Opium Finance, aptly named, has released Collateralized Debt Obligation Products (CDOs) for Compound Finance’s automated credit markets, Opium Protocol founder Andrey Belyakov told CoinDesk in a phone interview on Friday.
Investors can use the Compound Debt Token cDai – and soon the Uniswap LP Token – to diversify their exposure to the DeFi credit markets. In return, Opium’s product pays structured returns for both senior and junior risk tranches. The former tranche offers a 7% fixed rate of return on dai (a collateral-backed stable coin) at maturity, while the latter pool offers a floating rate that is paid out after the senior tranche is replenished, a blog post, which is shared with CoinDesk countries.
As depicted in Michael Lewis The Big Short, CDOs are notorious for their role in monetizing the subprime mortgage crisis that sparked the 2008 financial crisis. Warren Buffet went so far as to refer to CDOs and other derivatives as “financial weapons of mass destruction” years before the financial downturn. CDO holders lost expected payments when mortgage holders defaulted en masse. Banks that were excessively indebted to then worthless debt obligations began to default themselves, such as the failed financial giant Bear Stearns.
It is believed that the transparency of blockchain-based financial applications could limit the disadvantage of using these complex derivatives. Additionally, the risk profile of the average DeFi loan app is vastly different from the reasons CDOs became household names over a decade ago. Due to programmatic liquidation settings, DeFi apps have only a low probability of defaulting. The main risk is in software exploits that many poorly assembled DeFi apps have experienced over the past year.
Belyakov said risk tranching increases the efficiency of capital in credit markets – a poorly understood problem in young DeFi markets that he believes derivatives can help address.
It works as follows: A log issues a promissory note that represents a claim to funds that have been deposited or “blocked” in a DeFi app such as cDai. With these debt instruments, the same deposits can again be exposed to other markets. Most DeFi investors, however, leave these debt securities in wallets, invest them as collateral for other loans, or set them up for income farming. The problem is that these bets often move in the same direction. In contrast, adding debt to Opium’s CDO is a categorical alternative to other forms of capital exposure, Belyakov said.
“We looked at the lowest hanging fruit,” said Belyakov. “And we noticed that Uniswap LP tokens, Compound cDai and a few others are only stored in a wallet. You are not used as security or agriculture – you are not using that capital. “
The derivative joins other early attempts to protect lenders from the software risks associated with distributed finance. For example, Saffron Finance released its unchecked protocol in November while the little-known Barn Bridge protocol continues to develop a similar offering to Opium’s. The protocol also released a credit default swap (CDS) product for the Tether Stablecoin in September.
Opium is jumping on the governance token train too. The protocol released its opium token (OPIUM) on Monday to decentralize the governance structure of the protocol. The launch was preceded by a premiere and a $ 3.5 million private sale, in which venture capitalists Mike Novogratz, Galaxy Digital, QCP Soteria, HashKey and Alameda Research participated, among others.