We aren't shy to broadcast our vision of providing a bridge between TradFi and DeFi, but what does that really mean for us as a protocol?
The community discussion forums are now ready for proposals! Head on to https://gov.xbe.finance to register and look around the material already available... and keep an eye out for new proposals that you may want to participate in! While on-chain governance with our official UI is getting closer and closer, we will start off with snapshot voting if any proposals arise before the UI is ready. Now back to the subject at hand!
Recapping the vision
We aim to create an open protocol where holders to the rights of off-chain value (assets or income) can tokenise it in a way that ensures that ANY holder of the token's right to the respective asset or income (proceeds) is legally provided for within the existing regulatory regime where the asset or income is registered. Starting with corporate debt securities was a critical step from which we could now launch support for multi-term and rate based debt securities, and once this has been established properly we intend to progress to provide mechanisms for other securities such as equities (i.e. stocks, shares, etc) and other off-chain value such as funds in FIAT accounts, precious metal reserves, and immovable property.
It is needless to say that there is still a lot of legal legwork to be done to provide for regulatory compliances across the many regulatory regimes within which we are engaging with future partners currently - however we do maintain an optimistic confidence born from our engagements with several regulatory bodies on tokenised securities trade, off-chain collateralised stablecoins, and the other instruments covered in our long term roadmap - and of course our work with the South African Central Bank around a prototype tokenised securities market. We are further exceptionally bullish on our selected "ultra-conservative" tokenisation approach following the EIB's recent announcement of a 100m EUR 2 year note issue of green and sustainable bonds. The coincidence is truly uncanny, and it bodes exceptionally well for future regulatory approvals of our protocol mechanic.
What do we address next?
Tokenising off-chain value is one thing - however providing liquidity and true DeFi utility to those tokens is another matter entirely - and due to the critical importance it plays in our protocol's success, it has become the primary focus of our current development and partnership work. Liquidity comes from the ability to provide protocol stablecoin tokens secured by the tokenised off-chain value as reserves, like we have shown with EURxb stablecoin liquidity being created as first ESAT and then linked EBND NFT721 tokens are locked as protocol reserves for holders. The next leap is to demonstrate DeFi utility for that liquidity, which we deliver firstly through the new xbEURO token that capitalises the future term interests in a non-inflationary ERC20 token that is supported by all major DeFi protocols - and then secondly the creation of protocol yield that can be used to incentivise deep liquidity pools to provide an on- and off-ramp from xbEURO into other DeFi instruments (such as EURs, sEUR, and in future even other USD based stablecoin tokens, and native cryptos like ETH and others).
The key requirement here is the mechanism by which liquidity is incentivised - and whilst this require protocol partnerships in DeFi (which we have been working on ceaselessly), it is important to note that the quality of incentivisation from partner protocols is directly proportional to the independent yield we are able to offer as incentive on the same liquidity pool. In practice, this means that if we are able to offer our own yield incentive (LP Rewards) to a xbEURO / existing EUR based token liquidity pool on CURVE for example, the rate of incentive provided by the partnering protocol's token is substantially greater than if we do not provide our own protocol yield. Furthermore, the more yield is supplied by both partnering protocols the more likely sufficient CURVE community uptake will follow - resulting in an increase in community support.
Generating Protocol Revenues
The introduction of the xbEURO and the governance controlled XSR (XBE Savings Rate) rate starting at 5% (similar to the DSR mechanism Maker DAO deploys) generates substantial protocol fees through providing depositors immediate and real tangible value. Accessing future value of term interests up-front increases the capital deployed to yield farming activities so dramatically that even with the 5% XSR fee deduction, the depositor is still able to generate substantially greater returns over the interest term than they would otherwise have earned - ensuring a win-win scenario for both the depositor and the protocol. This revenue immediately provides substantial value which enables the native yield incentivisation from the protocol side to kick-start the LP reward incentives snowball we refer to above, but during the initial roll-out this income is still relatively unpredictable and will only truly grow to the level we believe is required to support our vision once we have been able to issue substantially more EURxb and EURx(n) that take advantage of the xbEURO token.
This leads us to our current position - where we need to create a mechanism to kick-start protocol yield from where we are now in order to take us into a fully self-sufficient yield generation platform that attracts sufficient off-chain assets to tokenise, provide protocol liquidity for, and deposit into xbEURO. To be clear - the influx of off-chain assets will quickly follow as soon as the protocol demonstrates reliable returns on xbEURO liquidity, and therefore the immediate challenge is how we can demonstrate this value with lower levels of liquidity in our initial partnerships that we can then organically ramp-up to prove the protocol succeeds at scale.
How would we pay rewards?
To unpack this challenge, let’s start with HOW we believe the protocol should be paying out yield as incentive for liquidity. Whilst institutional vault depositors require their returns to be paid in xbEURO / EURxb tokens (depending on the strategy allocation), XBE tokens as reward pay-out provide for a more sustainable protocol reward model. This however requires that XBE tokens not only have value, but that their value is maintained through the protocol activities, and this requires introducing mechanism to lock-up as much of the existing circulating supply as possible to reduce sell-pressure and increase price stability. To compensate for the long term risk holders must accept to lock-up XBE tokens, the protocol should provide sufficient incentive to deliver a strong net economic benefit for the lock-up - and at the current level of protocol income there does not seem to be sufficient native yield to provide for this incentive AND provide for the incentive to initiate LP rewards simultaneously.
Therefore - in summary - we need to lock-up a substantial volume XBE to ensure token value is maintained, so that XBE can be a lucrative incentive to draw counter-asset market liquidity for the xbEURO token, which in turn will draw in more off-chain assets to be tokenised that issue liquidity deposited for xbEURO tokens... A catch 22 indeed!
For those thinking about the XBE in treasury - we envision substantial future product development, and the establishment of a protocol funded foundation to engage with both regulators and large scale institutional holders of off-chain value, which is why the allocation of 3,000 XBE to community treasury was part of the original distribution schedule and is still a justification for the preservation of these funds at this stage. Furthermore, even if the protocol did not need these funds to see it through all the associated costs over the first 2 years of operation, raiding treasury in order to pay XBE based rewards does not represent a sustainable model for the protocol, so as the founding team we are heavily against touching any of these tokens.
The Founding Team’s first proposal
With all of the above in mind, the founding team is currently finalising a proposal to be released imminently to the community on how this can be equitably addressed - including how the much anticipated Vaults would integrate...