Fixed Rate Markets

Markets facilitated by swappable Zero Coupon Bonds

TL;DR

Users are able to borrow or lend zero coupon loans for a fixed rate by swapping collateralized bonds for cash (borrow) or by swapping cash for bonds (lending); later settling these positions.

Introducing Bond Tokens

Bond tokens (BTs) are zero coupon bonds which enable fixed rate borrowing and lending.

Fixed Rate Borrowing

Users can mint Bond Tokens (BTs) by opening an overcollateralized borrowing position. While the loan is denominated in BTs, the user effectively borrows cash by immediately swapping the minted BTs for cash.

To repay the loan and unlock their collateral, the user must return the same number of BTs they originally minted. This can be done at any time before maturity, or at maturity, by swapping cash back into BTs. The exchange rate for BT-to-cash is designed to be below 1:1 before maturity and converges to a fixed 1:1 exchange at maturity.

As a result, the implied fixed interest rate is determined by the difference between the cash received when the BTs are sold and the cash paid to repurchase them for repayment at maturity (which is equal to the amount of BT borrowed). This difference represents the interest paid on the loan.

This mechanism allows users to flexibly choose their collateral type, loan maturity, and loan face value.

Example Flow

  1. A user deposits 0.5 ETH and borrows 1000 BT-USDC with LLTV 0.86 and a maturity of 6 months.

  2. The 1000 BT are swapped for 950 USDC.

  3. After 6 months, the user brings 1000 USDC and swaps for 1000 BT-USDC to repay the loan.

Fixed Rate Lending

As for lenders, they choose a maturity and swap cash for BTs; later swapping them back into cash before or at maturity. Similar to borrowing, the implied fixed rate is fully determined by the swap—that is, the difference between the BTs received and the cash exchanged.

Example Flow

  1. A user takes 1000 USDC and swaps for 1050 BT-USDC with a maturity of 6 months.

  2. After 6 months, the user settles the position at maturity and exchanges his BT-USDC for 1050 USDC.

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