How does RaiseR work?
Last updated
Last updated
The participants of RaiseR can be categorized as
Borrowers: those who want to raise funds by offering interest and issuing zero-coupon bonds
Lenders: those who want to fund different issuances by buying zero-coupon bonds to earn a fixed income
Traders: those who want to trade the secondary markets of the zero-coupon bonds to earn a profit
Each participant has different needs and risk appetites, with each forming a necessary pillar of the RaiseR Credit Market.
A ZCB or zero-coupon bond is a simple way of representing an amount owed with interest. ZCBs are issued at a ‘discount to par’. Meaning, that at maturity, they will expire to some round number, and at today’s price, the discount will reflect the embedded interest. On RaiseR, the par value is $1, and anytime there is an issuance, all lenders that committed capital to a particular pool, will be issued a ZCB pertaining to that pool. Once the pool has been successfully funded, the ZCB will automatically launch for trading on RaiseR's proprietary DEX, RaiDEX.
To understand the concept of a ZCB, and how it pertains to RaiseR and RaiDEX, consider the following example.
MoonDAO ABC wishes to raise $1m for a term of 90 days, at an annualized interest rate of 15% (let’s ignore any collateral or bonus payments for the time being).
This means, that using simple interest (we do not compound interest), the value of a ZCB corresponding to the value of their borrow would be:
1/(1+.15* 90/365) = 0.9644
This means that the mark-value of the ZCB when it lists will be at 0.9644 and market-makers are likely to price bid/offers around that mark.
The total number of ZCBs that would’ve been issued would’ve been 1,000,000/.9644 = 1,036,914 to those lenders that committed to that pool, and at maturity, and ceteris paribus, the ZCBs would be worth $1 each, providing total interest of $36,914 over 90 days or 15% annualized.
The discount that a ZCB trades to its maturity value will depend on many factors, including:
Time left to maturity: If nothing has changed, and the borrower is seen as creditworthy, then the price of the ZCB should approach $1 as maturity nears.
Interest-rate environment: If interest rates rise tremendously, then owners of ZCBs may see it as an opportunity cost, and discount it using the prevailing market rates, ultimately perceiving it to have a lower present value. In this instance, the value of ZCBs would likely fall. The opposite is also true. If interest rates were to fall, the price of ZCBs would be expected to rise.
Credit-Risk: If the borrower’s risk profile has changed, the value of the ZCB should reflect that. I.e. In the abovementioned example, if MoonDAO raised $100m, then they may be seen as a low-risk for default on the $1mm borrowed, and there may be a natural demand for this particular ZCB. The opposite would also hold true, where an adverse development within the MoonDAO ecosystem would increase the likelihood of non-payment.
Utilizing ZCBs and enabling running liquidity, proliferates credit trading and creates a new paradigm in borrow-lend markets that has been absent from crypto thus far.
RaiDEX is the proprietary market for ZCBs on RaiseR. Anytime there is a successful borrow, the corresponding ZCB is automatically enabled on RaiDEX. Like any DEX, users are also free to create any other market to derive liquidity.
When (and if) all outstanding ZCBs of any particular issuance are redeemed upon the maturity of a borrow, the market will be automatically delisted from RaiDEX.