Decentralised finance (DeFi) can disrupt many existing concepts or introduce entirely new use cases. The field of fixed-income securities is exciting due to the opportunities it provides. DeFi can fuel growth in this segment due to its traceability and issuance benefits.
Understanding fixed-income securities
Many financial and investment vehicles exist in the world of finance today. As a result, fixed-income securities have started to gain more traction.
Unlike other investment options, every fixed-income security is a debt instrument issued by corporations, governments, or other entities. This instrument allows the issuer to finance and expand its operations, resulting in potential future growth.
Moreover, the fixed-income security is beneficial to investors, as they receive periodic payments and eventual returns of their principal investment. It is essential to understand that investing in these instruments is akin to investors extending a loan to the issuer.
Like a loan, the money needs to be repaid, and there are “interest payments” while this process remains ongoing.
Investors are drawn to these vehicles because they help diversify a portfolio. In addition, many people consider fixed-income securities as low-risk and secure ways to generate a steady flow of income.
All one needs to do is hold them to maturity to acquire a guaranteed return on investment with a transparent payment structure.
Several forms of fixed-income securities exist today:
- Bonds
- Savings bonds
- Guaranteed investment certificates
- Treasury bills
- Banker’s acceptances
- Mortgage-backed securities
- Strip coupons
- A laddered portfolio
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Despite various investment options, these securities are not always accessible to everyone. Decentralised finance protocols can shake up that model for the better, as the underpinning technology can extend such products to anyone in the world.
Decentralisation through DeFi
Making these low-risk instruments more accessible may require the use of a different technology stack and mindset. As anyone can issue a fixed-income security investment opportunity, the market can unlock tremendous potential liquidity with the help of blockchain and smart contracts.
Unlike legacy finance systems, the blockchain isn’t controlled by one group or person and provides equal access. As such, any fixed-income security on the blockchain can find a global audience of investors, bootstrapping liquidity for organisations, corporations, and other issuers.
DeFi protocols such as DeBond introduce multiple options to make investing in these instruments more straightforward. Users can choose between a floating rate bond and a fixed-rate bond. Each option has potential benefits but introduces a different level of risk depending on the investor’s appetite.
Making both solutions accessible gives users worldwide more options than they would have at their disposal. Additionally, the blockchain provides traceability and accountability, offering much-needed transparency.
The floating rate bond by DeBond provides users with a higher interest rate through a subprime bond with no fixed maturity date and a potential loss of principal and, as such, introduces a higher risk factor.
However, high risk/high reward can prove appealing to many people. Users with less risk appetite can opt for the fixed-rate bond with a lower interest rate prime bond through a fixed maturity date and predetermined interest rates while offering better principal protection.
The tokenisation of bonds and other fixed-income securities investment options introduces a new financial paradigm in the future.
Also Read: Demystifying NFTs and DeFi
On the one hand, the blockchain has many benefits, including transparency and broader accountability. On the other hand, it paves the way for more overall liquidity for those issuing such vehicles, as they can tap into a global market without relying on intermediaries.
Bringing accessibility to alternative investment tools
Democratising access to fixed-income security investments enhances the appeal of decentralised finance. In addition, an alternative financial ecosystem can be created through blockchain technology and smart contracts to increase global financial inclusion and provide unprecedented accountability.
Finally, exploring the many opportunities in this space can provide a competitive edge to whoever comes to market first with a safe, secure, and accessible investment vehicle.
Demand for exposure to fixed-income security investments is rising, and DeFi may be a crucial catalyst in triggering the next market boom.
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