Thread by @ipor_intern

Musing on valuation frameworks and why the duration of cash flow matters 🧵

As the industry matures, the supply of stablecoins is kind of a big deal for crypto.

The market turns against you and interest rates drop as a result of the increased float of stablecoins in the market

As expected,

- Borrowers become more sensitive to interest rates
- Lenders become more sensitive to their rate of return

All of a sudden, risk management is kind of a big deal and we need to go back and rethink the fundamental values of the most dominant protocols

Liquidity begets liquidity

That's the reason why, as an industry, #DeFi needs a base layer for credit markets

This invisible layer is the largest derivates market (interest rates derivatives) in #TradFi and underpins the debt upon which a yield curve is constructed

But there is more to it.

These markets run 24/7 and are auditable and transparent.

There are many ways to skin a cat, but there is a series of tradeoffs that will make that instrument more or less useful, specially for the fixed income market participants

You can split yield-bearing assets into a principal and a yield portion and trade them on an AMM

You can also come up with a vAMM construct that will allow for fixed-takers and variable-takers to interact with each other

...

But what's the issue here?

Liquidity fragmentation and exposure to the actual interest rates that drive market forces

A base layer for credit markets cannot be built on isolation, hence the value of capturing a benchmark rate into a single metric, like the @ipor_io index

This single metric is a public good and, at the same time, the center piece of a puzzle built upon money legos

Credit is a catalyst for growth, but what's the value proposition for the next wave of innovation in #DeFi?

Composability and venues to exchange of cash flows

You can't expect institutions to enter the markets with "fugazzi" financial acrobatics

Fixed income players call for stability, predictability, and liquidity

And this is the triad that everyone is overlooking

Have a good Sunday!