What is a Primary Market?

What is a Primary Market?

The primary market is a financial environment where new securities, such as stocks and bonds, are initially issued and sold to the public for the first time. Companies, governments, and other organizations use the primary market to raise capital by selling these securities directly to investors, often with the assistance of underwriters like investment banks. 

In contrast, the secondary market consists of established exchanges where investors trade already issued securities amongst themselves. Here, the original issuer is not involved in the transactions, and the focus is on providing liquidity and enabling price discovery.

Common examples of primary market activities include initial public offerings (IPOs), private placements, and rights offerings.

Different kinds of primary markets in TradFi and DeFi.

Primary markets encompass various forms in both Traditional Finance (TradFi) and Decentralized Finance (DeFi). While TradFi primarily focuses on centrally governed systems, DeFi introduces a more decentralized approach to financial transactions.

Traditional Finance (TradFi) Primary Markets.

Initial Public Offering (IPO): A company lists its shares on a stock exchange for the first time, making them available to the general public.

Private Placement: Shares are sold directly to specific investors, usually institutional or accredited individuals, without a public offering.

Rights Issue: Shareholders receive the option to purchase additional shares at a discounted price.

Preferred Allotment: Certain investors are given priority access to purchase shares before they become widely available.

Decentralized Finance (DeFi) Primary Markets

While DeFi does not strictly adhere to the concept of primary markets due to its lack of central authority, it does feature innovative approaches to token distribution and fundraising:

Token Sales: Project teams distribute tokens to early supporters, often through crowdfunding events or auctions.

Liquidity Pool Contributions: Users contribute assets to pools, earning rewards in return.

Yield Farming: Participants lock their assets into smart contracts to earn interest or fees generated by the underlying protocol.

Lending and Borrowing: some DeFi lending platforms provide users with additional tokens upon lending or borrowing cryptocurrencies. Specifically, Aave is known for offering interest bearing aTokens that are minted and burned upon deposit.

Furthermore, Term Structure offers tTokens to lenders, which can be bought or sold in their secondary market.

Alchemix offers future-yield-backed synthetic assets, which represent a flexible instant loan that repays itself over time.

Both TradFi and DeFi primary markets aim to connect issuers with investors, albeit through distinct structures and processes. The emergence of DeFi brings forth novel ideas and challenges, requiring collaboration between the two sectors to achieve widespread adoption and address regulatory concerns.

How Primary Markets Work On Term Structure.

Primary markets in the Term Structure protocol function as the core markets where borrowers and lenders match their desired amount and interest rates through a batch auction mechanism. Borrowers provide over-collateralized base tokens to borrow at fixed interest rates, while lenders provide lending tokens. The auction mechanism involves sorting orders based on time and interest rates to ensure fair matching. Lenders mint tTokens, which are traded 

in secondary markets and can be used in the repo markets as collateral to borrow underlying tokens for funding or leverage purposes while borrowers receive borrowed tokens as a loan.

How Lenders And Borrowers Benefit From Term Structure Primary Markets.

Participants in Term Structure's primary markets benefit from the following features:

Lenders

  • Receive tTokens representing fixed interest payments upon successful matches in the primary markets.
  • Can earn higher yields due to the competitive nature of the auction mechanism, leading to potentially better interest rates than anticipated.
  • Have the ability to choose between various base tokens as collateral, increasing diversification options.
  • Enjoy zero gas fee transactions and a high degree of transparency and security since all transactions are conducted via zkTrue-up, a privacy-preserving rollup solution built on Ethereum.

Borrowers

  • Access loans backed by over-collateralized base tokens, reducing credit risk exposure.
  • Obtain fixed interest rates that are better than or equal to their expectations due to the competitive nature of the auction mechanism.
  • Experience increased flexibility and liquidity within the fixed interest rate market ecosystem.
  • Leverage the opportunity to borrow against various base tokens, expanding investment possibilities.

Primary dealers, who act as market makers in the secondary markets, also benefit from the Term Structure protocol by receiving incentives for supporting liquidity and facilitating trades among users. This collaboration fosters a healthy and active secondary market environment, benefiting both buyers and sellers of tTokens.

To get started on Term Structure primary markets visit: https://app.testnet.ts.finance/