The reference rates have long been a cornerstone of traditional finance (tradfi), underpinning billions in financial instruments. Reference points such as Libor and Sofros play a crucial role in determining loans and loans. However, these reference points have faced criticism for their centralization and vulnerability to manipulation. In particular, in June 2012, Barclays admitted Manipula Libor, which resulted in a $ 450 million agreement with US regulators and the United Kingdom. Although Sof, like a rate overnight, solves some of Libor’s problems, it still faces centralization concerns, since the United States Federal Reserve supervises its publication. Despite these challenges, the tradfi fixed income market has continued to prosper, becoming the largest asset class in the invertible universe.
In contrast, the fixed income market within cryptography is fragmented and opaque. The sources of performance, such as the rethinking, the indebtedness rates and the financing rates, are highly volatile, correlated already often little understood. This lack of clarity has hindered growth in the cryptographic fixed income space.
A potential solution? Establish an infrastructure for decentralized reference rates similar to those that exist in tradfi, but more robust. In cryptography, we could decentralize the prognosis of these reference rates, incorporating foundations of Oracle’s mechanisms where precise predictions are rewarded and the inaccurate are reduced. In this way, the reference rate combines elements of Libor’s opinion methodology and the approach based on the SFO transaction. When decentralizing the process, we could mitigate the risks of centralization and reduce the manipulation potential, ensuring equity in how reference rates are determined.
Fix the fixed income with FRAST
The reliable reference points are key to building new markets of crucial financial derivatives to defend and grow. In particular, the term rate (FRAST) agreements and other fixed income derivatives could be developed using stable reference points to cover the interest rate risks more effectively. In tradfi, the FraS represent approximately 10% of the total notional amount of the global fixed income market. To put this in perspective, approximately $ 116 billion in ether is currently stabilized. Capture only 10% of this market through Fras represents an opportunity of $ 11 billion, highlighting the potential of reference rates to unlock the fixed income market in Defi.
So what are Fraities?
Term rate agreements (Fras) allow participants to block loan rates or future loans, reducing exposure to volatile market conditions. Think of a futures contract, but instead of blocking the price of an asset, an interest rate is ensured, similar to the reservation of an agreement for the future. For example, if the current reference rate for ETH is 3.2%, a Fra would allow you to ensure that rate for a future date, which makes your investment return a deterministic percentage.
The implementation of reliable reference points could unlock the next evolution of Defi, one that is not driven by speculation, but by structure, scalability and institutional degree infrastructure.
Interested in this concept? Read more about the bottle potential in the rest of the article here.
