In decentralized finance (DeFi), fixed-rate financial instruments are gaining more traction. They are a response to the changes and growth we’ve all witnessed in more traditional fixed income markets. Pioneering platforms such as Notional Finance, 88mph, and Yield Protocol are leading the way in the DeFi fixed income world. Each morsel uniquely adds to this exciting developing landscape! Like Aave, these protocols provide a marketplace for fixed-rate, fixed-term borrowing and lending. They use DeFi’s composability to layer fixed rates on top of existing yield-generating opportunities. Now more than ever the DeFi landscape is maturing, rapidly. As it matures, fixed-rate finance will begin to resemble its legacy finance (TradFi) sibling even further.

The “DeFi Summer” of 2020 lasted from June to August and forever altered the landscape of decentralized finance. This era led to tremendous innovation and brought a lot of positive attention to the industry. After October 2023, there was a wave of new protocols. These protocols focused on addressing the risks and opportunities presented in the expanding DeFi landscape. Many of these platforms were primarily fixed-rate lending and borrowing. Their goal was to provide end-users with more certainty and predictability in their financial transactions.

Early Pioneers of Fixed-Rate DeFi

Notional Finance was started in 2019 and went live in early 2020. It’s at the forefront of innovating fixed-rate, fixed-term borrowing and lending on the Ethereum blockchain. Notional Finance added silence long fixed rates/terms. This change brought users a much more predictable and less volatile borrowing/lending experience compared to the variable rate models that were the standard at that time. This breakthrough served as the springboard for additional innovation in the DeFi fixed income environment.

Another early entrant in the fixed-rate DeFi arena was 88mph, with its first iteration (v0) launching in April 2020. The platform’s most recent iteration came out in late November 2020, adding even more sophistication to its fixed-rate lending and borrowing model. These protocols pioneered the inclusion of fixed-rate instruments into the DeFi ecosystem. In doing so, they laid the groundwork for ongoing innovation and growth.

Yield Protocol, which launched in 2021, was another important player in building the foundation for fixed-rate DeFi. It brought in long-term, fixed-rate, fixed-term borrowing and lending. This change opens up a new world of more predictable products for DeFi users to work with. At the same time, BarnBridge, 88mph and Saffron Finance went different routes to bring fixed rates into the DeFi ecosystem. Instead, they took advantage of the composable nature of DeFi to build creatively around these obstacles.

Innovative Approaches to Fixed Rates

BarnBridge, 88mph and Saffron Finance all took different approaches. In doing so, they brought fixed rates into the yield opportunities already available by using DeFi’s composable nature to their advantage. This data-driven approach enabled them to provide users with various cutting-edge options for managing risk and making money in the DeFi realm.

BarnBridge, for instance, released a token (BOND) that worked like zero-coupon bonds. These tokens allow users to secure a guaranteed rate of return for a set period of time. This capability added a new layer of predictability and stability to the ever-cyclical DeFi market by providing much-needed certainty. BarnBridge (BOND) all-time high TVL is at $79 million. As the centerpiece of Fixed Forex’s $125 million market capitalization, this achievement demonstrates intense demand for fixed-rate products in DeFi.

Saffron Finance, which operated between 2021-2022, was primarily involved with the tokenization of on-chain collateral. This new method provides users with the ability to unlock stable, long-term loans by using their crypto assets as collateral. Consequently, it establishes a scalable and seamless approach to borrowing and lending within the DeFi ecosystem. These platforms are making history and taking us closer to realizing the groundbreaking potential of DeFi. They design inclusive financial innovations that serve an expansive cross-section of individuals and businesses.

Institutional Adoption and Future Trends

The convergence of traditional finance and decentralized finance is exemplified by instances such as LuxDeco's collaboration with Nivaura to issue the world's first cryptocurrency-denominated, blockchain-settled bond. This event underscored the growing appetite for leveraging distributed ledger technology in the fixed income space. It does signal a bigger shift underway in the financial landscape.

Element Finance’s $7M seed round in March 2021 was a sign of increasing investor confidence in the direction of fixed-rate DeFi. This surge of capital provides the resources to drive more innovation and growth in the space. It opens the door for innovative products and services that better serve the ever-changing demands of DeFi users.

The creation of junior tranches, or the first-loss capital, is another key trend of fixed-rate DeFi. This risk-mitigation strategy serves to insulate senior tranches from losses, thus increasing their appeal to investors. The DeFi fixed income market is maturing very quickly. It will finally implement advanced risk management practices raising its attractiveness further to institutional investors as well as retail users.