Term Structure AMA #1 with Term Structure Team (Transcript)

Nick ​​
Hi everyone! We'll kick this off in about three minutes from now and just allow a few more minutes for people to join. So, just hang in there, bear with us and we'll get going shortly, okay?

Nick
All right, we've got a fair number of people on here. Let's get going. Welcome, and thanks to everyone for joining this first Term Structure AMA. Hopefully, it's the first of many as the community grows. My name is Nick Donovan, and I'll be moderating today's session as the host. If you're wondering who I am, I'm a former colleague of one of the founders Jerry. I'm a former colleague of his from Deutsche Bank days and from a crypto perspective until recently, I was part of Amber's group. So that's why I'm here.

As for the format today, this AMA is probably gonna be slightly different to a normal AMA. It will be a bit more structured, perhaps, as Jerry and Vincent will be, you know, to some extent introducing term structure since it came out of stealth mode. We appreciate your patience as we address some initial questions. It would be helpful for Jerry and Vincent to introduce themselves and share their individual journeys, including how they arrived at the point of building term structure. Jerry and Vincent, the floor is yours to provide some background on yourselves and your experiences.

Jerry
Hello everyone, I'm Jerry Li, and this is my first AMA and my first time using Discord, so it's quite exciting for me. I have over 20 years of experience at investment banks, where I served as the head of fixed income and currency at Deutsche Bank until my retirement in March of last year. My responsibilities included overseeing trading activities, risk management, product development, and governance, which was particularly challenging. Nick and I were fortunate to survive a difficult period, and my reason for retiring was to make a change. I believe that in the debt financial markets, there are three pillars: the money market, foreign exchange, and fixed income. While money market and foreign exchange have been successful in DeFi, there is a lack of fixed income presence. That's why I see it as my mission to jump into this space and contribute, leaving behind my past endeavors within the bank. Now, over to you, Vincent.

Vincent
I'm Vincent, the CTO of Term Structure. As a serial entrepreneur and developer with 10 years of experience, I was drawn to the potential of Web3 and DeFi. I joined Jerry in building Term Structure, and the most exciting part for me is collaborating with talented individuals from the blockchain, software, and financial industries.

Nick
Thank you both for the introductions. Now, let's dive into the questions. Jerry, based on the quote from the website, which states that Term Structure aims to make DeFi complete by facilitating borrowing and lending with certainty and flexibility, could you explain to everyone on the call what Term Structure is, what has been built, and what it means in practical terms?

Jerry
Let me clarify the concept of term structure before I answer your question. The"term structure" refers to the relationship between fixed interest rates and time to maturity for bonds. When plotted, this relationship forms a curve known as the yield curve. In the context of DeFi, term structure is a protocol that aims to recreate the full fixed-income markets in the DeFi space. It seeks to monetize and realize the value of interest rates through a defined mirror of the full fixed-income markets interface. This includes three sub-markets: primary markets, where borrowers and lenders match through auctions; secondary markets, which allow real-time trading based on market-driven pricing; and repo markets, which enable borrowing of underlying tokens using bank tokens as collateral. Term structure aims to bring real-world impact to everyday life by creating a comprehensive DeFi solution for fixed income markets.

Nick  
So, to summarize, I see that Term Structure is a fixed income DeFi lending protocol that includes primary auctions, secondary trading, and repo markets. I'm sure we'll revisit these components in further questions. Now, moving on to the next question, why did you build this? What gap in the current DeFi infrastructure are you aiming to address, Jerry?

Jerry
We wanted to ensure that the value of interest rates can be realized in DeFi, which is why we built the Term Structure protocol. Term structure is powerful because it encompasses concepts like interest rate parity and discount factors, which are fundamental to 90% of total financial debt instruments. Without the term structure, you're limited to cash transactions only. We haven't seen this foundational infrastructure in the DeFi market yet, although some money market protocols allow lending and borrowing based on floating or daily interest rates, and automatic market makers provide pricing for spot trades. However, there's no way to participate in primary market auctions or place orders for trade binding or spiral sells.

