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What are Decentralized bonds? How do they work?

23 Aug 2022 By : Anirudh
Southeast Asia’s Lar

In the blockchain sphere, DeFi is one such field that keeps on growing; adapting and keeping on par with traditional finance is one of the primary goals of DeFi. Day by Day, DeFi's applications are increasing, and the field is gaining more adoption as we speak. 

According to data from DeFi Pulse, the Total Value Locked(TVL) in all the DeFi protocols combined is $40 billion; at its peak, this figure almost reached $100 billion. These figures are staggering, considering the world is still in its infancy regarding blockchain adoption. The idea of a decentralized blockchain banking system where users don't have to pay for intermediaries or any other needless charges while exponentially increasing the security is quite intriguing. 

While the genre offers various services, just like traditional finance, some niches have not gained much attention compared to others. Bonds are one such niche. 

Bonds are essentially fixed-income instruments that represent a loan made by an investor to a borrower. In simple words, the owner of bonds are creditors of issuers, according to the number of bonds issued and the number of bonds a single person is holding. 

We are in the initial stages of entering a recession; many analysts and banks are confident that America, Eurozone, and Japan will be facing its wrath. As instruments of debt, bonds are traditionally a preferred investment during challenging times when the equity markets are in shambles. Investors' interests are typically paid periodically, and the bond's primary value is subsequently paid in the long term. Bonds bring the instrument of stability that the crypto markets are missing. 

Decentralized bonds 

There are only a few decentralized bond solutions in the DeFi markets, mainly due to the lack of regulation and infrastructure. Decentralized bonds are dedicated to enhancing' the DeFi experience' by improving both the standards and capability of smart contracts. These DeFi-only bonds can help guarantee liquidity changing the sector that is always changing. 

These decentralized bonds are the next generation of potential investments for crypto enthusiasts who prefer low-risk investments. These bonds facilitate investors to participate in the firm's success, theoretically, without taking any risks, unlike traditional markets where there is an underlying risk involved with purchasing bonds. 

Investors can lose their money if the company they bought the bonds from goes bankrupt. But the concept of decentralized bonds has essentially changed the outlook toward bonds. Here, the money is secured through the power of smart contracts up until the investment period is completed. Besides, decentralized bonds are digital IOUs created on a blockchain and traded in open markets without the need for any intermediaries. 

But how do they work?

Decentralized bonds are a new and innovative approach for raising funds through the blockchain community. They allow investors to invest money into a new project and yield returns until it is completed. Unlike traditional bonds, DeFi bonds are highly transparent and secure. 

The idea of allowing investors to earn capital without selling the underlying asset is quite attractive, especially in this uncertain state of the crypto market and global economy. Investors can purchase bonds with cryptocurrencies like Bitcoin or Ethereum and receive monthly payments up to the expiry.

DeFi bonds issuing platforms enable different DAOs to deposit collateral from their treasury to create a bond offering that can be sold to investors at a discount rate and then let DAOs repay the loan until the maturity date with the incurred interest. 

Issuers typically build or develop their own protocol and solutions with the money they raise. Still, they can also invest the money into various other cryptocurrencies, assets, or venture capitals. In addition, bonds are resistant to market fluctuations, so they act as a good hedge in a dicey market. 

Some frontrunning decentralized bonds projects

SuperBonds

SuperBonds is a DeFi bond market built on top of the Solana blockchain network. It is the first of its kind on Solana and enables users to buy, sell or take custody of yield-generating bonds. In simple words, SuperBonds provides users with a DeFi bonds exchange that provides exposure to DeFi markets and receives adequate valuation of their bonds or NFTs simultaneously. SuperBonds unlocks a whole new scope in Solana's DeFi spectrum, a bond market financed through NFTs.

D/Bond

One of the pioneers of the ERC-3475 token standard, D/Bond, is a Web3.0 infrastructure platform for decentralized bonds. The D/Bonds ecosystem provides many services, including D/Wallet, D/Exchange bonds, and derivatives exchange, along with the open market for securities. 

The token standard ERC-3475 that D/Bond created opens the door for anyone to create their own bonds. The D/Wallet also supports ERC-3475 tokens. D/bond offers fixed-rate interest for investors who are interested in buying bonds and guarantees the security of their clients, theoretically introducing a risk-free mode of investment. 

Porter Finance

Porter Finance's target bond issuers are DAOs with treasuries who wants to raise funds for further operations. DAOs can raise funds through bonds by keeping a part of their treasury as collateral. Porter Finance has the vision to boost DeFi projects by assisting them in raising funds. 

Conclusion

Admittedly, bonds are not the preferable investment mode for most crypto investors who prefer high-risk, high-reward scenarios; but it is an excellent and smart hedge against an unstable market. If you want to diversify your portfolio further into crypto; it is an ideal way to both earn risk-free interest and support upcoming projects in the blockchain space. 

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