The Utility of FinCypher Collateralized Debt Obligations in the DeFi Space


In the crypto space still, the yields are highly volatile and risky, which creates a significant barrier of entry for risk-averse investors. There is a need for instruments in the crypto space which would enable the allocation of the risk from the risk-averse investors (who are looking for relatively riskless and stable returns) to the risk-seekers and speculators who are ready to take the risk for a higher return.

The development of the CDO protocol is designed for the purpose to enable this sort of efficient risk allocation. Further, for the risk allocation lender does need to liquidate his position, which is another advantage of the application of CDOs.

Unmitigated Risks in the Crypto Industry

The DeFi space being relatively opaque still faces risks from different dimensions:

  • Lack of accountability: Unlike traditional banks, which can be sanctioned or shut down, there is nobody who can be held accountable or take responsibility when something goes wrong. This is because the applications in DeFi are built on decentralized systems, which distribute functions and power away from a central location or authority. There is, however, a difficulty holding any particular person or entity accountable for any technological failure in this market.
  • Cyber-risk: In 2020, the crypto industry was no stranger to cyber-attacks and cybersecurity breaches. Hackers made off with millions after hitting the KuCoin exchange in September, while a range of DeFi (decentralized finance) platforms Balancer, Akropolis, Opyn, etc. also received more than their fair share of drama throughout the year. It is predicted that attacks on DeFi platforms and protocols — particularly new ones will rise. The possibility of the cyber-risk creates a significant risk of the loses of the crypto assets due to the lack of high-security standards in the space.
  • Highly Volatile Interest Rates: Currently, still the interest rates offered for the borrowing by the DeFi platforms such as Avaa and Compound is highly volatile. The high volatility affects particularly the interest of investors who are looking for stable returns.
  • High volatility of the crypto prices: The market prices are highly volatile, which can impact the total value of the portfolio in a relatively short period of time.

CDO can applied to create another layer of opportunities to mitigate this risk through effective allocation of the risk.

Enabling New Opportunities to the Extend the Market Size of DeFi

A CDO, in essence, allows lenders, to sell upfront the cash flows of the loans it has in its balance sheet, which gives the lender the ability to issue more loans to businesses and people that need it, which creates more economic opportunity and growth.

Such products could also be very useful in the DeFi market since they will create new opportunities for investors while at the same time give the ability to DeFi platforms such as Compound and Aave to create new products with new forms of collateral and thus give more loans.

New Opportunities for Investors of Utilization their Loan Positions

DeFi investors let these debt tokens sit idle in wallets (such as cTokens), re-invest them as collateral for other loans or put them up for yield farming. The problem is these bets often move in the same direction.

CDO tokens which have the claims over defi lend pools as underlining debt token representing a claim to funds deposited or “locked” on a DeFi app, such as cDai. These debt tokens allow those same deposits to gain exposure again on other markets. The whole mechanism enables efficient utilization of the debt tokens, enabling investors to benefit from them, putting it into.

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