Hipo is the first decentralized bond protocol with real fixed interest rate. Builds in the spirit of innovation and experimentation, Hipo mainly focuses on borrowing and lending services which is the infrastructure of DeFi ecosystem. Look down to the nuts and bolts of Hipo, a question arises, how fixed rate loan works on Hipo?
Before doing that, we need to learn more on Hipo’s lending procedures.
Borrowers take a loan from Hipo by issuing and selling bonds on the bond trading market. Lenders earn fixed income by purchasing bonds. Bonds issued on Hipo are zero coupon bonds. In other words, bonds that are sold at market price and redeemed at face value. The margin between bond price and bond face value is interest should pay.
Price of bond sold by the borrower on the bond trading market depends on the market condition at trading. Interest Token plays a significant role in market-oriented interest price formation Mechanism. The bond price is calculated by the price of Interest Token (INT Token).
INT Token is a media used in trading to calculate the price of interest under certain market condition. It doesn’t have value outside Hipo and couldn’t be withdrawn. Each Interest Token signifies one share of bond should trade.
Well, how does INT Token work in bond trading process?
If you were to purchase bond, that is to say, you are a lender. Hipo would mint INT Tokens and give them to you. And then you sell INT Tokens on the bond trading market.
If you were to sell bond, which means you are a borrower. At the point of trading, you need to purchase INT Token with the same amount of the shares of bond. For instance,if you were to sell 100 shares of DAI 30 days bonds, you need to purchase 100 INT Tokens (which can be marked as INT Token 30 days) to execute the trading. Different from the lenders, if you are a borrower, you need to purchase INT Tokens.
Later, we will illustrate how do the lenders and borrowers trade Interest Toke 30 Days. Let’s look into details of the two pools on the bond trading market.
Behind the scenes, the bond trading market consists of two liquidity pools. One is interest pricing pool and the other is lending pool.
The interest pricing pool works through AMM, while the lending pool is a trading pool which resembles order book trading mechanism.
Lending procedure on Hipo
Once you have grasped this, we will then circle back to the bond trading procedure.
You trade against the interest pricing pool to produce your interest price and then trade against the lending pool to lend or borrow your assets.
Interest pricing pool is a pool of INT Tokens and the same currency you borrow or lend. Both sides of the pair are of the same value in total. Traders exchange one currency for the other. If more borrowers buy INT Tokes from interest pricing pool, the amount of INT Tokens will decrease, the price of each token will increase thus incentivize lending.
In interest pricing pool, INT Tokens are traded and priced. For borrowers, the cost for INT Tokens is the fixed interest should pay. For lenders, earning from INT Tokens is the fixed income will get at expiration.
Once you’ve got these in mind, we can then circle back to bond price formation.
If you were to purchase 1,000 shares of ETH 30 days bonds, of which the par value is 1 ETH per share, you would be given 1,000 shares of interest pricing tokens. You sell all of them. If the price of INT Tokens you sold is 0.03ET per share, the price of bond you should purchase is 0.97ETH per share. Then you should pay 970ETH to purchase 1,000 shares of ETH 30days bonds. Hold to maturity, you would receive 1,000 ETH, 30 as interest included.
As suggested above, interest on Hipo is produced and fixed through AMM and could reflect supply and demand on market. If you want to know more about Hipo V1, please read our last post. (Looking Into Details of Hipo V1: Decentralized Bond Protocol)