Simple Economics

I have often looked out at financial systems and spat at the idea of fixed interest rates because it is very difficult to do in an economic system. We should all view any given economic system as living and breathing beast. Interest rates are always moving and are never stable. Interest Rates are comparable to a metabolism, and if a human set a stable metabolism even through varying access access to food.

But I was recently challenged to compose a way for Fixed Rate Lending in Crypto. From this point forward, this is all theory.

Variables in Lending

There are three variables in the act of lending that are not appropriately addressed in existing or now defunct fixed rate lending protocols. In this section I will look to address these.

Maturation

In the current system of cryptocurrency the majority of the lenders offer their savings to pools where they can withdraw them at any given time and have access to them. This power reduces the risks involved with lending because assets can be retrieved when desired.

Under a fixed rate lending system this may not be possible. When rates are variable, available liquidity directly affects the rates. In order to fix rates, we have to fix the available liquidity. This part of the system cannot breathe.

Interests Rates

I think the largest issue with decentralized fixed rate lending is that these fixed rates cannot compete where they cannot compare. Variable rates, especially in a bear market offer the ability to take advantage of the untapped liquidity. In a bull market, they might pick up and the option of fixed rate borrows to reduce exposure to volatile borrows.

Fixed Liquidity Fixes Rates. Assets should be locked inside of the liquidity pool for a certain amount of blocks in return for an NFT as a promise of interest. These assets should be inside of the variable liquidity pool.

IF 40% of the assets in a given liquidity pool was locked up for a certain number of blocks (which should make for a neat dune board), 40% of the liquidity is predictable. IF the variable rate rose above the fixed rate, the fixed assets are paid and the rates for new Fixed Rate Deposits should rise to compete with this. IF rates drop below the fixed rates, the rates on new deposits should be negative or astronomically low to prevent further Fixed Rate Deposits.

There should never be a situation where all assets are lent at a fixed rate. Fixed rate lending, in decentralized finance, should be used as a method of implementing a more* *artificial rate than the natural rate provided.

Time

Another thing that is easily forgotten is time. I say this because it is important to know how long should liquidity be locked up. This interest rate should be constantly changing for new liquidity entering the fixed rate market. It cannot be the same for every single asset entered. The average rate of interest should be calculable for all assets.

Time should be measured by Ether Block Time. I like the concept of human time for 3 or 6 or 12 months. Committing assets for longer entitles an investor to more promised interest.

• 12 Seconds per block on main net. 5 blocks a minute. 300 blocks an hour. 7200 blocks a day. (Barring any issue with block times).

I think that the promised interest should be considered as a share of profits. The shorter the time commitment the lower the guaranteed interest. This should be done in such a way that the fixed liquidity is never more than a certain percentage of the pool.

The amount of liquidity permitted to be fixed should be algorithmic with the majority of the Fixed Rate Deposits at a range of 216,000 - 432,000 blocks (3 - 6 months). A smaller portion of these assets should be devoted to higher time commitment for 864,000 or more blocks.

What the Variables Address?

Providing lending liquidity at a fixed rate is nearly impossible unless it is person to person. The best that this method offers is a rate floor, not a ceiling. The reason this is more decentralized is because it offers the ability for fixed rate deposits and the corresponding variable rate deposits to protect lenders with artificial rates.

Artificial rates have long benefited centralized finance because of their predictability. Under the current paradigms of decentralized finance, interest rates are not predictable and this is definitely a step in that direction.

Further experimentation is needed to better test this out, but it is a very beautiful beginning.

The biggest issue will likely come from debating how much of the deposits should be fixed rates in a given pool. I think the best answer is variable and not fixed, floating between 30% - 70%.

Fixed Rate Deposits should be lower when lending is more volatile and unpredictable, as they might be in a bear market. These deposits should be higher when lending is low to encourage more deposits. This also allows for artificial rates to flow with the market. Volatile lending (likely a bull market) should have more natural rates to prevent tomfoolery, debauchery and ignominy. Stable activity (likely a bear market) should have artificially higher rates to prevent lenders from leaving.

One More Asset Class

These promissory notes can function elsewhere in decentralized finance as collateral or in as proof of income. An addition of 5,000 USDC for 216,000 blocks earning 2.9% can be used somehow. I believe these coupons could be priced at 60% of face value with their price increasing slightly every block as the coupon nears maturity.