Why Coupon Finance

Overview

Coupon Finance is a fixed-rate, fixed-term lending protocol with high flexibility in duration management. It separates yield and principal, tokenizing them fungibly per expiration date.

It is designed to narrow the lending-deposit spread by eliminating term spreads in the current DeFi ecosystem while keeping the peer-to-pool fungibility for liquidity. This offers users greater flexibility in position management, such as the option for early withdrawal. It also opens up new opportunities through enabling interest rate markets.

At a high level, Coupon Finance emulates what happens under the hood in the traditional banking system, with further capital efficiency enabled by the programmable nature of the decentralized finance

Problem

High lending-deposit spread

The discrepancy between low deposit yields and high borrowing rates is a significant issue in current lending protocols.

The 100BP gap between 2% and 3% might seem small, but it's actually a 50% bid-ask spread in terms of the rate market, which is like having $2,000 as the highest bid and $3,000 as the lowest ask in the ETH-USDC market

Cause

Term Spread

Financing perpetual loans with demand deposits imposes term spread, widening the lending-deposit spread.

In plain English, since depositors should be able to withdraw their funds instantly, while borrowers can keep their loans as long as they want, lending yields should stay low and borrowing rates stay high.

Solution

Core Idea

Eliminate Term Spread

Financing term loans with term deposits eliminates the term spread.

Existing Solutions & Their Limitations

Peer-to-peer lending model

This model matches loans and deposits at the same rate.

The need to match individual borrowers and lenders who agree on the same rate can significantly delay the execution of loans and deposits.

Batch-matching model

This model utilizes a batch-based rate decision mechanism, such as an interest rate auction, to solve the matching problem.

However, it only solves the problem for the primary market, but not the secondary market. Therefore, it still lacks flexibility in duration management. For example, opening a new loan position at an arbitrary time is not allowed. Also, withdrawing a fixed-term deposit before its expiration date is not allowed.

A Glimpse at TradFi

When you buy a 10-year treasury bond, you’re not expecting to wait for the whole 10 years. Since treasury bonds are “fungible” per expiration date, you can always exit your position by selling the bond at a fair market value. This fungibility brings “liquidity” to lending positions, attracting much larger capital to the market.

How Coupon Finance Solves the Problem

Tokenized Principal/Yield

By separating the yield tokens and principal tokens, the protocol maintains peer-to-pool fungibility, which enables flexible duration management.

Free Market Rate Decision

Utilizing Clober's on-chain Central Limit Order Book (CLOB), the interest rates are set through natural price discovery.

How It Works (Example)

Depositor

Alice can make a 1 ETH deposit that expires at the end of the year, and issue coupons accordingly. By selling the coupon at 0.03 ETH, she's effectively getting a 3% yield upfront. Since there’s a coupon issued against Alice's deposit, she cannot redeem the face value before the expiration date.

However, a month later, she changed her mind and wanted to withdraw her deposit. In this case, she can buy a coupon with the same expiration date from the market, and burn it to free her deposit.

Borrower

Similarly, let's assume Bob wants to borrow 1 ETH until the end of the year. By purchasing the coupon at 0.03 ETH, he's effectively paying a 3% yield upfront to get a fixed-term loan. Of course, Bob can always pay back his loan before maturity, and sell the coupons to the market to effectively get a partial refund for the interest he paid upfront.

Value Proposition

For depositors, borrowers, and traders alike, Coupon Finance seems to offer a more equitable and efficient ecosystem. Depositors can secure fixed yields while retaining the option to withdraw before maturation, borrowers benefit from more favorable rates, and traders can utilize yield tokens to speculate on DeFi interest rates, thereby contributing to liquidity.

This is even more efficient than the traditional bond market, in that we can make loans liquid by only providing liquidity to the coupon market, instead of providing liquidity to the bond itself. For example, an ask order for an ETH coupon at 0.03 ETH actually provides liquidity to a 1 ETH deposit.

Competitive Analysis

	Lending Protocol 1.0	Coupon Finance	Other Term Loan Protocols
Term Deposit/Loan	X	O	O
Capital Efficiency	Low	High	High
Lending-deposit spread	High	Low	Low
Flexible Duration Management	O	O	X
Supports Interest rate trading	X	O	X