PERMISSIONLESS MARKETS
BUTTON ZERO
Buy and sell crypto-backed zero-coupon bonds. Borrow or lend against Bitcoin, Ethereum, AMPL, and more with zero liquidations and zero margin calls.
WHY BUTTON ZERO?
THE PROBLEM OF MARGIN LEVERAGE
Margin leverage is traditionally used by sophisticated traders, since price volatility requires careful management of positions. The impact of liquidations is asymmetrical to the downside–liquidated debtors become forced sellers at the worst price. Yet all DeFi leverage today rests on margin calls and liquidations. Most borrowers have little use for margin leverage because they are economic - not financial - borrowers. They borrow to fund future activities such as paying contributors or purchasing goods.
HOW BUTTON ZERO WORKS
Borrowing is a one-time event, there's no need to “top up” collateral and there are zero liquidations. Lenders share in some of the collateral's risk. Similar to how banks share some of the housing market risk when they make housing loans.
Step 1
A user chooses the size and duration of his USDT loan.
Step 2
They then lower or raise their one-time interest rate by increasing or decreasing how much collateral to mortgage.
Step 3
After choosing their loan size and collateral amount, Button Zero takes the collateral, mortgages it with lenders, locking the collateral for the duration of the loan. The user then receives their USDT loan and Z-Tranche tokens.
Step 4
At maturity, the Z-Tranche tokens can be redeemed for the value of the mortgaged collateral, minus the value of the loan and interest.
UNDER THE HOOD
Button Zero tranches the asset into “mortgage” and “equity” tokens—called A-Tranches and Z-Tranches—and sells the “mortgages” for stablecoins via Uniswap v3 or another AMM.
Each A-Tranche token is redeemable for $1 of collateral at maturity. Lenders buy these “future $1” at a discount, which serves as a one-time interest payment. For example, a lender bought 10 A-Tranche tokens for 8 USDT, and at maturity redeems them for $10 worth of collateral, which equals a 25% interest rate payment.
The discount rate is not set through an arbitrary utilization curve or pricing algorithm, it is set by the market.
DEFI BOND MARKET
Uniswap v3 is a like a “fuzzy” central limit order book (CLOB), providing the foundation for a web3 bond market. See this tweet thread by Hayden Adams.
Bond buyers can take USDT and lock in a price equivalent to the discount at which they are willing to purchase A-Tranche “bonds.” For example, a buyer might lock 100 USDT at $0.90 per token (10% discount). When the price of A-Tranches drops to $0.90, their liquidity of 100 USDT has been swapped for ~111.11 A-Tranches (100/0.9), which at maturity can be redeemed for $110, for a total yield of 11.11%.
Bond sellers do the opposite — they lock A-Tranches at the price equivalent to the discount they are offering to the market. For example, a seller might lock 100 A-Tranches in at $0.80, which will be sold for 80 USDT, implying an interest rate of 25%.
Using this approach, bond buyers and bond issuers can pull liquidity after their “limit orders” are filled. More importantly, it allows each side of the market to signal their desired discounts and change these according to market conditions and opportunity costs.