White Paper

Secured Finance Protocol

A Decentralized Solution to Long-Term Capital Markets

Masa | Secured Finance

Published in

Secured Finance

10 min readMar 14, 2023

Executive Summary

Secured Finance is a decentralized finance (DeFi) platform that provides a unique solution to the liquidity problem in the industry. Our protocol enables peer-to-peer lending and derivatives trading for fixed-income investments and hedging, offering a more efficient and cost-effective alternative to traditional financial institutions.

By utilizing a smart-contract-based platform, we eliminate the need for intermediaries and provide a transparent, robust, censorship-resistant, and low-cost way of transacting. Our OTC market for digital assets ensures that primary and secondary markets have enough liquidity, while our smart-contract-based central clearing counterparty model guarantees transparent and efficient transactions.

Moreover, our unique features, including the standardization of plain vanilla products, order-book-based price discovery, on-chain orderbook matchmaking, smart-contract-based collateral management, and auto-rolling, provide a hassle-free solution that benefits long-term investors and borrowers. These features offer a solution to the DeFi industry’s challenges, paving the way for an inclusive, accessible, and efficient financial system.

Secured Finance has a clear roadmap for growth, a strong use case and a dedicated team committed to building a strong and vibrant community around the Secured Finance ecosystem. We welcome anyone who shares our vision to join us on this exciting journey.

Introduction

Decentralized finance (DeFi) has transformed the traditional financial system by offering a more accessible, inclusive, and efficient way for individuals to participate in global financial transactions. However, the DeFi industry has primarily focused on short-term money markets, such as spot exchanges and lending platforms, which limits the types of financial products and services offered within the DeFi ecosystem. There is a need for a long-term, fixed-income capital market to enable more sophisticated financial products and services, and this is where Secured Finance comes in.

Secured Finance is a decentralized finance protocol that aims to fill the gap in the DeFi industry by developing a unique approach to building a fixed-income capital market. Utilizing the Ethereum blockchain offers users a transparent, robust, and low-cost alternative to traditional financial institutions. Our platform enables peer-to-peer lending and derivatives trading for fixed-income investments and hedging, offering a more scalable, transparent, and efficient financial market.

Problem

Despite the growth of electronic trading platforms, the global bond market remains highly fragmented and predominantly traded over the counter (OTC). Unlike equities, there is no centralized global exchange for bond and loan trading. This fragmentation results in higher transaction costs, limited transparency, and inefficiencies that hinder the development of efficient and accessible capital markets. The absence of a global bond and loan exchange makes it difficult for retail investors to participate in the market, and institutional investors struggle to access global liquidity and price discovery.

The lack of a centralized global exchange for bond and loan trading presents several challenges, including standardization, price discovery, transparency, liquidity, and counterparty risk. While OTC markets have been used to provide lending and derivative solutions, they also present their own challenges. For instance, the lack of transparency in the OTC market makes it difficult for market participants to understand pricing fully, and the negotiation-based transaction can result in a lack of secondary market liquidity. Additionally, counterparty risk remains a significant concern, as there is no central clearinghouse to manage the risk of default. These challenges have made it difficult for the DeFi industry to develop long-term capital markets, leaving a gap in the market that Secured Finance aims to fill.

The emergence of DeFi aims to address the limitations and difficulties of OTC markets. However, DeFi currently only focuses on developing short-term money markets, such as spot exchanges and lending platforms, that allow users to transact in digital assets. Building a longer-term capital market for digital assets presents unique challenges, including maintaining liquidity, establishing standardized products and market conventions, and navigating complex regulatory considerations. Fortunately, blockchain technology and smart contracts can offer promising solutions to create a decentralized and efficient capital market.

Smart contracts can automate the issuance, trading, and settlement of bonds and loans, significantly reducing transaction costs and improving efficiency. A smart-contract-based decentralized bond and loan trading platform can provide greater transparency, liquidity, and streamlined settlement processes, making it more accessible to a broader range of market participants. At Secured Finance, we believe that blockchain-based solutions can play a significant role in addressing global bond and loan market challenges, unlocking the potential for efficient and accessible capital markets.

Solutions

To address the gap in the DeFi industry, Secured Finance is developing a unique approach to building a fixed-income capital market. This approach includes the following features:

1. Standardization of Plain Vanilla Products

Our platform provides a zero-coupon, fixed-maturity standard that simplifies settlement and calculations, reducing gas costs. Zero-coupon standard means there are no interim interest rate payments, so the loan price is directly linked to the discount factor for maturity. These public and transparent discount factors simplify the valuation of the present value of a future cash flow. Also, the fixed maturity standard lets us quickly find counterparties to unwind/cancel trades in the secondary market. Also, the settlement date adheres to existing centralized exchanges’ conventions to ensure efficient trading and hedging activities while consolidating secondary market liquidity.

