What’s the latest trend in decentralized finance (DeFi)? Yield farming backed by U.S. government debt.
Following the recent launch of Ondo Finance’s U.S. Treasury-backed Government Bond Fund (OUSG), Flux Finance has launched a decentralized lending protocol that allows users to deposit USDC or DAI into Flux’s protocol, which is backed by OUSG, and, in turn, receive fUSDC or fDAI, two derivative tokens representing the USDC and DAI on Flux.
Flux is a fork of the popular lending and borrowing protocol Compound, which holds billions of dollars in locked tokens as of Thursday.
DeFi protocols like Flux rely on smart contracts instead of intermediaries to provide financial services – such as lending and borrowing – to users. On the other hand, yield farming refers to users getting rewarded with a project’s tokens for providing liquidity to that project.
The fUSDC and fDAI tokens can then be used as collateral at lending and derivatives protocols. All this is similar to how liquid staking protocols like Lido issue tokens such as stETH, which represent ether staked on their platforms at a 1:1 ratio, and can be used for yield farming.
The interest in yield from tokenized U.S. Treasurys comes as lending rates for major DeFi platforms struggle after 2022’s chaotic crypto market, and the Federal Reserve continues to raise interest rates, making conventional assets potentially more alluring than DeFi.
According to DeFi Prime, the average rate for USDC lending is 1.68%. But conventional savings accounts at traditional finance (TradFi) entities are paying more, up to 4%, in this rising rate environment. For instance, CapitalOne offers 3.4% and Discover pays 3.3%. And those TradFi accounts are protected by Federal Deposit Insurance Corp. (FDIC) insurance.
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