Cryptocurrency Synthetics are Giving Rise to Interest Markets in Decentralized Finance

May 4, 2021 2:04 PM UTC
Decentralized Lending


Decentralized lending markets have been around for some time now and they provide a very lucrative opportunity for DeFi users to park their tokens. Even though decentralized lending markets are very valuable they are still in their infancy and leave much to be desired.

Current decentralized lending markets are still primitive in the sense that they only allow users to generate interest yield from their tokens. Even with their simplistic nature there is immense popularity in cryptocurrency lending markets. In fact, the top three biggest use cases in DeFi are all lending markets right now.

A new project, Unreal Finance, intends on using synthetic tokens to take decentralized lending markets a step forward. Unreal Finance is adding an additional layer of value on top of existing lending markets by creating synthetics of existing yield bearing tokens to create a decentralized interest market. The most interesting aspect of this project is that it could be the very first decentralized interest market which has no interference by middlemen.

Synthetic Unrealized Yield Token

Unreal Finance intends on using synthetic assets to provide a type of decentralized interest market. The way the Unreal protocol will do this is by utilizing smart contracts to mint two different types of synthetic tokens: UTokens and UOS tokens.

These UTokens and UOS tokens are minted whenever someone deposits yield bearing tokens into the Unreal Finance smart contracts. By separating the underlying yield token into two different tokens Unreal Finance essentially creates one generic synthetic token and another new kind of synthetic token that derives its value from yield interest. The UOS tokens are generic synthetic tokens that derive their value from the underlying yield token. The UTokens will allow Unreal Finance to create a new tokenized asset that strictly derives its value from the yield interest generated by the underlying token.

An easy way to understand how UToken works is by looking at bonds. Similar to bonds, UTokens derive their value from the present value of all the potential interest payments that will be generated by the underlying asset. Also, just like bonds, UTokens will have their present value fluctuate based on the volatility of interest rates in the cryptocurrency lending markets.

The UToken’s will be completely tradeable on any DEX, which allows them to be turned into a speculative market. The minters of UTokens will be free to trade them on the market to immediately cash out on the present value of all the potential yield that can be generated by their assets. Other players in the market will be free to trade UTokens on the market as well based on their present value and speculation.

New Layers of DeFi

Decentralized Finance (DeFi) in general is still a very new industry, but it is expanding rapidly. There are already a few different use cases in DeFi that have gained immense popularity. The current most popular use case in DeFi is the lending market. Decentralized lending markets currently have over $38 USD billion in assets locked in them. The growth rate of decentralized markets is also very impressive; in just one year decentralized lending markets grew by over 47,000%!

To continue their astronomical growth decentralized lending markets will need to keep innovating. Unreal Finance is leveraging the existing proto lending markets and taking them into their next iteration by using synthetic assets to create decentralized interest futures.

As of now the decentralized lending ecosystem only has primitive lending markets, but as they continue to grow, especially with the addition of bonds, the potential room for growth is huge. For reference the traditional global lending market is sitting at $6.9 trillion USD right now!

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