Illuminate - DeFi: Fixed

An introduction to the Illuminate ecosystem
Illuminate is a lending protocol designed to aggregate fixed-yield Principal Tokens and provide Illuminate's users and ecosystem a guarantee of the best rate in DeFi, while also deepening liquidity across the fixed-rate space.
Most simply described, Illuminate aggregates and wraps principal tokens with similar maturities and underlying assets into one single (meta) principal token (iPTs).
The wrapped / meta principal token (iPT) is traded on a secondary market YieldSpace AMM to provide an on-chain guarantee of the best fixed-yield.


The fixed-yield space first saw traction in 2020 with Dan Robinson & Allan Niemerg's first paper on "YieldSpace -- An Automated Liquidity Provider for Fixed Yield Tokens", their YieldSpace concept having since been extended by ~10 protocols.
This early research led to significant experimentation with regard to optimizations of the YieldSpace model and enabled a number of different yield origination models so long as they utilize a tradable principal token (PT).
Protocols such as Swivel take interest-bearing deposits from across the entirety of the Ethereum (and Layer-2) ecosystem and enable the decomposition of these deposits into their future yield - leaving behind the deposits redemption in the form of a PT.
Protocols such as Porter & Maple allow DAOs and institutions to issue collateralized debt through PTs and borrow directly from lenders at a fixed-rate.
And protocols such as Yield allow anyone to deposit their collateral and mint PTs that they can sell and effectively borrow against at a fixed-rate.
These protocols have seen consistent growth with an overall market that has oscillated between 500m-2b, however even with consistent growth significant issues remain in the current market structure.

Current Issues

The fixed-income sector has traditionally displayed dominance in the context of broader lending largely fueled by professional participants, and rate arbitrage.
These trends have insofar been prevented in Defi by inefficient market design with regard to the standardization of the instruments themselves, and standards such as IMM dates which would otherwise allow professional market participation cross-protocol (and therefor cross-yield generation source).
Further, without this market participation, the fixed-rate niche is unable to accrue the key liquidity mass necessary to reach a wider audience. Unlike spot markets in DeFi, each protocol is faced with the need to bootstrap bespoke participants rather than the normal DeFi native traders and lenders.
These key issues largely lead to:

Poor User Experiences

Retail users are currently faced with the need to compare offerings across a staggering number of protocols, which themselves source yields from a variety of of lending markets.
In context of recent market events (Anchor), retail users are faced with the need to conduct due diligence to identify the risks of reach protocol, as well as their integrated/partner lending markets.
These asks are unreasonable of even advanced market participants.

Prohibitive Integrator Market Structure & UX

Integrators are currently unable to confidently work with any single fixed-rate protocol given the continuous overhead of integration, lack of a market leader, and the poor documentation that most fixed-rate protocols provide.
When faced with integrating principal tokens, protocols such as FiatDAO are faced with at least four protocols - Element, Notional, Yield & Swivel.
They are then faced with integrating at least three currencies for each - DAI, USDC & ETH. They are then faced with integrating at least three maturities for each currency - normally 3m, 6m, 12m.
This leaves FiatDAO exposed to the maintenance of 36 markets and that market liquidity itself is further fragmented across markets that should be fungible.

Native Market Inefficiencies

Without consistent maturity dates, arbitrageurs are unable to interact cross-protocol, and market-makers are unable to remain delta neutrality.
Without a system to bridge similar maturity dates, each protocol's liquidity exists in a silo, and unlike new spot DEX/AMMs that can easily attract arbitrageur liquidity, each protocol suffers from the need to bootstrap individually.
This results in fragmentation results in inefficient markets, as well as insufficient depth for larger market participants.

DeFi -- Fixed

Illuminate remediates all of the above issues through the creation of an aggregated meta principal token (iPT).
Through this single interface for fixed-yields, we guarantee lenders the best rate in DeFi, developers the best integration and optimized yields, and traders the depth necessary for active participation.
Lenders: Avoid significant time-debt managing positions and lend confidently knowing the source of their yield is optimal, while also as a byproduct deepening liquidity across the space.
Integrators: Shed the roadblocks that prevent fixed-rate proliferation, knowing that they both have access to all sources of yield and minimal technical debt.
Traders: Participate in the fixed rate space, actively trading deep yields cross-protocol while arbitrageurs ensure that each individual fixed-rate protocol has more depth than it has ever had before.

Illuminate -- An Ecosystem

Described further in Integrations, the existence of deep fixed rate liquidity enables an ecosystem of products built upon "maturity atomicity", starting with Illuminated Options.

Maturity Atomicity

In traditional contexts, instrument composability is relatively restricted by settlement delays and large ticket sizes.
However in the context of Defi / atomic transactions, settlement delays are irrelevant and instruments can be created with tight maturity tolerances (preferably atomic), enabling an increasingly rehypothecated and higher yielding financial stack.
Rephrased, developers can create instruments that mature simultaneously and in doing so construct products with a structural composability (and high yield) that is impossible to compete with traditionally.

Illuminated Options

As a product that does not move capital until maturity, European options are an ideal product for the implementation of atomic maturities alongside Illuminate.
By purchasing iPTs while underwriting options atomically, a user is ensured access to multiple yield sources simultaneously, significantly increasing yields.
Then, as sellers earn a higher total premium, supply bloats and direct option premiums decrease. This leads to an environment where:
Options Sellers -- Earn significantly higher premiums.
Options Buyers -- Get a significant discount on positions.
To learn more, read our recent blog [LINK] on our upcoming release of Illuminated Options.
Last modified 1mo ago