Intro to Copra: The Internet Corporate Bond

Copra
4 min readJun 14, 2024

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In TradFi, the bond market stands at $300T and is three times larger than the equity market. This signifies that there is just something about the certainty of fixed-income that is inherently attractive to human nature.

Now in DeFi, although yield products have been its bread and butter since the very start, it’s fair to say that the DeFi yield space is still nascent particularly for real organic yield. Through a Whitepaper in 2020, Mara Schmiedt and Colin Myers coined the term ‘Internet Bond’. This refers to (the then incoming) ETH staking as the sovereign bond of DeFi, that serves as the risk-free yield anchor of other DeFi yield products. Fast forward today, not only we have seen the wave of ETH staking, but also the growth of ETH restaking. ETH restaking latches to the security of ETH staking and hence can be thought to be the state-sponsored agency bond of DeFi.

So then, after its version of sovereign bond and agency bond, what’s next for DeFi yield space? We believe that there is a massive vacuum in DeFi for the equivalent of the corporate bond asset class. After all, if companies in the real-world can secure debt for growth, then why can’t protocols (as companies in the DeFi world) do the same and not just rely on tokens?

The above question is what started our journey to create an entirely new DeFi primitive we call protocol debt. Protocol debt is a fixed-yield undercollateralized loans for protocols that they can use for the purpose of liquidity in their protocol pools. This loan serves two main use cases:

  1. Bootstrap and grow TVL. To attract liquidity, most protocols currently rely on token emissions. This put pressure on teams to launch token early, even when they are not ready. Token emissions itself mainly attract mercenary capitals who would leave and dump the tokens immediately after incentive ended. Many times the simultaneous decline in TVL and token price would do irreversible damage to the protocol’s traction and brand. Protocol debt offers a much more efficient and effective alternative to accumulate TVL.
  2. Provide additional income source. Protocols can take any spread between the fixed-interest of the loan and the yield generated by the protocol pools into which the loan proceed is deployed. In other words, it’s an instrument for protocols to leverage the yield of their own pools that they are confident in.

How is the loan secured given it is undercollateralized?

At the core, we help protocol partners to open vaults that issue fixed-yield debt on top of their protocol pools. These vaults (we call them liquidity warehouses) would only allow lender deposits to be deployed to those predefined whitelisted protocol pools, hence securing the loan by fully custodying the LP tokens.

What guarantees the fixed-yield for lenders?

The fixed-yield for lenders are essentially being guaranteed by the deposit posted by borrower protocol. This deposit, which is typically single-digit-percentage of the total loan capacity, acts more generally as a junior insurance buffer for the loan and its fixed-interest to lenders in case there are any drawdowns or liquidity risks on the underlying pools. In other words, we abstracted out the underlying pools’ floating-yield into two parts: fixed-yield for lenders and leveraged-yield for the borrowers (early alpha: soon we are making borrower deposit side permissionless so anyone can be an insurer to the loans in order to leverage up on yields and incentives!).

We believe that protocol debt will be the new standard of lending in DeFi. Today, as much as 65% ($290B) of ETH supply are sitting idle, not earning any yield. The volatility of floating-yield and the complexity of risk management that exist in most DeFi yield strategies are the main reasons why only a small portion of ETH is staked or lent. Protocol debt offers lenders the comfort of a simple way to get fixed-yield as well as principal-protection over DeFi yield strategies. This will expand the universe of lenders for DeFi, not just to crypto holders but also to billions of TradFi normies, for them to start earning organic yield on-chain.

Introducing protocol debt is only the start of our larger plan to become the credit infrastructure for DeFi protocols. We will gradually expand the types of collateral that borrower side can deposit. Apart from simple ‘cash’ deposit, protocol borrowers would be able to escrow their future protocol fees or even pledge an on-chain receivable invoice. We will also, in stages, as protocols gain creditworthiness reputation from historical loans, allow the loan proceeds to be used for purposes other than on-chain liquidity for protocol TVL. We believe this is the start of how DeFi uncollateralized lending will truly be solved and how DeFi lending can be adopted by borrowers beyond protocols, even those in the real-world economy.

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