Introducing the Duet Protocol 3.0 Series — Part II
This article is part II of the Duet Protocol 3.0 Series. If you are interested in reading the 1st part, follow the Duet medium.
Part 1
- Vision
- Challenges
- Introduction
- Overview
Part 2
- Value propositions
- Utilities of DUET
- Duet Bond
Part 3
- Roadmap
- Token Allocation
- User guide
- F&Q
Value Propositions
Liquidity Providers
Liquidity providers in the Duet protocol can assume two roles, liquidity provider and market maker.
When a user supplies capital to the Duet protocol, which is subsequently supplied to other DeFi protocols as liquidity, the user is considered a liquidity provider. A liquidity provider can mint synthetic assets that generally do not fluctuate in value, like stablecoin dUSD.
Duet provides liquidity providers with:
- Automated reinvesting: automatically reinvests rewards from the receipt tokens and enhances overall return
- Free line of credit: Mint dUSD free of interest, use dUSD to acquire additional exposure to more assets or to simply spend it without having to sell their positions
- Yield on dUSD lending pool: Mint dUSD and deposit in lending pools to earn an additional yield on top of the automated reinventing
- Reward on dUSD AMM pool: Mint dUSD and provide liquidity to designated dUSD AMM pools to earn the reward.
Market Makers
When a user supplies capital and mints any synthetic asset that fluctuates in value, which is then supplied to the market, the user is considered a market maker. Market makers often assume a short position in the underlying synthetic asset. They are expected to buy back and return the synthetic asset to claim their reserve capital. This may result in a loss when the asset price rises or even liquidation when the liquidation ratio is crossed.
Duet provides market makers with:
- Automated reinvesting: automatically reinvests rewards from the receipt tokens and enhances overall return
- Reward on AMM pool: Synthetic assets can be used to participate in various farming pools
- Mint to earn rewards: Duet rewards market makers for assuming more risks with returns from Duet swap
- Covered Short Positions: Legacy synthetic protocols cover losses of the market makers by paying a lot of tokens, Duet introduces a novel solution where market makers are able to hedge all the short positions by opening long positions in underlying asset markets
Investors
Duet satisfies the needs of both crypto investors and traditional investors.
As a crypto investor, you are able to
- Open Leverage Positions: Use crypto assets as collateral to mint dUSD and subsequently acquire additional exposures
- Yield Farming: Using Duet, crypto investors can wrap their holdings into receipt tokens and receive rewards typically received by a liquidity provider
- Diversification: gain exposure to assets that are less correlated with the crypto market without having to move liquidity out of the crypto market
Traditional Investors
As a traditional investor, Duet protocol provides you with
- Availability: Gain exposure to various asset classes in just one crypto wallet
- Divisibility: Own a piece of or divide previously indivisible assets
- Programmability: Program your asset
- Yield Farming: participate in various farming pools with either synthetic assets or just dUSD
Third-Party DeFi Protocols
For third-party DeFi Protocols, they are able to grow their TVL （Total value locked）by collaborating with the Duet protocol, enhancing returns for their liquidity providers, generating liquidity, and use cases for their existing liquidity providers.
Utilities of Duet Token
Duet token is a key facilitator of the Duet system. All of the Duet services including minting unit, security unit, liquidation unit, and swap unit charge fees from the users, which are paid to the Duet treasury as income. The Duet DAO will approve spending on various farms. The farms are set with clear goals to grow the ecosystem and in turn, increase the demand for the Duet services and thus generating more income.
The Duet Treasury buybacks Duet tokens with residual income to increase the price of the Duet token in the long run.
Bonded Duet
Overview
A Duet bond is a certificate issued by the Duet Treasury for an investor to receive principal and interest payments denominated in Duet tokens in one or several future dates.
A typical bond consists of a series of interest payments and a principal payment. For example, a 6 month Duet bond with a face value (principal) of 100 Duet tokens and interest payments of 10 Duet per month would entitle the holder to receive the Duet token as follows:
Whereas an investor who would have received 100 Duet tokens today, he/she can opt to be paid with 160 Duet tokens in 6 months time, which is 60% more Duet tokens.
Mining rewards are locked for 12 months and Duet token holders may choose to reinvest their Duet tokens for any duration they please.
How to calculate the value of a Duet Bond
Before we calculate the value of a bond, we need to understand the basics of a bond
Face Value(F): The principal amount owed by the bond issuer.
Epoch: The time interval between every payment, Duet defines an Epoch to be the 1-month equivalent amount of blocks, depending on different block times of different blockchains. All pending payments of all bonds are claimable on the same block every month.
Coupon Rate(r): The coupon interest rate is used to calculate interest payments for each epoch, for example, a bond with the face value of 100 Duet and a coupon rate of 10% per epoch will be paid 10%*100=10 Duet tokens each epoch as interest payments
Duration(n): The amount of epochs left to be paid
Discount Rate(R): Discount rate is derived using market price of a bond, duration of the bond, and expected payments of the bond.
Net Present Value(NPV): The NPV is arrived at by discounting all expected payments of a bond with respective discount rates, NPV is the fair value of a bond.
