Analyzing the operational mechanism of the BridgeFi project Cytus Finance

Author: John Feng (Independent Crypto Analyst)

Current on-chain yields are declining. With the Federal Reserve's interest rate hikes, the appreciation of the dollar has led to a global harvest, causing dollar-denominated assets to rise in value, resulting in an inversion of on-chain and off-chain yields. Smart money only goes where it can make profits, leading to decreasing liquidity on-chain as large amounts of capital are withdrawn to off-chain.

After this trend emerged, more and more DeFi projects chose to introduce off-chain assets. MakerDAO has been actively promoting the use of off-chain assets as collateral since last year. The BridgeFi project in DeFi, Cytus Finance ++https://www.cytus.finance/++, also shifted its focus to the yields generated by off-chain assets after interacting with MakerDAO last year.

But will off-chain assets be the new lifeline for DeFi, or just a fleeting moment?

1: What are Off-Chain Assets?

Off-chain assets, also known as RWA (Real World Assets), are assets that have value in the real world. These assets can be categorized into different types, but in terms of investment attributes, we are more concerned with assets that can continuously generate value, such as real estate, land, raw materials, equipment, etc. In DeFi, tokens are similar to equity in startups. Many tokens corresponding to DeFi protocols do not generate profits in the short term, thus lacking underlying value support, leading to extreme price volatility. Therefore, when the economic environment changes, DeFi token prices can easily plummet, resulting in yield collapse.

2: Transferring Real Yields from Off-Chain to DeFi

DeFi has experienced significant ups and downs, but it will certainly not disappear. The future of DeFi needs to move towards normalization to allow the entire ecosystem to thrive again. The Cytus Finance team identified a missing link in the DeFi ecosystem, which is to provide stable yields based on assets with real value as the foundation of contracts, and then add DeFi rules on top of that, which is BridgeFi. This ensures underlying yields while maintaining the unique attributes of DeFi.

Cytus Finance launched a liquid stable yield pool on November 3, 2022. The pool types include a collateralized real estate debt pool and a U.S. Treasury pool. The real estate debt pool primarily focuses on debt investments in developers or large real estate projects, only engaging at the highest tier. This loan tier has historically been monopolized by banks and institutions, preventing the general public from accessing such investment projects. The characteristics of these top-tier loan projects are as follows:

1. Typically secured by land, property, and personal guarantees;
2. Leave sufficient value fluctuation space through LTV (Loan-to-Value) and LTC (Loan-to-Cost);
3. Provide fixed interest income, with all terms locked in the loan contract;
4. The first lien on collateral, transaction information of the underlying projects, and market value are all public information and can be queried;

Thus, this high-level loan ensures the safety and yield of the project through sufficient collateral, making it most suitable for fixed-income products, which is also why banks and institutions favor such projects. Additionally, since property information can be queried on public platforms, it is very suitable for being on-chain.

The U.S. Treasury pool primarily invests in U.S. Treasuries. With the Federal Reserve's interest rate hikes, a large amount of capital has flowed back into Treasuries, and many Wall Street institutions have indicated that now is a good time to invest in bonds. Cytus Finance's U.S. Treasury pool mixes bonds with varying maturities of one year, six months, three months, and one month.

3: The Operating Mechanism of the Two Pools

First, both pools are currently single-asset pools and have initial target amounts. The advantage of single assets is that it makes the underlying project information more transparent, allowing investors to clearly see the status of the assets they are investing in.

Secondly, the U.S. Treasury pool operates on a rolling investment basis, with the current initial capital utilization rate set at 90%, meaning that for every $100,000, $90,000 will be invested in Treasuries, while the remaining $10,000 serves as liquidity. The yield is calculated by taking the weighted average from investing in bonds of different maturities, while the daily interest fluctuations are automatically distributed based on the amount in the pool at that time.

Through the operational principles of the pools, Cytus Finance has generated liquidity from originally illiquid assets, significantly improving capital utilization. In the future, the Cytus Finance team has also indicated that they will increase leverage through collaboration with other contracts to further enhance yields. Additionally, the project will collaborate with Chainlink to ensure fund security through tracking on-chain and off-chain funds.

4: Does DeFi Need Off-Chain Yields?

In the past DeFi frenzy, off-chain yields were negligible in comparison. However, after the frenzy, order will be restored, and the missing parts will gradually be exposed. DeFi needs self-sustaining capabilities, and thus requires assets with stable value that can generate real demand. If everyone holds a sickle, then DeFi will ultimately face extinction.