ERC-3475 enables a new asset class | Weekly Insights

Sep 2, 2022

Fundamental Insights

Ethereum Foundation Adopts ERC-3475 Standard

Thus EIP-3475 has now been accepted as a new Application Programming Interface (API) standard that makes it possible for protocols to issue bonds with multiple redemption data.

The Ethereum network lets developers build — independently or collaboratively — using Application Programming Interfaces (APIs). These APIs handle everything that happens on-chain. They make up the mechanism that integrates different protocols. APIs facilitate the borrowing, lending, and collateralisation of assets. Developers use them to simplify how they interface with their users through a process called abstraction — where complexity is managed to bring out developers’ ingenuity to separate an idea from general concepts.

Decentralized bonds represent a revolutionary technology. As ERC-3475 standard was accepted, DeFi industry should see a new asset class, bond, to emerge. Bonds are very common financial instruments for financing corporates and states in traditional finance system.

What is bond?
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Owners of bonds are debt holders, or creditors, of the issuer.
Bond details include the end date when the principal of the loan is due to be paid to the bond owner and usually include the terms for variable or fixed interest payments made by the borrower.

Fixed-rate instruments have not been very efficient on the blockchain. Issuing these interest-bearing securities was an aspect of DeFi that no protocol was able to work out competently. It is mainly because existing token standards — codes that make tokens of a particular kind conform to an API template and function on-chain accordingly — cannot handle bonds.

The ERC-20 format also does not allow for a reward and redemption logic to be stored on-chain. This usually leads to higher gas fees.

To be able to issue bonds, a DeFi project would require a token standard that has complexity in its data structure with multiple redemption functions.

The ERC-3475 standard comes with new built-in functions that enable users to economize on their gas fees. Unlike ERC-20, ERC-3475 uses the multi-layer pool which allows for a bigger liquidity provider to create a vast multitude of pairs. As each bond stores all necessary data e.g. its supply and type, ERC-3475 removes the need to issue separate contracts every time a new liquidity provider pair is added to avoid common attack vectors like an impermanent loss. The new standard helps simplify the management of a liquidity provider.

In short, we expect to see more innovations in existing DeFi ecosystem after new asset class, fixed-income instrument, emerges and the new standard should unlock more liquidity for borrowers.