The fixed-income corner of DeFi just got a major boost with Sense Finance going live on restricted mainnet. For the uninitiated, Sense.Finance is decentralized and permissionless infrastructure. Here teams can build and develop new yield primitives for DeFi, such as fixed income tokens, yield tokens, and other custom re-divisions of exposure for existing tokens. Built on Ethereum, its main feature is yield-stripping with nearly unlimited customization. The fundamental parts of this feature are the network’s eponymous Principal Tokens and Yield Tokens, which break down a digital asset into its principal and yield-bearing components. The simplicity of this framework is deceptive, because the Sense team has been able to pair it with an incredible amount of flexibility for issuers to craft custom fixed-income products, new types of primitives, and for users to trade in them all on a permissionless level of digital infrastructure.
Sense helps a wide range of actors who want to realize gains on yield-generating assets, including fixed-income earners, issuers, market makers, and arbitrageurs. The ways in which users can capitalize on the Sense Protocol’s functionality are based on its two core outputs: Principal Tokens (PTs) and Yield Tokens (YTs).
Principal Tokens (PTs): PTs are like zero-coupon bonds, delivering a single cash flow at maturity. They are simple and easy to value.
Yield Tokens (YTs): YTs are like floating rate bonds, delivering unknown cash flows at future date(s). They are more complex and harder to value, but they present fertile ground for financial innovation.
In this way, issuers can lock up yield-bearing assets in a similar way to vault protocols like Maker or Compound, but receive liquid, transparent, and functional components of the underlying asset in return. The yield component will remain variable, but the principal source of that yield will always be visible and known, providing a predictable source of yield for issuers and traders. This results in the other functions of the Sense platform that users can capitalize on, such as tranches for fixed rates in non-underlying terms and debt positions issued to firms or internet-native organizations like DAOs.
The beauty of Sense is in its ability to let users curate their own products in so many ways. Products can be created with any number of different attributes, such as being paid out in stablecoins or in like-kind, compounded reinvestment or immediate withdrawal, or collateralized debt positions to fund additional leverage or raise additional working capital.
Internet native organizations, such as DAOs, have both large treasuries of digital assets and future liabilities which are denominated in fiat currency. Often, in order to pay these liabilities, they are forced to liquidate the assets held in their treasury. Rather than using these assets or tokens to pay these liabilities, they could earn fixed yields in fiat currency on these assets by using the Sense platform. In this way, they are able to pay their liabilities with future stablecoin cashflows without losing valuable exposure to native tokens or other digital assets held in their treasury. Internet native organizations in particular are having a difficult time managing their tax burdens given the amount of fluctuation in asset value and their need to pay contributors meaningful compensation.
The fundamental structure of Sense automatically fosters markets in future expected yields. This is due to the delineation of principal and yield-bearing properties of underlying assets, which present very different investment profiles. This feature is integral to the Sense Space liquidity pools, where liquidity providers earn yield on their LP shares from Principal Tokens, yield-bearing assets, and trading fees. Unlike many other liquidity pool platforms, the risk of impermanent loss is substantially lower than in other, more common trading pairs.
For those interested in additional customization, Sense offers another layer of collateralization through their integrated Fuse Pool. The Sense Fuse Pool allows users to collateralize Principal or Liquidity Pool tokens, which can then be used to borrow Principal Tokens and yield-bearing assets.
The functionality of this protocol being properly addressed now only begs the question of how best to utilize it. Although creative groups will get together to capitalize on these concepts in their own way, here are a few potential directions and industries Sense could easily disrupt:
Annuities – Annuities are insurance products that provide a reliable, steady stream of payments to support one’s financial needs for the rest of their life or for a predetermined number of years. Annuity yield can be fixed or variable, and could be tethered to a Sense issuance in a number of ways, and potentially be wrapped into pre-existing annuity insurance contracts.
Surety Bonds – A Surety Bond is a legally binding agreement that provides a guarantee that a company or individual will deliver on their obligations. Surety Bonds help ensure a company or person will complete the duties it has promised to carry out, and is used in contract bidding, professional licensure applications, court bonds, fiduciary or probate bonds, and other private transactions. All of these applications could be made on-chain using the Sense platform.
IOLTA Accounts – IOLTA is an acronym for Interest on Lawyer Trust Accounts, which hold client funds in trust and can be audited at any time by state regulators to ensure compliance and safety of these funds. Interest earned on IOLTA accounts is usually directed to support legal aid programs.
Payday Loans – With more paycheck direct deposit functions on services like Coinbase and CashApp, people have greater access to being paid in crypto. This could lead to alternatives to payday loan services, which often charge exorbitant interest rates of almost 400 percent. A product using the collateralization function of the Fuse Pool could easily offer a more competitive rate.
On-Chain Trust Accounts – Banks like Anchorage and internet-native organizations like DAOs are increasingly looking to the trust as a vehicle for managing assets. In the interest of minimizing risk, officers of these on-chain trusts may use Sense for fixed-income to better serve their fiduciary duties to clients.
Corporate/DAO Bonds – Firms and DAOs can use Sense to increase available working capital with the current v1 iteration of the platform. Debt can currently be issued either secured or unsecured, and offers many options for DAOs and corporate entities that may wish to preserve their treasury’s digital asset equity.
For even more use cases, see the following information posted by the Sense team, or take part in the conversation at the Sense Discord channel: