If you look at DeFi through the eyes of a rates quant you immediately notice the void where term structure should be. On-chain lending and borrowing has so far been almost entirely confined to lending pool-based implementations. This approach was adopted because it fits elegantly into the heavily constrained runtimes of older blockchains. But, viewed as debt instruments, lending pools have significant drawbacks:
Existing efforts to serve these needs in DeFi are based on periodic auctions for debt with fixed maturities. While this does give access to fixed rates, it’s not a particularly flexible approach and has so far failed to draw anywhere near the volume of simple lending pools.
So we zipped up our flight suits and got to work building continuous markets for debt of fixed tenor, hosted in efficient limit order books. In short, DeFi users can now initiate secured fixed-term loans at any time, with fixed rates determined in advance purely by supply and demand for the token in question. We achieve this by making markets in zero-strike perpetual American call options on bonds that are issued upon exercise. We call these options “bond tickets”. For a deep dive, refer to the eponymous section below.
As we started building out the collateral management component of our bond product we had a realisation. Over and over again DeFi teams are building collateral solutions into their programs, often tightly coupled with the product they’re protecting. And alongside that they’re building the off-chain keepers, deploying them, and managing the associated infrastructure. All of this duplicated effort is even more alarming when you realise that, as products get more sophisticated, collateral management becomes more complex.
Our objective is not to craft Jet Protocol in every detail. We are deploying the basic infrastructure that will support an open collection of stakeholders in collective evolution of the protocol. This basic infrastructure includes
Jet Protocol is a permissionless DeFi protocol governed by a Decentralized Autonomous Organization (DAO), which operates under a Swiss Association (The Association) model as a legal wrapper.
The Association’s governing model will structure the DAO to be shepherded by a Governance Committee consisting of the founding members of The Association as well as additional non-Jet Protocol employees to hone proposals set forth within the governance forums against rigorous standards to protect and strengthen the health of the protocol as a filtering mechanism before going to formal on-chain voting.
For on-chain voting, holders of the JET governance token will be able to cast their votes for or against changes to the protocol or DAO operations through a governance portal (JetGovern). JET token holders will initially be able to cast votes on governance proposals related to collateral onboarding, which already has a governance framework set forth in The Association’s documentation, found here. There will be additional opportunities for the Governance Committee to set forth purpose-specific sub-committees to research and gain consensus on topics such as tokenomics related to the economic incentives ingrained in the protocol’s operations and treasury management.
Jet Protocol employs a concept we call integrated tokenomics. This means that the governance and tokenomic components of the protocol are coupled. Staking is the entry point for JET holders into the economic and governance life of the protocol.
The guiding principles of our tokenomics are:
We recognise the power of the “liquidity mining” model to fuel the growth of a protocol and, at the discretion of Jet governance, incentivisation schemes may be strategically employed for user acquisition purposes. Of course, this approach is unsustainable over the long term, and a robust protocol needs a plan for incentivisation in the steady state, once treasury-issued token rewards dry up.
The core economic element of Jet’s integrated tokenomics is the recycling of protocol revenue into rewards for ecosystem participants. This is a fair and sustainable way for users to be rewarded for engagement.
The below product suite is delivered by the LLC, however, any product iteration thereafter is managed by JET tokenholders. These core modular products are the building blocks for a robust and liquid on-chain debt market.
Jet margin accounts are hub of user activities on the platform. A margin account connects you to:
All collateral management is handled by the margin accounts so that users are able to collateralise not only across all Jet products, but also across multiple protocols.
We introduce permissionless markets for secured debt of fixed tenor. These markets are hosted on order books that facilitate the exchange of bond tickets.
Bond tickets are perpetual zero-strike American call options on secured bonds that mature one tenor interval after exercise. They are characterised by their tenor and principal token. Bond tickets are minted by the bond program subject to a claim placed on the minter’s collateral. The face value of one ticket is defined as the principal amount of the underlying bond.
Tickets may be exercised at any time by staking them to the bond program. One tenor interval after staking, staked tickets may be burned. In that case, the face value of the tickets is delivered from the bond program to the staker.
The minting logic of the bond program ensures that principal tokens are available for delivery to ticket stakers. The minter acquires an obligation to the bond program for the face value of the minted tickets. This obligation is over-collateralised by crypto assets. As usual, if the value of the collateral falls below some fraction of the obligation value, some may be sold to ensure availability of the principal tokens. An additional mechanism allows rolling of the obligation one tenor interval after minting. The bond program mints and sells tickets to cover the obligation. As a result the face value of the obligation will increase. This process may continue indefinitely, with the obligation rolling over on every tick of the tenor interval. Should the backing collateral be insufficient to support the obligation, or if for any other reason the obligation cannot be rolled, minter collateral may be sold for underlying tokens.
