Before we get started, DeFi Dad disclosed that his team 4RC did invest in the FIATDAO seed round. This is not a recommendation or endorsement to buy FDT, but it is intended to disclose any bias he might have in talking about FIATDAO’s liquidity mining program for FDT.
In the legacy financial system, fixed income is the largest sector with an estimated $120 trillion in assets. In DeFi, countless protocols such as BarnBridge, Element, Notional, and Pendle have already launched to emulate these fixed income assets and mechanisms. Previously, I’ve written about familiar variable rate lending markets such as Aave or Compound which have become widely accepted in DeFi. However, fixed rate protocols have yet to gain real product-market fit despite all the innovations of these new DeFi protocols.
The lagging traction for such DeFi offerings is the inability to leverage these positions earning fixed yield. In the legacy world, fixed income assets enjoy copious amounts of leverage, which is believed to be the missing link in DeFi. In light of this, FIAT Protocol is being built to let you “borrow against your positions in fixed income assets issued by leading DeFi protocols, at high loan-to-value ratios and for low fees.” FIAT is an acronym for Fixed Income Asset Token because FIAT will be backed by fixed income assets issued by other DeFi protocols. FIAT is not a stablecoin and I’ll explain why below.
What’s important is in the near future, one will be able to deposit fixed income assets, mint FIAT, and spend or invest FIAT while still earning yield on your assets.
Here’s how it will work eventually:
- Deposit Collateral: Users are able to deposit supported fixed income assets as collateral
-
Collateral Pricing: The protocol prices deposited collateral via a discounted cashflow calculation
-
Borrow: Users then mint $FIAT against the total principal sum of their collateral as a function of protocol pricing
-
Redemption: Users can redeem their $FIAT either to pay down their collateralized debt position or to acquire the cheapest-to-deliver collateral asset in the protocol vault
The real devil is in the details here, as explained by the FIATDAO team:
The discount rate utilized by the protocol in valuing assets is determined algorithmically as a function of the price of $FIAT. This is justified insofar as $FIAT fundamentally represents a claim on the collateral assets in the protocol vault, implying that its market cap thus represents their aggregate fair value. So, as $FIAT declines below $1, the protocol increases its reference discount rate and decreases collateral loan-to-value ratios accordingly.
I want to clarify this is one of the most advanced DeFi protocols I’ve encountered. Between the language and the moving parts of how it works, it requires some time to understand unless you’re familiar with these concepts in traditional finance. But for now, the FIAT Protocol has only launched a token distribution program to attract like-minded communities to join in building FIAT Protocol. To dig deeper into FIATDAO, check out this Medium post.
Per Usual, FIATDAO will be controlled by a governance token called FDT. The FIATDAO team has launched yield farms to begin distributing FDT for those interested in the future of this protocol. With already $360M TVL staked, one can stake any of the…
Hi! My name is Lark Davis!
I’m a cryptocurrency investor with years of experience and I’ve been making consistent profits in the crypto space.
I’m passionate about helping others do the same, so I run multiple educational channels on crypto investing.
