Now that DeFi yield has become a hot topic amongst traditional finance players and institutional interests in tokenization is growing, it's time to revisit an idea whose market is yet to be discovered by most.
Yield trading
It's not something you hear every day, but so far, the leading project in this category has already facilitated $80.95 billion in traded volume and settled $71.13 billion in fixed yield.
A little over 517k addresses have interacted with this market via the leading project, meaning that less than 500k people trade yields currently.
But, change is coming. As finance moves on-chain, capital will find new ways to expand and move. I've long talked about how tokenization will lead to money finding ways to move more quickly, and I believe that yield trading can potentially contribute to the growth pace.
But what even is yield trading?
Yield trading refers to the practice of buying, selling, or speculating on future yield (interest or return) generated by an asset.
For example:
You stake 1 ETH and expect to earn 5% annual yield.
Yield trading protocols separate your stake into:
Principal Token (PT) — represents your 1 ETH principal.
Yield Token (YT) — represents your future yield (the 5% expected return).
Traders can buy or sell the YT, speculating on whether yields will go up or down
This lets users:
Lock in fixed yields (by selling their YT)
Speculate on yield changes (by buying YT)
The big question is: why is this valuable and set to attract trillions?
DeFi yield farming already will attract trillions thanks to tokenization and stablecoin boom.
When that happens, significant TradFi capital will be sitting on-chain, generating income, but sometimes, fresh capital may be needed to invest in other ecosystems or alternative projects, so how do companies and individuals access said capital without moving out of their current investments?
The easiest path for businesses is generally loans, but with DeFi in the picture, yield trading will be one of many ways for initial capital to stay invested, while businesses still access capital to fund further operations.
Instead of loans, businesses can sell their future yield and fund their operations. As the example above highlighted, imagine a $10 trillion in staked value, selling its 5% future yield today, that's $500 billion in capital being unlocked for immediate use.
When much of traditional assets come on-chain, these decentralized yield trading markets will become the channels for invested capital to access future revenue today, further enabling markets and developments to move faster.
Posted Using INLEO