An Introduction to Version 1 Markets on Horizon Finance
Our mission is simple, we seek to enhance the trading toolkit available to DeFi participants engaged in key yield streams across the ecosystem. We look to do this by introducing interspersed auction markets (Horizon markets) across various tenors where participants can compete for preferential payment in return for capping their yield, on a fair and transparent playing field.
All design choices have their trade-offs. When we first contemplated ways in which people could trade/hedge their interest rate risk for a chosen cash flow stream, we naturally arrived at another over-collateralized framework. As it goes, within any sphere of over-collateralization you have the flexibility to define rules that offer traders various exposures or payoffs. As long as the overall system remains adequately collateralized potential withdrawals are fully-funded and the system can operate as desired. But such a system would require a robust liquidation framework, carrying its own complications and risks, and one can never truly eliminate insolvency risk, especially if the platform allows leverage. Moreover, we were concerned about the potential capital inefficiency related to the funding cost of the collateral itself, regardless of whether that was in ETH, wBTC or one of the widely accepted stablecoins.
So we landed on a different system where no collateral is necessary. Horizon markets are created by the participants themselves. Those who own the underlying tokenized yield stream have the ability to mint a Horizon token which sits on top of it, effectively operating as a derivative payout on the realized yield, measured from a starting blockheight to an ending blockheight. The protocol collects the orderbook of fixed IR bids (which act as yield caps) plus the floating pool which have all sealed in an auction, and system income for the round is then distributed in order from lowest IR bid (cap) to highest IR bid (cap), with any excess income spilling over into the floating pool. By nature of the mathematics, a participant’s PnL denominated in USD is floored at 0, although they can outperform the benchmark yield by being on the right side of expectations. The following diagram summarizes the basic timeline of operations for a given Horizon market.
A predefined universe of auction parameters exist from which any participant holding the tokenized yield stream (eg. yUSD) can craft a newly minted token. By minting a token you are essentially creating or joining an upcoming round. If you are first to choose a particular yield cap (with floating also being an option) then you mint the token — say a 9% bid cap on yUSD over blocks X to Y —and Horizon’s treasury will refund you all gas costs in ETH. This is aimed at fostering active participation. Simply joining an existing token pool is less costly so gas is paid by the user.
In the diagram below, on the left hand side you can see a list of Ethereum addresses that interacted with the protocol for a single round. Those coloured in blue are the addresses that were first to choose their specific yield cap and hence minted a token, while the others simply joined afterwards. On the right hand side you can see a proposed naming convention for Horizon tokens in the format Horizon_underlying_blockLength_roundNumber_IR.
The protocol charges a 1bp admin fee each round which helps fund token minting subsidies and further protocol development. With scale this has scope to be changed via decentralized governance or distributed to those staking the HRZ native token.
Now let’s consider the dynamics of an example round. We can run a weighted average calculation on the yield cap that participants have bid at (dotted red line). If realized yield (purple line) turns out to be higher than the WAYC, then the floating pool will outperform — particularly vs. the lower bids that locked in preferential payment at the cost of a low yield cap.
Another viewpoint is to display accumulated income against accumulated capital in a Horizon market. Here you can think of yield as the steepness of the accrual of income across each segment of capital. Black dots mark the divisions of capital assigned to different yield caps, ordered from lowest to highest (accumulating from left to right). The black vertical line marks the beginning of the floating pool which in this case outperforms the underlying yield (slope of blue line).
Moving onto another example, let’s imagine that the realized yield (purple line) for a round turns out to be lower than the WAYC like in the following scenario.
In this case, the over-bidders that have locked in preferential payment pick up some extra yield at the expense of the floating pool.
The first horizon markets will be built on top of yUSD. We look forward to expanding that offering as the protocol grows.
