With macroeconomics, US Federal Interest rates, and fiat-based yields currently taking centre stage, let's quickly go over one of the global economy's building blocks: the bond. A bond is a loan made by an investor to a borrower. It is the foundation of one of the oldest and largest investment markets in the world, and it has been used for centuries by both governments and companies to raise capital. Currently, there is a 119 trillion dollar global bond market with fixed financial instruments that allow a borrower to issue a bond (essentially an I.O.U.). This in turn allows lenders to lend capital back to that borrower, and the borrower then has the obligation of paying back the bond's full amount, plus interest, at a specified date in the future.
There are three main components of traditional bonds:
Par Value (or “Face Value”): the amount that the bondholder will receive at the date of maturity.
Coupon Rate: the annual interest rate that is paid on the bond. Coupons are usually paid semi-annually.
Maturity Date: the date at which the money that was borrowed must be repaid in full (principal plus interest)
(Side note: These 3 main components are for traditional bonds. The bonds we discuss later have slightly different names, but are essentially the same)
Bonds also function as important market indicators for the directionality of the overall market - recently bonds, and more specifically the 10-year bond yield, have been in the spotlight. The FED has been far more hawkish on combating inflation, and it has decided to lower its debt by, you guessed it, selling bonds. Interest rates and bonds are inversely correlated: a decrease in bonds means an increase in interest rates and vice versa. Thus, higher borrowing costs lead to less spending, and this results in a shift of the demand curve which causes inflation to fall. That said, you now should have a basic understanding of the bond market and its importance.
Now, how does this relate to crypto?
On-chain Bond Advantages & Use Cases
The one risk that bond issuers face is the risk of default or the inability of the borrower to pay back the loan. However, with decentralized bonds, investors can invest in the success of a project without that risk - they can secure their funds until the completion of the investment period by leveraging the use of on-chain smart contracts. Furthermore, decentralized bonds naturally offer many advantages such as greater transparency, trustless systems, and lower transaction costs than traditional bonds.
Let's take a deep dive into a protocol leveraging these novelties and trying to disrupt a 119 trillion dollar market.
Enter 88MPH…
88MPH offers two main services: fixed yield rate bonds and yield tokens. Users may purchase bonds with a variety of digital stablecoins, along with BTC, ETH, etc. 88MPH acts as a noncustodial market for bonds and as an intermediary connecting users to third parties. It is important to note that 88MPH does not act as a financial market instrument but rather as a servicer connecting buyers to sellers where users may speculate on the variable yield rate of third-party protocols (AAVE, COMP, Etc…) with every bond by purchasing Yield Tokens (YT).
Fixed Yield Rate Tokens (Bonds)
88MPH bonds are easy to use and understand. You simply go to the app, choose the asset you want to deposit, and set a custom maturity date. Each asset type has a custom fixed rate which is paid flat to the depositor and a MPH reward rate which helps to make both the rates a little juicier and incentivize deposits. Once your tokens are deposited, they earn a variable rate which fluctuates based on the yield available within third-party markets such as Aave, Compound, Yearn, and a few others.
A quick look at the UI, some of the asset types, and rates currently present (7/11/2022):
As mentioned before, there are a variety of markets from which users can choose with a variety of yield rates, and users can play around with where their fixed yield rate will come from. The more stable the rates of your preferred market, the greater the fixed APR you earn. The reason for this flexibility is due to a few factors. Firstly, MPH is non-custodial and the user remains in control of where his/her funds are sent. Secondly, Users choose where they want to risk their capital (or rather with whom they trust their capital). Third, as yields fluctuate, the need to seek better yields persists - now why is that?
Let's have a better look at how these fixed yields are generated and how they are calculated while answering the question we're probably all asking ourselves: why deposit on 88MPH? Why can't I just deposit straight to Aave, Curve, Compound, or any other place to earn yield? What's so good about a fixed rate?
The fixed yield rate for each bond is calculated based on a 30-day EMA of the variable rates that can be found on the yield-bearing protocol that is used. As mentioned before, higher and more stable APRs on these third-party protocols = a higher fixed rate. 88MPH offers between 32% and 75% of the EMA variable rates as the fixed-rate bond interest. As a result, because of the third-party protocols rates variability, bonds with longer maturity dates naturally have lower fixed rate APRs to compensate for the uncertainty of those rates in the future. Once the user chooses their asset type and maturity date, they can finally sit back and relax. Upon maturity of their bond, they collect their principal plus interest from their bond. Users can withdraw early, either in full or in parts, however, these withdrawals forfeit their fixed rate interest accruals and also cost 0.5% in a penalty fee which is then redistributed to MPH stakers (veMPH Holders Later). Furthermore, the user can choose to add more funds to their bond and roll over completed bonds using the principal and the fixed-rate yield of the old deposit. When users add more funds or “top up” their deposit, they create a new deposit with the same maturity date as before, along with the current fixed yield rate offered. In addition, the new deposit and old deposit are merged into one. One of the unique features I love when depositing funds on 88MPH is the NFT that you get which serves as a digital representation of your deposit. Users can openly trade these deposits if they choose to. This essentially opens up the possibility of a secondary market, which conceptually offers more liquidity for deposits. In addition, users can also change the metadata of their NFT and change the picture and name of their deposit, which doesn't do anything financially but nonetheless is just a nice touch worth mentioning.