All tickets for a particular principal token and tenor are completely fungible, regardless of when they are minted. The bond program manages exercise and obligations so that tickets may be traded in a single order book where the price of liquidity is established directly by supply and demand.
Tickets trade at some discount to face value, expressing the liquidity premium for the tenor in question. If the ticket price is 𝑃 and the tenor is 𝑇, then the annualised fixed rate 𝑅 for debt of this tenor is given by
Example. Lilah the lender has 10,000 USDC available to lend for 24 hours. Bob the borrower is looking to borrow 10,000 USDC against SOL collateral. Bob sees that he needs to sell 10,001 24-hour USDC tickets to received 10,000 USDC. Bobs interacts with the margin program which places a claim for 10,001 USDC against his collateral, mints 10,001 24-hour USDC tickets, and delivers these to Bob who sells them for the 10,000 USDC he was looking to borrow. On the other side of that trade is Lilah, who stakes the 10,001 tickets to the bond program. 24 hours later the bond program is triggered to manage Bob’s obligation. It mints and sells 10,002 24-hour USDC tickets for 10,001 USDC. Bob’s obligation now has a face value of 10,002 USDC and a new 24-hour timer. Meanwhile Lilah is able to claim her 10,001 USDC by burning her staked tickets.
In order to have a single debt market for a particular tenor and underlying token, it must be for secured debt. This is because unsecured borrowers have varied credit worthiness and hence no common price for their debt.
We introduce permissionless credit swap instruments as the bridge between borrowers seeking unsecured loans, and the secured debt markets described above.
Credit swaps are created by a borrower looking to make an unsecured loan. The swap specifies
Anyone who trusts the borrower may stake appropriate collateral to the swap. This collateral may be used by the borrower to mint and sell bond tickets in the indicated market. The borrower is expected to pay the premium into the swap on the tenor interval.
Collateral stakers assume all the credit risk in this arrangement. If the borrower fails to manage their bond program obligation successfully, the collateral will be liquidated in the normal way. The entire lifecycle of a credit swap is decentralised and permissionless, with no built-in recourse for credit providers.
From a borrower’s perspective, the cost of an unsecured loan is neatly broken down into
These credit swaps are not speculative instruments, in the sense that they cannot be used by traders looking for exposure to credit events they are not themselves a party too.
The primary objective of this design is to avoid fragmenting the available loanable funds into secured and unsecured markets. By creating a low-friction solution for unsecured lending of collateral, we allow the concentration of all primary loanable funds into a single market serving the needs of all borrowers.
Jet offers several simple products for users to earn yield on their tokens.
In addition to our own products, we also offer powerful composability solutions for users to access yields on other supported protocols. Tokens deployed via a margin account to external protocols still serve as collateral within the margin program, as appropriate.
We have simple borrowing products for users to borrow against any collateral recognised by their margin account, including tokens they have deployed to other supported protocols.
Beyond Jet’s native products, our cross-protocol margining solution makes it easy to borrow a cheap asset on margin for use as collateral in other supported protocols so that advanced users can benefit from borrowing opportunities throughout the Solana ecosystem.
Jet supports spot margin trading across multiple venues with maximum capital efficiency.
Among the external protocols supported by our margin program are trading venues like Serum and Orca. Users are able to trade on these venues through their margin accounts, and their positions contribute to their collateral for accessing loans from Jet.
This means that users can get long or short, with leverage, on a wide variety of tokens. Long positions can be transferred into margin pools where they earn interest to offset the borrow cost of the shorts.
Through our dapp and data APIs users will have detailed insight into their open and historical orders, fills, swap, loans, deposits, and P&L.
External protocol integrations go beyond spot trading venues. Traditional lending and borrowing protocols like Solend and Port will also be integrated with our margin program. This will open up new trading opportunities for Jet users to efficiently arbitrage interest rate disparities across these platforms, with leverage.
Our helpful copilot helps users to identify these and other opportunities, and keep an eye on the risks in their portfolio.
This is the approximate launch schedule for the products outlined above. The work of curating liquidity and refining the protocol will naturally continue into 2023 and beyond. We expect that new initiatives will be added to the roadmap as governance assumes full responsibility for the protocol and initiates the grants program.