Why is trading at fixed rate important? Currently, real-world assets can only be used as collateral and are subject to prevailing market prices at maturity, which can be uncertain. With fixed interest rate, however, people could manage their assets and liabilities more effectively. For example, stablecoin issuers could turn their current liabilities into term liabilities by issuing bonds, which would promote DeFi financial stability. Investors could also buy real estate with hedged positions developed by the term structure, allowing for more diverse real-world asset products in DeFi.

Furthermore, users could utilize bank tokens as future payment methods, taking advantage of lower present values compared to future values in a positive interest rate environment. This would enhance the payment process and utilization of DeFi as a service in the real world. There are many more applications that can be envisioned with a term structure in place, but for now, the term structure protocol serves as the starting point.

Nick
Let me push you further on that, Jerry. You mentioned that the term structure is foundational infrastructure with utility for asset liability management, among other things. What is your vision for the term structure in the future? How do you see it becoming the venue for fixed borrowing and lending, and the yield curve used in the crypto space? What products from traditional finance does it unlock in the DeFi ecosystem?

Jerry  16:33  
The term structure is more than just a fixed income protocol, as it unlocks various opportunities. It serves as fundamental infrastructure to determine full prices. The importance of the forward market cannot be overstated, as it enables traders and option market makers to hedge their risk and scale their risk appetite. With forward markets, term futures with maturity dates can be built, allowing for effective hedging of different timeframes. This opens up possibilities for interest rate swaps, cross-currency swaps, and other derivatives. The flexibility is vast, enabling functions both on-chain and off-chain. This creates a wide spectrum of products, including options and token swaps. The term structure is just the starting point for the development of a diverse range of products.

Nick
Great, thank you for that. Now, returning from the visionary perspective to the current market reality, do you believe the market is prepared for the implementation of the term structure? I understand you've had discussions with numerous market participants in the past month, as we discussed earlier.

Jerry
Indeed, I have engaged with over 50 market participants, including traders, market makers, VCs, and exchanges. Many have asked whether it's too early or too late for the term structure. However, pinpointing the right timing is challenging. Factors such as Bitcoin price fluctuations, stablecoin issuance, and regulatory clarity all come into play. Nevertheless, in the web 3 era, innovation and entrepreneurship are key, and timing is critical for success. We have a clear vision and execution plan, but evaluating the timing requires effort. Our observations reveal a strong demand, with 50% of token borrowings being repaid within 30 days and the total value of bearer tokens on top DeFi protocols exceeding $250 billion in the past year. Market makers and option traders urgently need access to foreign markets for hedging, and institutional investors are showing interest in longer-term investments. Additionally, the maturity of the roll-up technology we use is a favorable factor. Therefore, it is evident that there is a sizable target market and the timing is right for execution. It's not a question of whether the market is ready, but rather if we are ready to execute our plan considering all the factors we have carefully considered, including integrity, data availability, and privacy.

Nick
When considering timing, I'm reminded of a quote by Steve Jobs, which goes something like "the market doesn't know what it wants until we show them." However, I don't believe this applies here. I think the market has always wanted this product, but it simply hasn't been built until now. It's a massive target. Thank you, Jerry!

Now, Vincent, could you provide some insights from a technological perspective? Specifically, what is term structure all about, how has it been built, and what are its technological advantages?

Vincent
Thank you for the great question. Term structure offers several technological advantages that enhance user experience, security, and interoperability. For user experience, users can manage their orders anytime without paying gas fees. The system can handle back orders efficiently with low gas fees, ensuring fairness in the auction process by hiding order book information until orders are matched. In terms of security, term structure uses zero-knowledge (ZK) proof to verify all transaction data, ensuring transactions are secure and authentic. Data availability is maintained even if the server is down, allowing users to withdraw their assets on day one without any worries about downtime or censorship. Interoperability is also a key feature, allowing users to interact with other layer 1 (L1) protocols and enabling easier arbitrage and hedging opportunities. Term structure is built on top of existing Zk-rollup solutions, providing convenience for transactions across different protocols. In summary, term structure stands out in the DeFi world with its significant advantages in user experience, security, and interoperability.