But why 88MPH?
The answer is simple: variable rates are constantly changing. We’ve seen Aave’s rates, as well as others, plummet to dismal levels. 88MPH allows you to lock in a good interest rate in times of variability and thus allows you to outperform other market participants. The whole objective is to try and lock in the best-fixed rate yields possible for as long as possible. Although you could search places to find better yields, the variability of these yields and the overall question of safety is a big risk factor (not to say 88MPH is risk-free, nothing is risk-free). That uncertainty is minimized through the use of 88MPH. 88MPH takes the risk of paying you a rate higher than can be yielded if they miscalculate the fixed rate that they payout. This is something which can be used to your advantage. However, this is unlikely and I'll cover the reason why later in this paper. In summary, the main advantage is the ability to lock in a fixed rate and not have to worry about the variability or volatility of the market rates. This moves us on to our next topic….
Yield Tokens
Yield tokens (YT) allow investors/speculators to take advantage of market volatility and speculate on the future variable yield rates. In addition, they also serve to allow borrowers to hedge their positions against their loans. As an example, a user borrowing USDC on AAVE could buy USDC YT on 88MPH to hedge his borrowing costs, because all YT are tied to a fixed rate deposit. So Yield Tokens can only be bought if there is a position/deposit to speculate on, and YT gives holders the ability to earn all the deposits' future variable yield rate along with the YT purchasing costs. Now let's get into a little more detail: YT are not just instruments to speculate on yields and hedge loans against.
As was alluded to before, 88MPH rates are highly dependent on the market volatility of variable rates on third parties. In the case that 88MPH miscalculated or overpaid on their fixed rates, how would they be able to make up the difference? Well, YT allows them to transfer volatility away from themselves and instead allow market actors to take on that volatility and make up the difference by purchasing YT - it allows a trader to enter the market with a small size and pay a small amount to earn a large interest rate. In short, YT allows users to leverage their positions against deposits in the hopes of correctly predicting rates while providing solvency to the depositor. Thus, Yield Tokens are a win-win for both parties.
Here's an example from the team to make better sense of it all:
(https://docs.google.com/document/d/16UfURl3S8rj-42Jn9PGBX3j_scXrg7B_i424C32iZHI/edit?usp=sharing)
Yield Tokens are priced based on time (T), deposit amount (D), and the fixed-rate (Y) established by the depositor (bonder). Thus, T, D, and Y are multiplied together and are offered at the cost of their product which is equal to the fixed yield rate offered to the depositor. 88MPH creates a sell order against the deposit through the selling of YT in order to hedge against the aforementioned volatility. The YT buyer pays for the solvency of the depositor and in return earns the floating interest rate of the deposit. If the future market price of the yield is greater than the initial yield, then the sell order is filled. When all YT are purchased for a deposit, the deposit is then riskless as it has all been financed by the YT purchaser. Thus, when users purchase YT they are purchasing debt due to the depositor. However, if the future market price is not greater than the initial rate, then the order is not filled. Therefore, the deposit is “naked” in that case there is no YT to finance the deposit. Consequently, the only way to pay the depositor is to increase the floating interest rate on the third-party protocol; however, this is not what we want because 88MPH then must scramble to pay the difference (which we’ll get into in the next section). As a result, 88MPH’s fixed rates must be more conservative than the expected future market price to prevent this from occurring. Some last quicks things regarding YT:
- Yield payments are automatically paid to yield token holders when either part of the deposit or all of the deposit is withdrawn. It can also be manually triggered with the claim button on the UI.
- When the underlying deposit is withdrawn before maturity the YT holder will automatically be refunded since, with no deposit, there is no longer a need to speculate on the yield. The refund amount is equal to the lost yield which is calculated using the average floating yield rate and the fixed-rate yield offered on the withdrawn funds.
- Because early withdrawal is not known and cannot be predicted, the returns on yield tokens are harder to price in.
