Sollar Protocol

Sollar - app

Interest rate market is one of the most foundational building blocks of finance. As of January 2022 in decentralized, we observe most of the yield offered are in APYs which are paid out in risk assets, or are floating rates, or both. Furthermore, most Defi interest rates are not guaranteed. Based on the writer’s knowledge, there does not exist a broadly adopted risk-free interest rate benchmark on which financial valuation can be based. This makes it difficult for hedgers, asset managers, and investors to price and manage their assets.

To tackle this issue, we propose the use of decentralized derivatives to create synthetic bonds to approximate the market-implied risk free interest rate. A synthetic bond can be created through the use of the interest rate parity condition in which long asset, long European put, and short European call can produce a risk-free position, against which a bond can be minted. Liquidity and depth of the options market will determine the variety and quantity of bonds that can be minted. Through this simple mechanism, we would like to see more structured and fixed income market activities that can help Defi participants better price interest rate, risk, and assets.