Nick
Brilliant. Thanks, Vincent. There's so much in. I'm sure some of the questions will come back into this but you're in there. Scalability, cost, privacy, noncustodial, interoperability, all kinds of technology, things that people can ask questions about. So we'll stay with technology though. And Aaron I see you've put your camera on. So maybe this is a good time for you to introduce yourself and then maybe you can come with Can you talk a little bit and I know we've had some questions in the discord develop this as well. So why why have we chosen to build our own customized Zk-rollup?

Aaron
Nice to meet you all, I'm Aaron, the blockchain developer at Term Structure. We are currently building our own optimized ZK-rollup system to address the scalability challenges of Ethereum, specifically in terms of TPS and gas fees. Term Structure is an all-encompassing fixed income protocol consisting of three markets: primary markets, secondary markets with order book, and the repurchase market. High TPS and low gas fees are critical requirements for our business, which is why we are building our own system to achieve these goals and provide a seamless user experience on our platform.

Nick
Thank you, Aaron, for your response. However, it seems that there are different types of roll-ups. Can you explain why you chose ZK-rollup instead of optimistic roll-up or any other type?

Aaron
Before building the ZKroll-up, we thoroughly researched various options like optimistic roll-up and plasma to overcome the scalability challenge of Ethereum. However, we found that optimistic roll-up, which relies on a fraud-proof system, is not as secure as the ZK system. In Zk-Rollups, every transaction is proved by L2 circuits and verified by smart contract in L1. This characteristics of Zk-Rollups makes it more secure than optimistic roll-up. That's why we chose to implement the Zk-Rollups.

Nick
Why did you choose to build your own instead of using an existing one available in the market?

Aaron
Yes, that's an important question. While there are various Zk-Rollup solutions available like StarkNet and zkSync, which can bundle multiple off-chain transactions in large batches before submitting them to Etheremum mainnet, average users still need to pay some gas fees. In the case of Term Structure, our focus is on interest rate products, rather than spot products like CFO or DX. The code for orders and matching is critical for our users as they trade in these complex products and in large volumes. Therefore, we aim to reduce transaction fees for order placement and cancellation for users to manage their positions effectively. This is why we plan to launch our own Zk-Rollup to significantly improve the overall experience and efficiency.

Nick
Thank you for that. Please stay here in case there are any questions for you. Now, let's switch to security, which is a crucial aspect of any new protocol. Vincent, could you elaborate on the security measures that Term Structure has implemented into its protocol?

Vincent
Certainly, thank you. Security is our top priority and we have taken multiple steps to ensure the safety of our platform. Our security measures cover the four main categories: smart contracts, layer 2 system, connection between users' browsers and our session, and development practices. We conduct regular audits, reviewed by reputable firms, to identify and address potential vulnerabilities in our smart contracts. We also plan to launch bug bounty programs to incentivize developers to discover weaknesses in our smart contracts, and we will reward those who contribute to improving our security. We are building a watchdog system to promptly detect and respond to potential threats.

Additionally, we implement security measures adopted by major companies, such as code review, witness detection, and CDN services. We protect our domain name from DNS hijacking through DNSSEC to ensure users always connect to the legitimate site. Our team members use Defil Lama browser plugin for phishing detection and we employ a multi-signature mechanism for audit management. User security is always our priority, and we are committed to providing a safe and reliable platform for our community, although I may not be able to cover every detail during this AMA.

Nick
Regarding security, there was a question on Discord about data security, which I believe you have already addressed. However, they are also asking if you offer insurance against theft.

Vincent
We provide insurance in our protocol to safeguard our users' ACH. If issues arise, we offer compensation through our insurance. We have implemented multiple measures to protect our users and are actively discussing the percentage of insurance coverage in our pool.

Nick
We will now address pre-submitted questions. If you have any live questions, please post them on YouTube or in the Discord AMA questions room. We are actively monitoring those channels and will do our best to address them. Let's begin with a couple of questions already submitted. Jerry or Vincent, please share the roadmap for the future and what we can expect next.

