Fiat DAO

From DefiLlama
Jump to navigation Jump to search

Fiat DAO is a leveraging protocol for DeFI native fixed income assets that was implemented on the Ethereum blockchain. The goal of Fiat DAO is to be the first on chain repurchasing (repo) market for fixed income assets. A financial transaction is made in which one party (the user) deposits collateral with a promise to repurchase the collateral at a later date. Fiat DAO will enhance secondary market liquidity for cash markets such as fixed income assets like zero coupon bonds by acting as a market maker for the underlying in a capital efficient manner not currently available in decentralized finance. A healthy repo market makes available the necessary funds to allow the secondary markets to perform effectively. Investors of this asset class are thus able to efficiently and safely gain leverage and issuers are able to benefit from reduced funding costs. $FIAT itself stands for Fixed Income Asset Token which was developed as an instrument to represent an over collateralized claim against collateral deposited.


Fiat DAO is the brainchild of a team of core contributors Nils, Johannes, Max and Daniel. Many of whom had been contributors of Barnbridge DAO and were intimately familar with the Smart Yield product utilizing senior and junior tranches that represent fixed and variable yield products. It was clear to the creators that the problem with fixed income assets like zero coupon bonds lies in the illiquid nature of the asset itself. Essentially there was no secondary market available in which the user could bring this class of asset to the lending market as collateral and develop leverage for fixed income. The lack of an available secondary market represents a lost opportunity cost until maturity of the asset. The founders recognized the problem of poor capital efficiency was not just an issue that exists at Barnbridge but a problem that exists across all of DeFI and also a problem that traditional finance has addressed already with the development of repo markets. So as a consequence, in the 4th quarter of 2021, seed investors and the core team had begun work to bridge this gap in DeFI and develop a repo market in DeFI that would allow fixed income to become a superfluid collateral at high LTV ratios not currently seen.


At a high level, Fiat DAO consists of two ERC-20 tokens that represent both a governance token and an algoarithmic token that is minted against deposited collateral. The FDT token is our governance token which when staked in the DAO will allow participants to oversee direction and provide stewardship of the project. FIAT, as mentioned before, is essentially a claim against deposited collateral and looked upon as a floating token that is not net pegged to the dollar but instead will fluctuate with the prevailing discount rate. If $FIAT is trading above $1 then this will decrease both the collateral ratio and thus LTV and when $FIAT is trading below the $1 will in turn increase the collateral ratio and increase LTV. Because of the illiquid nature of fixed income assets, a rapid expansion or redemption of collateral at scale makes a floating "stablecoin" better suited for the fixed income market.


Standard operation will allow users to bring fixed income assets to [Fiat DAO Fiat DAO] and deposit them as collateral. This will allow the user to mint $FIAT at high LTV ratios. The minted $FIAT can then be deposited in another protocol providing for more fixed income to use as collateral. So now a leveraged loop for the purchasing of more of the underlying asset has been developed that can be again be used for minting of more $FIAT as positive sum re-leveraging. In this case there is no sell pressure on FIAT which could affect the loan to value ratios offered. Another scenario would allow users minting $FIAT to then use a DEX to exchange $FIAT for another stablecoin which can then be deposited into another fixed income asset as collateral to mint more $FIAT.

Borrowing $FIAT establishes a debt position at a loan to value limit ratio (LTV) that will define the maximum amount of leverage to be obtained as well as a borrowing fee. Releveraging $FIAT in the secondary market is a powerful strategy for financially experienced users who are cautioned; if the prevailing market rate moves against them, they may experience a loss of collateral value. If the underlier price drops below a calculated threshold that the protocol cannot recover the users debt position then a liquidation is triggered. To assure no pernicious bad debt accrues, liquidation allows for the conversion of confiscated collateral to $FIAT to pay back the positions outstanding debt. The expectation is that outside market participants are incentivized to buy confiscated collateral at a discount to the prevailing market rate for profit. This can be particularly challenging given the fragmented nature of fixed income assets on the secondary market which not be liquidated as easily as say stablecoins.

In essence $FIAT represents an over collateralized token which is minted against a users deposited collateral. It is not meant to be a replacement of stablecoins but rather provide a specialized lending market that represents the fixed income assets of stablecoins. This in turn will result in deeper liquidity as stablecoins become locked in fixed income assets thus providing for greater stability and increased circulation as minted FIAT is leveraged back into the underlying asset. Fiat DAO thus develops a symbiotic relationship with stablecoin issuers rather than an adversarial one.