Here's a quick look at the UI of YT buying:
You choose the amount of debt you'd like to fund, and then you move the blue bar where you believe the interest rate will be. A user can predict the interest rate to be either higher or lower, or just go with the current floating rate. If you are right, you are paid in the asset with which you bought the debt.
Link to the YT section in the 88MPH Docs for more detail: (https://docs.88mph.app/getting-started/yield-tokens)
Risk of Insolvency
As we talked about before, 88MPH sometimes faces the risk of not being able to pay the depositor the fixed interest rate promised. 88MPH falls back on four lines of defense to mitigate the risk of insolvency:
- “An oracle that can accurately price (not necessarily predict) future yield. This ensures that YTs get sold most of the time.” The pricing of deposits and the pricing of their underlying YT is crucial to the solvency of 88MPH. As was mentioned before, this is why the fixed rates are conservative relative to the market rates present.
- “Frequent early withdrawals, which allow 88mph depositors to accumulate the forfeited yield to build up a surplus that acts as a backstop”. These early withdrawals can then be put into Yearn vaults or other protocols to then continue to always have a surplus in case of erroneous oracle pricing.
- “Volatile floating yield rates in the underlying yield protocols, which allows 88mph to use the surplus yield from deposits that were offered low fixed yield rates to subsidize the deficit caused by the deposits that were offered high fixed yield rates.” With constant deposits and withdrawals, there is quite a diversity in yield rates present. Thus, it makes balancing the yield easier to facilitate.
- “A security module (not yet deployed), which acts as the ultimate backstop; similar to Aave’s safety module with capped double liability”. In addition, the variable rate APR on MPH plus the fixed-rate yield incentivizes depositors with MPH rewards.
These parameters were established with the help of the cadRAD agent-based model which is a collaborative effort from the 88MPH and CADlabs teams to simulate possible insolvency scenarios. For more information and insight on the risks of insolvency see the research/simulations conducted by CADlabs:
Tokenomics
88MPH tokenomics are quite interesting because they've just done a complete rework of the tokenomics in the last few months. 88MPH voted to overhaul its tokenomic model to the popular venomic model in the #8IP6 proposal (and these tokenomic changes are set to be in full effect sometime in late May). One of the main issues this rework solved was the infinite minting of tokens as it set a cap on the token supply. Initially, there was no supply cap because it didn't make sense to have one. The purpose of the protocol is to continuously grow the Total Value Locked within the protocol, and the no supply cap made sense originally. However, continuous inflation of the token has not been kind to the token price of 88MPH, and as a result, the MPH token supply is now capped at 1,888,888 tokens (however this is renegotiable after 4 years). The current circulating supply is 1,129,623 and the total supply is currently 1,574,863 tokens. At the time the new tokenomic model was adopted, on December 19, 2021, the total supply was 419,000 with 1.4 Mil left to be minted. The distributions of these 419,000 + 1.4 Mil tokens were set to be as follows:
- 62.5% to the community
- 37.5% to the team advisor and future employees with a 4-year vesting period.
The unissued supply of 1.4mil was distributed as such:
- 52.5% to the community
- 35% to early team and advisors
- 12.5% to 88MPH SA
(Context on SA = 88mph is the commercial entity developing 88mph protocol since January 15, 2021. This Swiss entity will continue to grow as a standalone organization contributing to The 88mph ecosystem)
The breakdown of the remaining 52.5% is as follows:
-70.5% of the 52.5% (514,500) allocated to the community will be used for incentives to 88MPH users over a 4 year distribution:
-46.2% (238,000) will be used for incentives in 2022, which will be immediately minted after the passage of this proposal to prepare for distribution.
-30.8% (154,000)will be used for incentives in 2023
-15.4% (79,200) will be used for incentives in 2024
-7.7% (39,600) will be used for incentives in 2025
-13.3% of the 52.5% goes to the 88MPH Foundation which is subject to a 10-year unlock period. This fund is used to distribute grants and also to help with the governance of the 88MPH treasury.
-9.5% were immediately minted and unlocked to acquire protocol-owned liquidity (POL). This was a great change for the 88MPH protocol because it allowed them to generate more revenue for them to redistribute to holders through LP fees. In addition, POL has many other benefits for the longevity of the protocol as a whole.
-2.9% allocated to bug bounties - all minted and unlocked immediately
-3.8% immediately minted and sold to strategic community members in order to have funds to operate upon the launch of new VE tokenomics.
The remaining 35% (of the 1.4 mil not to be confused with the 52.5%) was allocated to the early team and advisors. These tokens are on a 4-year vesting schedule
The last 12.5% (of total 1.4 mil) is given directly to the 88MPH commercial entity which is responsible for developing the 88MPH protocol. Funds are needed for employees, audits, contractors, taxes, etc… These tokens are also on a 4 year vesting period.
