crypto market right now, so it's hard to find a lot of solid investors. In addition, the volatility of interest rate still needs to be borne by another counterparty, and the risk can only be transferred and cannot disappear into thin air. Therefore, a high-risk participant is needed to speculate on the volatility of interest rate. Although there is a lack of funds from institutions and DAOs, there are a large number of arbitrage traders in the market, and this part of investors can be used as a source of funds for "low-risk investment". At the same time, the market is more populated by risky speculative traders, who can serve as the other end of the spectrum to absorb volatility. For example, Pendle, a kind of revenue tokenization project derived from LSD, divides the revenue of LSD into two parts:

principle token (principal Token)A fixed interest rate product, you can view it as a zero coupon bond;

yield token, interest rates fluctuate, and users can bet on future yield increases by buying yield tokens. It not only meets the requirements of arbitrageurs and low-risk investors for yield, but also allows high-risk investors to participate in the forecast speculation of LSD yield.

In terms of time limit

The overall cycle of the crypto market is faster, so the maturity of bonds should be shorter. Let's say a bond with a maturity of less than 1 year. The advantages of this design are not only beneficial to low-risk arbitrage traders, but also to high-risk traders: short-term interest rates will fluctuate more violently and frequently, which can provide more potential trading opportunities for short-term traders.