Decentralised Finance and Corporate Bonds

The link from bonds to DeFi brings benefits for both traditional and decentralised finance.

The EURxb token described here represents a Euro denominated asset with a fixed interest rate that compounds per second in real-time and is therefore considered a stablecoin. The term stablecoin is used in this context to describe a digital asset that is not subject to the volatility associated with assets based on cryptocurrencies; the interest is a bonus. This stability gives it utility in the context of decentralised finance, where value is transferred peer to peer, outside the traditional financial system. Stablecoins are useful in DeFi to hold value pegged to fiat currency without incurring the time and expense of leaving the DeFi ecosystem. Examples of their use include a store of value, to link to fiat denominated expenses, or for remittance purposes.

The DeFi environment consists of a permissionless and public ecosystem of digital assets, smart contracts, protocols and decentralised applications that can be assembled to create financial products. It is permissionless and public because anyone can access and use the tools; it is decentralised because it does not rely on agents or third parties to enable peer to peer transactions. Most DeFi projects are being built on the Ethereum blockchain, but other environments are also being used.

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The more useful the EURxb Token is in DeFi, the higher demand will be for this and similar tokens. This will bring improved liquidity for the debt issuer and its bondholders, since it will create a market for the EURxb tokens. The success of this project is likely to lead to other companies doing similar things, creating a family of this type of stablecoin. Services and use cases can then be expected to develop around this family, with additional benefits in terms of increased liquidity and other tools for bond token holders.

While this solution brings DeFi benefits to traditional finance, it can also bring some traditional finance benefits to DeFi. As a stablecoin, it represents a regulatory compliant and transparently audited asset, so the stablecoin’s value is clear and secure - something that is not always the case with asset or fiat currency backed stablecoins.  

The creation of a bond backed stablecoin enables DeFi users to create products around that asset, leveraging its stability and fixed interest rate to build other DeFi derivatives. This benefit is intangible and hard to predict quantifiably but is probably one of the most significant outcomes of this work. The creation of tokens like EURxb also has the potential to give DeFi users access to the bond market, and longer term - via similar mechanisms - other traditional financial instruments.

The process of going from bonds to stablecoins can work in the other direction as well. An acquirer of EURxb tokens could thus use them to buy bond tokens from the issuer, and thereby own the bonds directly. This would require the token holder to register with the debt issuer (MIRIS in this case) and the National Numbering Authority (Euronext VPS) to satisfy KYC requirements, and then be registered as the bondholder.

The early trends in DeFi were centered around yield farming - maximising the return on cryptographic assets. The ability to tokenise fiat denominated assets with this kind of structure provides another building block to be used in innovation. This structure becomes a “plug in” for existing DeFi projects who would find value in connecting to such assets. Potential uses here include building tools that link to Euro denominated payments or remittances. Innovators could also use EURxb to lock in crypto gains, leveraging the relative volatility of crypto assets. DeFi derivatives could be built, such as options on cryptocurrencies, and there are many more possibilities that will emerge.

A further implication is that this mechanism is a convenient route for corporate investors to gain exposure to crypto assets and enter into DeFi. Despite the growing number of businesses buying bitcoin directly as noted above, there are still logistical and governance barriers in many cases that prevent institutions from participating in this rapidly developing area of finance. A mechanism that enables an investor to buy a conventional bond, and then to leverage that bond in the crypto market, may well be something that is an attractive proposition for forward thinking organisations.