Here's a quick look at what that vesting schedule looks like:
Moving one from the token allocations. Let's get into the actual “tokenomics”
88MPH runs on a gauge-based incentive and veMPH model adapted from the Curve and Frax models. Holders can lock up their tokens for up to 4 years - in exchange, they will receive veMPH which provides them the right to vote on: gauge weights, earn protocol revenue, governance proposals to control fees, protocol parameters, and new asset listings. Rewards for each pool asset will be set by veMPH voters based on what pool gauge holds the most weight. Protocol revenues come from the following three sources:
- “A 20% fee on the fixed-rate interest, which is computed at the time of deposit/top up, but stays in the pool until the deposit is partially/fully withdrawn (if it's a partial withdrawal only the fee on the withdrawn part is taken out of the pool)”
- “A 0.5% fee on the early withdrawn amount from a fixed rate deposit. This fee is taken out of the pool when the withdrawal happens.”
- “The liquidity incentive tokens received from protocols the fixed-rate APY pool deposits into (e.g. Compound, Aave). This never enters/exits the pool, it is sent directly to the dumper contract which will sell the tokens into MPH on the market every 30 days (monthly buyback); think stock dividends without dilution.”
(https://docs.88mph.app/mph-token/mph-staking)
The current xMPH model or staked MPH will be completely phased out when the new venomic model is live, and all revenues will be distributed to veMPH holders. Another update is the gradual elimination of 88MPH token incentives on bonds and Yield Tokens by halving the rewards every month until the new tokenomics are fully launched, thus, decreasing emissions and inflationary pressure. Lastly, the revenue distribution is set to be revised to the following:
- 50% of revenue will be distributed to veMPH holders
- 25% of revenue will be given to the governance treasury to acquire protocol-owned liquidity
- 25% of revenue will be given to the governance treasury as working capital and metagovernance assets.
Very important: As regards to the disparity of the current token supply and what was mentioned before: “Regarding the current token supply, we minted the first years of the community rewards dedicated to the gauges and other allocations listed in the 8IP6 but there are still another % of the max cap supplied to mint; it'll happen in some years as we don't need it right now” - McFly (88MPH Developer)
Link to the 8IP6 proposal and other proposals:
88MPH Analytics
88MPH has this really nice analytic page that tells users almost everything they would like to know about the platform. I'll quickly go over some of the information on the page that I believe is valuable….
Disclaimer: Some of the analytics of this page are currently not working properly. The team switched to a new API using the Graph, however; it doesn't seem to be working properly. Consequently, the best available data currently can be found on Defillama. This issue is in the process of correction. And should be fixed fairly soon as the team is working with the Graph to resolve the issue. Thus, we won't go too much into detail here.
From the image above, we can see that there is a total of 15.7 million dollars currently deposited across all 4 integrated blockchains. A rather small amount, likely due to the monthly halving of the MPH rewards for depositors over the last 4 months until the switch to the venomic model is made. A positive spin on this comes directly from the team as they are planning for Yearn and Midas to deploy more TVL in the coming days after the release of the veMPH model. In addition, to launching a liquidity mining program to help juice up the liquidity.
Here's a look at the Fixed-Rate Yield over the past year. Just analyzing the graphic we can see 88MPH had an early expansion phase which also expanded in a time in which third-party protocols had higher APRs. Of course, all yield in Defi has subsequently shrank due to the end of many incentive programs that fueled the lucrative yields.
Another good metric to look at is the TVL over the course of a little more than a year. 88MPH had a rapid expansion in TVL growth at the start of the protocol reaching a high of 50 million in deposits. However, as mentioned before, the API for some of these graphics is wrong. This graphic is one of those. The true data shows TVL reaching a height of 80 million on February 2022. 88MPH is currently sitting on TVL lows from the periods of Jan 31, 2021 - May 1st, 2022. This can be attributed to the general downturn in the overall market. In addition, we can also attribute some of the decline to the monthly halving of rewards since the approval of the 8IP#6 proposal. The slow discontinuation of rewards has correlation with the decline in TVL, although, it is important to note that global defi TVL has been cut in half since in between that time. Here is an example of one of the faulty graphics:
Link to this data:
Another quick thing to point out here is the lack of deposits on the other chains. The majority of TVL is all on the ETH side (11 Mil) with another small portion on the FTM side (3 Mil). AVAX and Polygon are pretty abysmal in terms of deposits which can be attributed to the lack of rewards on these chains - fixed rates in their expansion process don't take off well without early incentives. In addition, a lack of liquidity on FTM has caused the TVL to take a hit. Again, the two issues of reward halving and liquidity will both be solved with the implementation of the liquidity mining program and the launch of the venomic model. ETH and FTM hold the only real user base which currently sits at around 1.5k active users. (This allows you to see active users)
Liquidity Mining Program:
88MPH has launched a liquidity mining program to fix its low liquidity issue. Proposal 8IP#8 hopes to “incentivize more liquidity for $MPH trading pairs on Ethereum Mainnet and Fantom over 12 weeks. It also covers some ideas to kickstart our POL (Protocol Owned Liquidity).”