2. On-Chain Orderbook-Based Price Discovery

Our platform utilizes the orderbook to enable fair price discovery and eliminate the need for negotiations. By leveraging the public blockchain, we offer a transparent price that is globally applicable and universally composable. Unlike pool-based local prices and interest rates, our orderbook-based prices and interest rates don’t require arbitrage price corrections and thus can be suitable for benchmark references.

3. On-Chain Orderbook-Based Market Orders

We have addressed the technical challenges of developing everything on-chain, which were caused by the gas-cost limitations of the Ethereum blockchain. Market order calculation involves matching one taker with many small-sized makers. However, such calculations and orderbook updates were not feasible in existing DeFi projects. To overcome this, we utilized the lazy evaluation method to avoid unnecessary and redundant computations. As a result, the gas cost of our one market order is lower than that of other DeFi projects, such as AAVE.

4. Smart-Contract-Based Clearing Counterparty

We drew inspiration from the success of AAVE, which was the transition from a peer-to-peer model to a peer-to-pool model to increase liquidity. However, the pool-based model has disadvantages such as impermanent loss, external price dependency, and capital inefficiency. To solve these, we learned from the success model of the global OTC market and implemented a smart-contract-based central clearing counterparty (CCP) among trading participants. This simplifies unwinding or canceling trades for peers, guarantees secondary market liquidity, and effectively manages counterparty risks.

5. Smart Contract-Based Mark-to-Market Calculation

Our smart contract uses a decentralized price oracle like Chainlink’s to calculate a fair valuation of users’ existing positions. The calculation methodologies and price sources are open, fast, transparent, and verifiable. This approach provides a fair and efficient valuation for mark-to-market and collateral management, replacing the middle-office operations of banks and drastically reducing operational and reporting costs.

6. Non-Custodial Collateral Management & Netting

Our platform uses smart-contract-based collateral management, which allows for non-custodial control. This reduces counterparty risk by using self-executing and automated smart contracts. Our user-friendly interface makes it easy for users to manage their collateral positions and adjust collateral requirements, providing greater control and customization over their positions.

Moreover, our smart contract enables collateral netting, simplifying and reducing the cost of maintaining collateral positions. Through this feature, users can offset the value of their collateral across multiple transactions, including currencies and maturities. As a result, overall collateral requirements are reduced, and capital efficiency is increased. Additionally, this helps mitigate counterparty risk by consolidating collateral management into a single value, thereby reducing the risk of collateral loss.

7. Automatic Mid-Price Rollover

Fixed-term investments carry a risk associated with reinvestment. Finding similar reinvestment conditions at maturity can be challenging, especially with larger investments. To address this, our protocol has deployed an automatic reinvestment feature (Auto-roll) that rolls over positions to the nearest market with a close-to-mid price. This function benefits long-term investors and large-scale traders by avoiding the operational costs of finding another counterparty on the order book. Our system stabilizes the protocol, maintains total value locked (TVL), and provides continuous growth to our users.

Secured Finance offers a unique solution to the DeFi industry’s challenges by developing these features. It has the potential to revolutionize the world of finance.

Market Analysis

The traditional fixed-income securities market, which includes government and corporate bonds, is a vast and well-established sector. Primarily operating through over-the-counter (OTC) trading, this market had a debt securities size of $139 trillion as of June 2022 (BIS). Additionally, the OTC derivatives market, featuring instruments such as interest rate swaps, has been a dominant force for decades with an estimated market size of $632 trillion as of June 2022 (BIS). The OTC market operates in a decentralized manner, allowing financial products to be traded directly between two parties without intermediaries.

The OTC market distinguishes itself from exchange-traded markets due to its unique combination of liquidity and customization. In OTC markets, parties can tailor transactions to their specific needs using cross-jurisdiction liquidity pools, an option unavailable in exchange-traded markets. This adaptability creates liquidity by addressing participants’ unique requirements and risk profiles. Additionally, the OTC market offers superior pricing and risk management flexibility, as parties can negotiate prices and terms directly.

