Introduction

In finance, collateral is a safety net—a way to secure loans and ensure lenders have something to fall back on if things go wrong. Traditionally, this has involved assets like property, stocks, or even precious metals. In decentralized finance (DeFi), though, collateral usually comes in the form of crypto assets, like Ethereum (ETH) or Bitcoin (BTC), which are volatile. Stablecoins, pegged to fiat currencies like the U.S. dollar, have become a safer option, creating predictability in DeFi. But stablebonds? Now we’re talking about a whole new level of collateral—an asset that combines stability with yield.

Imagine an asset that’s as stable as a stablecoin but structured like a bond, built to earn a return while it sits in your wallet. That’s essentially what stablebonds offer. They combine low-risk, stable-value, and yield-generating capabilities, making DeFi lending and borrowing smoother. In this paper, we’ll unpack what stablebonds are, how they work, and why they’re set to change DeFi.

What Are Stablebonds?

Think of stablebonds as a hybrid of stablecoins and bonds. A stablebond is a digital asset pegged to a stable value, usually the U.S. dollar, but with an added feature—it generates yield over time. Unlike most stablecoins, which are designed to hold value, stablebonds are structured to grow in value, much like traditional bonds.

From a user’s perspective, stablebonds offer a stable store of value with the benefit of passive earnings. This stability makes them attractive for lending protocols and collateralized loans, where traditional crypto assets’ volatility is often a dealbreaker.

Stablecoins vs. Stablebonds Chart

Feature Stablecoins Stablebonds
Value Stability Yes (pegged to USD) Yes (stable and pegged to USD)
Yield Generation Typically None Yes (via DeFi strategies)
Use as Collateral Common in DeFI lending Ideal for lending due to stability & yield
Risk of Liquidation Low Very Low
Primary Use Store of stable value Store of stable value + passive income

This table compares stablecoins and stablebonds, focusing on key features like value stability, yield generation, and ideal use cases in DeFi. (Reference: Etherfuse, Superteam Research)

Why Use Stablebonds as Collateral?

Using volatile assets as collateral carries significant risk in DeFi. Price drops can lead to sudden liquidations, creating stress for borrowers and lenders alike. Stablebonds, with their stable value and yield generation, promise a smoother experience. Here’s why they could be game-changing for DeFi:

  1. Lower Liquidation Risk: With a steady value, stablebonds reduce the chance of forced liquidations due to price drops, making the borrowing experience more predictable.
  2. Passive Yield Generation: In most DeFi setups, your collateral doesn’t earn anything while locked. With stablebonds, you’re not only securing a loan but also earning yield on the collateral.
  3. Simplified Risk Management for Protocols: Stablebonds offer lending protocols a stable, less volatile asset, which can improve risk calculations and stability.

The Mechanics Behind Stablebonds

How do stablebonds maintain both stability and yield? Let’s break down their structure.

  1. Value Pegging: Like stablecoins, stablebonds are pegged to fiat (often USD) to maintain stability. This peg is maintained through reserves and mechanisms to absorb shocks.