Full Liquidity Mining Program Details:
88MPH Analytics & Defillama Page:
https://88mph.app/stats
https://defillama.com/protocol/88mph
88MPH Future & Message From The Team
After the team launches the 88MPH venomics (V4) in mid-May, the team wished to make the transition from a technical/product focus to a more business development-minded focus. The team is satisfied with the product they have made and the success they've had with it, and they believe that adding additional features to the 88MPH product would not add significant value as opposed to building out their brand. This is something that I like to see out of the team. Yes, teams should always ship and make their product speak for them, however; at a certain point, the hours you put into the product don't generate the same ROI that they used to - the 88MPH team has come to that realization and decided to pivot; they will now spend their time building partnerships, looking for integrations, and finding other ways of increasing investor value than just shipping. The team also has plans to launch a new protocol called Timeless, a perpetual yield token, shortly after the implementation of 88MPH v4. They plan to distribute a large amount of the native supply of the Timeless token to veMPH holders. This is just one of the many ways they will continue to add value to the 88MPH protocol and its investors.
While writing this article, I got a chance to speak with the developers, and upon asking them what their main priority was, their response was: “making sure we continue protecting 100% user's funds”. In accordance with this, the 88MPH’s V3 version has had three separate audits from Trail of Bits, Code423n4, and PeckShield as well as two subsequent security analyses from Defi Safety & Defiyield. In addition, the team also has a bug bounty to incentivize whitehat behavior.
Links to relevant information:
https://docs.88mph.app/developer-docs/security
Smart contract security analysis (DefiYield)
88mph V3.0 (0.7) Process Quality Review (Defi Safety)
88MPH INSPIRATION & FUN FACTS
- The 88MPH logo and theme are inspired by the iconic 1985 Back To The Future movie
- 88 miles an hour comes from the Delorean time machine (a car) needed to reach 88 miles an hour in order to initiate time travel in the movie.
- A funny headline I saw while researching: 'Back to the Future' fan gets 'dream ticket' after hitting 88 mph in his DeLorean - Los Angeles Times
- Question I asked the team - What inspires you (the team) to wake up in the morning?
“Running a project named after one of the best movies ever: Back to the Future. It’d have been harder to wake up every morning if your whole project isn’t 100% based on memes.” - McFly (imo BASED AF)
“As one of the trailblazers in this category, we are here to grow the new frontier of fixed-rate yield.” - Dakotah
Final Synopsis/My thoughts
To start, let's be honest here: fixed-rate yields aren't the most exciting thing in the world. In a market where participants all share the same vice of chasing a lottery ticket, fixed rates don't present degens with the same intoxicating what-if daydreams. In addition, it isn't practical in terms of capital efficiency for most retail users. However, the Yield Tokens do serve to bring in more retail adoption, and (when it is live) the venomic model should allow more retail user adoption and interest. However, I don't believe the genre of decentralized bond market protocols necessarily market themselves for complete retail adoption in the first place. The real end goal, and likely the main adoption force, will not come from retail usage but from CeDeFi usage. Consequently, that leaves us with hopeful optimism about CeDeFi adoption, however; that's neither here nor there. Therefore, what does 88MPH offer in its current state, with the assumption of the veMPH model being live? What we have is a cash-producing asset, deflationary tokenomics, a proven history of protocol security (no exploits or hacks ever), the best UI/UX design among competitors, and a promising growth of a bond market. And most importantly, a great team of developers who you can bet on. If you want to bet on the growth of the decentralized bonds, I think 88MPH is a good bet. In addition, I'm excited to see them pivot to the creation of their perpetual yield token, a.k.a. Timeless.
In the time I spent talking to the team, it really felt that they were a good group, and honestly, it was hard to be unbiased in this section. I’ve always liked to bet on people and the 88MPH team is a group of people I'm willing to bet on. That said, I would like to thank the 88MPH team, specifically Mcfly and Dakotah for making this piece possible. It's been a joy working with you all and a great learning experience for me. Wish you all the best of luck and hope for a successful launch of the veMPH model
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