In contrast, exchange-traded markets operate as centralized platforms where financial products are traded on a centralized exchange. As of December 2022, the notional outstanding amount of exchange-traded derivatives (futures and options) reached $79 trillion (BIS). Although exchange-traded markets provide certain advantages, such as price transparency and standardized liquidity, they tend to be more rigid and less adaptable than OTC markets. Furthermore, the centralized structure of exchange-traded markets increases their vulnerability to price manipulation.

Within the DeFi industry, the primary focus has been on money markets, which encompass spot exchanges and short-term financial products. However, there is a growing demand for a long-term, fixed-income capital market in the DeFi ecosystem, which is where the OTC market for digital assets can play a pivotal role.

The potential business opportunity for the OTC business in digital assets is significant, with several areas of potential growth. Firstly, there is a need for a long-term, fixed-income capital market within the DeFi ecosystem, which Secured Finance aims to address. Secondly, the global and cross-border nature of blockchain technology makes cross-border transactions and businesses more feasible. Lastly, there is an opportunity to build a more accessible and inclusive financial system that enables financial freedom and commercial activities for all individuals.

Regulatory considerations are crucial when examining the digital assets market. The cautious regulatory approach towards the financial system has limited access to finance for certain individuals, emphasizing the need for a more inclusive and accessible financial system. DeFi’s open finance concept is instrumental in achieving financial inclusion. By employing SBT (soul-bound-token), a non-transferable NFT, as proof-of-humanity, it becomes possible to enforce specific on-chain activities and monitor on-chain AML activities. This progress signals a promising future for DeFi and regulation, contributing to enhanced financial inclusion.

Future Developments

Secured Finance is committed to continuous development and growth. Our long-term vision includes expanding into other asset classes, integrating with other DeFi protocols, and researching and developing new financial products.

To increase scalability and interoperability, we plan to expand our platform to other blockchains in the future. This will provide more opportunities for cross-chain transactions.

We will continue to improve our platform’s efficiency and scalability to reduce gas costs and provide a better user experience. Our team is dedicated to staying up-to-date with the latest developments in the blockchain and DeFi space. We will incorporate new technologies and innovations as they become available.

Finally, our governance model is based on a DAO structure, which enables community members to participate in decision-making. Community and governance play a critical role in the success of our platform, and we are committed to building a strong and vibrant community around it. We will continue to engage with our community members and seek their input on important decisions to build a platform that truly reflects their needs and interests.

Conclusion

Secured Finance is a DeFi protocol that offers a decentralized solution for long-term capital markets. Our smart-contract-based platform caters to the over-the-counter (OTC) market of digital assets, fulfilling the need for a fixed-income capital market in the DeFi ecosystem. Our platform facilitates peer-to-peer lending and derivatives trading for fixed-income investments and hedging. It presents a transparent, robust, censorship-resistant, and low-cost alternative to traditional financial institutions.

Secured Finance offers unique features, including standardized plain vanilla products, order-book-based price discovery, on-chain orderbook matchmaking, a smart-contract-based central clearing counterparty model, collateral management, and an auto-rolling mechanism. These features ensure sufficient liquidity, reduce gas costs, avoid the need for intermediaries, and eliminate counterparty and reinvestment risks. Our platform also provides a more scalable, transparent, and efficient financial market that benefits long-term investors and borrowers.

The potential business opportunity in the OTC market for digital assets is significant. Using a smart-contract-based platform, we can offer several advantages regarding transparency, efficiency, and security. Based on a DAO structure, our governance model enables community members to participate in decision-making, leading to a more inclusive and participatory financial system.

Secured Finance is committed to continuous development and growth. We have several planned future developments to improve our platform, including expanding into other asset classes and integrating with other DeFi protocols. We believe that by addressing the challenges facing the DeFi industry, we can revolutionize the world of finance and build a more accessible, inclusive, and efficient financial system.

We invite anyone who shares our vision to join us on this exciting journey. Together, we can create a better future for finance.

References

Bank for International Settlements. n.d. About Securities Statistics. [online] Available at: https://www.bis.org/statistics/about_securities_stats.htm [Accessed 10 March 2023].

Bank for International Settlements. n.d. About Derivatives Statistics. [online] Available at: https://www.bis.org/statistics/about_derivatives_stats.htm [Accessed 10 March 2023].

BIS Statistics Explorer. (n.d.). Table D1. Retrieved March 10, 2023, from https://stats.bis.org/statx/srs/table/d1?f=pdf

Giancarlo, J.C., 2015. Pro-reform reconsideration of the CFTC swaps trading rules: Return to Dodd-Frank. White paper.

Next Steps

For those curious about the high-level philosophy of our market design, which draws inspiration from traditional finance history, we invite you to check out the concept paper.

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