The vast majority of lending protocols follow a peer-to-pool approach that consist of variable rate models and governance. Risk-related factors and parameters such as interest rates are determined by governance in a reactive fashion as market conditions change. Even though this approach has been an innovation in DeFi and offers utility, fixed-rate lending is an untapped area.
Fixed-rate lending would allow borrowers to predict the costs of a given loan in contrast to the existing approach where costs change over time, degrading UX.
The primary parameters can be set by governance but some parameters can be set freely by participants. This would be achieved by an overcollateralized zero coupon bond-based P2P lending protocol.
Zero coupon bonds are a debt instrument that pay no interest, they rather trade at a discount and thus generate profit for the holder at maturity when redemeed.
Borrowers would set collateral in ratios pre-set by governance. Upon minting these bonds, users would be able to sell them on the market in return for the token they were looking to borrow.
Lenders would receive these bonds and exercise them for face-value at maturity.
Here is a concrete example on the flow:
Upon maturity, borrowers have the ability to repay the loan or the system will automatically roll the maturity one additional period. This ensures that there’s always principal for lenders to redeem. This system is overcollateralized and borrowers are subject to liquidations when the ratio drops below governance-defined thresholds.
We believe an orderbook design is more expressive as lenders can quote based on their views about interest rates. As bonds reach maturity or liquidation, the system requires sophisticated market makers to supply liquidity.