In our most recent update, we are going to be taking a look at and defining secondary markets in DeFi, derivative based assets DeFi produces and the long term vision for what kind of role will Yield Bank play in the entire DeFi ecosystem — so, let’s get to it!
Secondary markets in DeFi
A secondary market, by definition, is a market where investors buy and sell assets they already own i.e. assets that are already being traded actively on the open market. What if then these assets are able to be merged (typically in pairs of two, but can be more) into a single derivative asset?
For the sake of simplicity, let’s call these markets the DeFi derivatives markets. From the viewpoint of terms and definitions used in traditional finance, LP tokens would be seen as derivatives or derivative-esque assets, since their value (dictated by the open market) is significantly impacted by price movements of the assets the LP token is derived from i.e. composed of.
“The submarket for LP tokens is still in its infancy.”
Submarket for DeFi derivatives
Following that train of thought, an LP market would simply be a submarket of the DeFi derivatives market. The only current major DeFi derivatives being actively used are LP tokens, but the trading of LP tokens, in other words the submarket for LP tokens is still in its infancy.
“Our goal is to make a platform where such new derivative assets are adapted seamlessly”
The iYield team at Yield Bank aims to set a new standard for the secondary markets in DeFi and the derivatives these markets create. Currently, our aim is to focus on LP Tokens as that is the only significant derivative-esque asset DeFi offers, but should another asset with unique properties hit the markets in the future (as is the case when dealing with derivatives derived from brand-new tech), our goal is to make a platform where such new derivative assets are adapted seamlessly (with minimal additional development required, depending only on specific new properties the respective asset would have) and given a platform where they can grow, allowing for widespread market adoption and increasing DeFi’s market share of the cryptocurrency space.
This would be achieved through launching a marketplace (a DEX focusing on a specific set of assets) consisting of two types of trading pairs
- LP token + LP token trading pair, such as ETH-DAI / WBTC-USDC
- LP token + non-derivative asset trading pair, such as LINK-SNX / ETH
Setting up a wide range of trading pairs and allowing 3rd parties as well as users themselves to deploy these pools (for new trading pairs not already deployed on our protocol as to avoid duplicates) is one way to achieve our desired solution, and becomes more feasible with every dollar that pours into DeFi, however for now with the DeFi derivative market being still in its infancy, something more akin to an auction style trading system for LP tokens would be more feasible, where the sellers can dictate what non-derivative or derivative assets they are willing to accept for the LP token they are selling. Sellers would also be able to either auction off their assets, or sell for a fixed price, or a hybrid of those two (setting up price ranges for an auction, a minimum price, an instant buy-out price / strike price etc.).
This goes hand in hand with branding, naming and tracking LP tokens, allowing on-demand price feeds of LP tokens and other DeFi derivatives as well as on-demand “Fair Value” calculations for LP token’s value among many other metrics that need to be supplied to potential traders and investors looking to get involved with the DeFi submarkets. This is extremely ambitious but necessary if the DeFi space wants to move forward and evolve. We hope to see more projects and platforms tackling this problem head-on as we believe it is healthy for the entirety of development of decentralized finance.
The Liquidity Problem
Liquidity is quite literally the lifeblood of DeFi as without it, virtually all DeFi products and concepts could not function the way they are currently functioning.
This is a problem centralized solutions do not really have to deal with because of their reserves, years of marketing making experience and support. Anybody who has been in crypto for more than 5 minutes knows Binance or Coinbase isn’t ever going to have liquidity issues, effectively no matter the circumstances.
However, in DeFi this is not the case. Liquidity can be a fickle mistress that comes and goes as it pleases based on what the market volume and price swings look like. The mere fact that liquidity is not a guarantee introduces great risk to traders as well as investors and holders relying on DeFi solutions to execute their trades — this is obviously a problem.
The Solution to the Liquidity Problem
The model of permanently locked liquidity pools Yield Bank implemented since its inception now seems more imperative than ever.
The team at iYield believes that propagating the locked liquidity model to the forefront of DeFi will result in a more stable, healthier ecosystem that promotes longevity and thus will provide a more stable bedrock upon which the DeFi ecosystem can grow into something much bigger than it is now. The locked liquidity model holds far greater purpose than what is currently apparent. Its presence alone when in mass paired pools will create liquidity that never leaves the DeFi space, forever cementing liquidity depth for assets like a CEX, only in our DeFi markets. When the liquidity is locked forever, our secondary market begins to flourish with LP tokens. The LP token becomes a derivative of the locked liquidity in the pools, whilst generating passive income forever as long as those pools are swapping assets. This brings massive potential to the LP market and tokens, expanding into areas not seen before. These permanently locked liquidity pools at Yield Bank will host the largest variety of pools market wide. We plan to develop an LP market product with the ability to merge multiple LP tokens into one, wrap LP tokens with other assets, and leverage your LP tokens for popular pools with leverage. Locked liquidity does so much more for DeFi than what is apparent at first glance and has far more benefits than negatives, with the most important being DeFi’s longevity!
We hope to see more protocols incorporating pools with permanently locked liquidity.
Mutual Leverage of Protocols
Yield Bank’s team and developers aim for Yield Bank to become the central intersection for all protocols and DeFi in general to route their swaps and trading strategies through.
Through leveraging our open-source code published by our developers, any other protocol in DeFi will be able to plug into Yield Bank and leverage all of our products using a simple block of code that is then implemented into the external protocol by the developers of that respective protocol. This goes hand in hand with our plan for the LP market and other DeFi submarkets as we will allow external protocols to use our branding, data and price feeds for naming, tracking and pricing LP tokens.
It also works vice versa — Yield Bank’s developers have implemented nearly all major DeFi protocols into our code and trading strategies. We believe in a tightly-knit ecosystem where protocols even without working together directly, can leverage other protocols at their own discretion and need.
This allows for various trading strategies to be executed through Yield Bank when it comes to trading and arbitraging LP tokens and other derivative-esque assets on the market.
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The article and any other associated content of Yield Bank does not constitute as financial advice. Cryptocurrencies are a high risk investment and may not be suitable for all members of the public and all types of investors. This is an experiment in DeFi yield aggregating to bring longer and steadier yields to its users.
Next article coming up: TBA
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Liquidity Episode Round 2 date: TBA