Benchmark rates have long been a cornerstone of traditional funding (tradfi) that supports trillion in financial instruments. Benchmarks like Libor and SOFR play a crucial role in the determination of lending and borrowing costs. However, these benchmarks have been criticized for their centralization and vulnerability to manipulation. Especially in June 2012, Barclays admitted to manipulating Libor, resulting in a $ 450 million settlement in US and British regulators. Although Sofr, like one overnight, solves some of Libor’s problems, it still faces centralization problems as the US Federal Reserve oversees its publication. Despite these challenges, Tradfi’s permanent income market has continued to thrive and grow into the largest asset class in the investable universe.
In contrast, the market for fixed income in crypto is fragmented and opaque. Replacement sources, such as efforts, borrowing and financing rates, are very unstable, loosely correlated and often poorly understood. This lack of clarity has hindered growth in crypto -fixed income spaces.
A potential solution? Create an infrastructure for decentralized benchmark rates similar to those found in Tradfi but more robust. In crypto, we could decentralize the prognosis of these benchmark rates that contain basic elements of Oracle mechanisms where accurate predictions are rewarded and inaccurate rates are cut. In this way, benchmark rate combines elements in both Libor’s meaning -driven methodology and SOFR’s transaction -based approach. By decentralizing the process, we could mitigate centralization risks and reduce the potential of manipulation, which ensures justice in how benchmark rates are determined.
Fixing fixed income with frozen
Reliable benchmarks are the key to building new economic derivatives markets that are crucial for defi to mature and grow. In particular, in the future, cleaning agreements (FRAs) and other fixed -income derivatives could be developed using stable benchmarks to uncover interest rates more efficiently. In Tradfi, Fras accounts for about 10% of the global permanent income market’s total nominal outstanding amounts. To put this into perspective, approx. 116 billion dollars at the moment stacked. Catching only 10% of this market VIA represents an option of $ 11 billion and highlights the potential of benchmark rates in locking the fixed income market in DEFI.
So what are froms?
Progress agreements (FRAs) allow participants to lock future borrowing or lending rates, reducing exposure to unstable market conditions. Think of a future contract, but instead of locking the price of an asset, you ensure an interest rate – similar to reserving an appointment for the future. For example, if the current stack of ETH is 3.2%, one would allow you to secure this rate for a future date, making your return on the investment a deterministic percentage.
Implementation of reliable benchmarks can lock the next development of the defic, which is not driven by speculation, but by structure, scalability and institutional quality infrastructure.
Are you interested in this concept? Read more about the potential for Fra’s in the rest of the article here.