Jerry
In April, we will submit our code for audit by a chosen auditing company, ADK. In May, we will roll out our test net and host trading games as part of our trading campaign. Depending on the progress of the audit, we plan to launch the mainnet in July or August, starting with the MVP (primary market). In Q4, we will explore options such as repo and buying options, while also monitoring the volume of our third charger protocol to develop a fourth market. In the meantime, we will work on forward and futures markets in Q1 and Q2 of the next year, followed by real world assets products.

Nick  
It seems like there is a lot to keep you busy, Jerry. Can you provide details about the tokenomics of the governance token, as it seems to be a common question among people?

Jerry
Thank you for asking about the tokenomics. It's an important part of our go-to-market strategy, as the community, including users, developers, partners, and the team, are the owners. The token serves as a means to connect everyone together and bootstrap the network. However, our initial focus is on the product and its positive elements. We plan to revisit the tokenomics after the MVP stage, which may be around three to six months later. Thank you for your interest in tokenomics.

Nick
Alright, sure. We can discuss that in the next session. Let's see what questions we have. So, Jerry, why did you choose primary auctions in the secondary market instead of something else? And why peer-to-peer instead of peer-to-pool?

Jerry
Based on my 25 years of experience, mostly in fixed income, I have found that the most efficient way for the market to operate is through a market-driven mechanism, such as auctions on the primary market and order books on the secondary market. Automated market makers use preset parameters, leaving traders with limited choices and no opportunity to negotiate prices. We believe that users should have the freedom to make their own decisions when it comes to their transactions because it's their own money. That's why we chose to use auctions and order books, thanks to Zk-Rollup that allows for scalability and data availability to ensure user trust and integrity in the system.

Nick
As we move on to the second part of the question, let me tie it in with another query from YouTube. People are asking if this is similar to Aave or Compound but with fixed rates. When addressing the difference between peer-to-pool and peer-to-peer, it would be helpful to explain how Term Structure differs from existing solutions so that it's clear why our approach is unique.

Jerry
The protocols you mentioned rely on automated market makers to determine token prices, with no room for negotiation. However, peer-to-pool protocols may not be ideal for fixed income due to limitations in capital efficiency caused by interest rate variations. For instance, Aaave only utilizes 1 billion out of 4 billion in deposits for lenders at a 4% interest rate, resulting in low capital efficiency. At Term Structure, we maximize capital efficiency by using peer-to-peer lending and borrowing.

In addition to primary markets, we also have secondary markets and repurchase markets. Users who are dissatisfied with token prices can sell their tokens. They can choose to keep them to earn interest rates if they would like to. Tokens can also be used as collateral in other protocols to trade at discounted prices.

Nick
Can you provide insights on how you plan to handle regulatory aspects moving forward?

Jerry
We need to recognize the importance of complying with regulations. Currently, we've observed regulators and commercial/investment banks collaborating for tokenized bond issuance. We need to keep an eye on staking, interest-bearing, and term structure tokens, which carry interest rates and are determined through market-driven price discovery processes. Ultimately, we need to work alongside regulators and other stakeholders to align regulations, legal frameworks, custodian processes, and permissioned environments. This will enable tokens to be used for payments, investments in real-world account receivables, or bonds. We should be prepared to adjust ourselves accordingly when regulatory changes arise.

Nick
Thank you, Jerry. Can you also share your thoughts on the current challenges to the growth of the crypto bond market and how you plan to overcome them? Given the difficult environment we're facing, what are your strategies for building an effective crypto bond market?

Jerry
I believe there are several challenges we need to address from various angles. Firstly, community engagement and support are crucial. As a pioneering project, we may face skepticism from some, but we need to garner support from key stakeholders such as money market makers and centralized exchanges. Cybersecurity is also a concern, and we must ensure robust risk management tools are in place for our users. Educating the community is another challenge, as fixed income investors may not be familiar with concepts like construction or discount factors. We need to emphasize the potential of leveraging these factors to maximize returns. Overall, community engagement, cybersecurity, and education are key challenges we must tackle for the success of our project.