Current Price（P）: P is the market price at which a bond is being traded at
Yield to Maturity(YTM): YTM is annualized return on the principal of a bond
Consider the simplest bond, a bond with a face value of 100, coupon rate of 10%, and duration of 1 epoch.
Coupon payments=F*r=100*10%=10 DUET
Principal Payment= F =100
The bondholder is expected to receive 110 Duets in 1 epoch time. On the date of issuance, the coupon rate is always equal to the discount rate, which is 10%.
NPV=Payment/(1+R)n=110/(1+10%)1=100 DUETs
When a bond’s current price is equal to its face value, the bond is trading at par, when it is trading above the face value, it is trading at a premium and when it is trading at lower than the face value, it is trading at a discount.
Now consider after the issuance of the bond, the discount rate drops to 5%, the value of the bond would be
NPV=Payment/(1+R)n=110/(1+5%)1=104.76 DUETs
This example shows how the value of a bond can appreciate when its coupon rate is higher than the discount rate (which is typically the coupon rate of a newly issued bond)
Now back to the more complicated bond that is mentioned in the overview, a bond with the face value of 100 Duets, coupon rate of 10%, and a duration of 6 epochs. The payment structure of the bond is
The above payment structure can be replicated with 6 bonds like follows:
Calculating the NPV of the bond now is just as easy as adding NPVs to these 6 bonds.
NPV=Payment1/(1+R)1+Payment2/(1+R)2+Payment3/(1+R)3+…..+Payment6/(1+R)6
Assuming the discount rate is as follows and it becomes higher as durations increase, the NPVs are calculated as
The bond’s fair value or NPV is 122.59 Duets, thus the bond is trading at a premium, selling immediately will amount to a return of 22.59 Duets. This is the result of a lower coupon rate after the issuance of the original bond. However, by selling the bond now, the holder will have to accept a discount of 1-(122.59/160)=23.38%.
Duet Bond Market
By looking at the previous example, we understand that a bond with a complex payment structure can be viewed simply as a combination of several simple bonds with just 1 payment at each epoch that corresponds to the original payment structure.
This means a complex bond can be decomposed into several simple bonds and many bonds can be combined to form a complex bond.
Traditional bonds denominated in US dollars are more like NFTs, with face value, coupon rate, and the duration recorded on the certificate and traded like ERC-1551. This means older bonds face liquidity depletion.
With blockchain technology, we are able to reengineer the bond in a web 3.0 context. With Bonded Duet, payments are made once only each epoch. This means there are going to be only 12 payment blocks each year. Any bond that is set to expire in this time window can be represented by 12 separate bonds each expiring at every epoch.
Each of these payments is administered by an ERC20 token contract.
As a result of this new structure, Duet presents a bond market with 12 AMM pools each representing a bond maturing in each of the 12 epochs.
Investors could reinvest their Duet tokens by buying Bonded Duet with Duet tokens in the bond market with a customized payment structure of his choosing. The longer the duration, the higher the coupon rate, thus the system encourages token holders to lock in preferable coupon rates with longer duration bonds.
Bondholders may choose to sell their bond at the market at a discount and effectively unlock the liquidity.
Yield to Maturity and Yield Curve
After initially providing liquidity to all bond AMM Pools, market forces will determine the bonded Duet discount rates.
Let us assume that bonds with a duration of 12 epochs with 100 Duet face value are now trading at 49.7 Duets. This implies that the market is pricing a 6% coupon rate per epoch.
Yield to Maturity is the annualized return expected if an investor buys a bond at market price P, reinvests all payments at the current rate, and holds until maturity.
Given that the current price P is 49.7, payment is 100 and duration is 12, Knowing that P=payment/(1+R)n
Thus R=(payment/NPV)1/n-1=(100/49.7)1/12–1=6%
Now, to annualize return, we calculate YTM as
Yield to Maturity (YTM)=(1+R)12–1=(1+6%)12–1=101.22%
Market prices of bonds of all 12 epochs will form an implied yield curve, typically with higher yield to maturity at higher durations.
The market mechanisms will balance buying and selling pressures such that when selling pressures of bonds are greater, the market price of bonds will fall, and yield will rise, which will attract more investors to reinvest Duet tokens; when investors reinvests Duet tokens with enthusiasm, bond prices will increase, and yield will fall, which will encourage bond holders to sell their bonds at a profit.
Protocol Controlled Value (PCV)
Duet seeks to control most of its liquidity in AMM pools. Duet will be issuing Bonded Duet to investors in exchange for LP tokens in swaps. By controlling its own liquidity, Duet avoids liquidity depletion in case a large LP choses to exit positions.
Bonds as a Service (BAAS)
The Duet Bond system can be applied to more than just DUET tokens.
One can consider Duet bond system to be an innovative staking scheme where liquidities are encouraged to lock in for as long as possible to maximize returns while locked liquidity can be traded for underlying tokens anytime. In this context, Duet can extend its bond as a service to other projects to issue bonds denominated in other tokens.
In the future, Duet can also allow users to open a vault with specific crypto assets to issue bonds denominated in dUSD, to be sold to bond buyers to raise capital.
We are going to introduce the dAssets module in the following articles. Stay tuned!