Nick
Thank you, Jerry. Due to time constraint, we may only have time for one or two more questions. This question is directed to both Jerry and Vincent. It revolves around the level of decentralization in the term structure. Are there any centralized mechanisms in place, such as a centralized database of logins, that can be manipulated by humans? Additionally, how do you verify login information, such as using wallet addresses? In essence, while the trading elements may be decentralized under DeFi, what about the underlying technology and structure around it?

Jerry
Certainly, let me clarify the first question. Our platform is decentralized, meaning we do not hold user funds and have no control over users' assets. We utilize Zk-Rollup, a technique that bundles transaction data and sends them in large batches to the Ethereum mainnet every hour to ensure data availability and integrity.

Users can withdraw their assets at any time as needed. We also have a forced withdrawal and evacuation mode in place. For example, if a user requests a force withdrawal and we do not respond, it will automatically trigger the execution mode, allowing users to withdraw their assets. Our protocol is open-source and transparent, aligning with the principles of DeFi.

Nick
How do you evaluate the risks of the bonds themselves that are being traded here?

Jerry
So essentially, there are two components to consider: the bond tokens themselves and the interest rates. Managing the risk associated with interest rates can be done through hedging with futures and other proxy assets with similar risks. However, currently in the DeFi space, there are limited options for such hedging products. We are exploring the possibility of bringing futures and forward markets together to offer users diverse asset classes for hedging and pricing. Currently, the market price is determined by users, including borrowers, lenders, buyers, and sellers, through the order book or auction.

Nick
The last proper question here, and one that I find intriguing because we have discussed it before Jerry, is about bringing it back to real-world events that have occurred in the last few weeks. What are your comments on the recent pegging of USD Coin (USDC)? How could Term Structure have potentially helped in that situation if it had already been fully operational at that time?

Jerry
OK. So unlike traditional banks, Silvergate and SVB were more cautious of issuing bonds to convert part of their current liabilities into long-term liabilities, also known as term liability. For stablecoin issuers like Circle, the problem is that their long-term liabilities are still considered current liabilities because tokens can be redeemed by users at any time. To prevent market volatility, stablecoin issuers should consider converting the current part of their equity into term liability through the term structure borrowing process. In this way, they could borrow USDC back and lock it up in MakerDAO for six months or one year. This would allow these issuers to purchase six-month US Treasury bonds. We're currently in the process of implementing this.

Nick
There is one more question pending on the discord chat that requires an answer. Vincent, could you please address this follow-up question in relation to the previous ones? If your database system experiences an outage or is compromised, will it disrupt the service and cause the term structure to stop functioning? This is an important question that needs to be addressed.

Vincent
We do have a centralized database as part of our layer 2 scaling solution. We have a main plan in place to handle any potential disasters, such as server downtime. So, rest assured that users can still withdraw their assets even if the server is down. Additionally, we have multiple backup mechanisms and a comprehensive plan for duplicating our database. We use Merkle tree technology to ensure the integrity of our data and maintain consistency between the production and backup databases. We also conduct rehearsals for disaster recovery to be prepared for any unexpected events. Our priority is to protect users and their transaction data as quickly as possible in case of any issues with our database.

Nick
Great, we can't leave that question unanswered. So let's make sure we address it. But considering the time, Jerry, would you like to share some final comments as this is our first AMA? And for those watching on Discord or YouTube, what would you like to ask them? What is your call to action for the community? What support do you need?

Jerry
Thank you all for your support. I want to emphasize that our fixed income protocol is more than just interest-rate borrowing and lending. We aim to establish an interest rate benchmark for asset-liability management in DeFi and the real world. We are here to bring about a revolution in DeFi and TradeFi. We need the community to work together and support us through action. If you have any thoughts or ideas or are interested in partnerships, please don't hesitate to contact us. Whether you are a centralized exchange, market maker, options trader, wallet service provider, developer, or anyone in the Web 3 community, we welcome your collaboration to make a change in DeFi. Thank you.

Nick
Great! For those who want to get in touch, we have an open Discord channel and an active Twitter account that's already posting updates. You can also find contact details on our website or reach out directly to Jerry or Vincent. Thank you all for joining us today, and we look forward to seeing you in the next AMA.