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What is the latest trend in decentralized finance (DeFi)? Yield farming supported by US government debt.
Following the recent launch of Ondo Finance’s US Treasury-backed Government Bond Fund (OUSG), Flux Finance has launched a decentralized lending protocol, allowing users to deposit USDC or DAI into Flux’s OUSG-backed protocol and receive fUSDC in return or fDAI, two derived tokens representing USDC and DAI on Flux.
Flux is a fork of 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 — like lending and borrowing — to users. Yield farming, on the other hand, refers to rewarding users with a project’s tokens for providing liquidity to that project.
Read more: DeFi protocol Ondo Finance sets up tokenized corporate bonds with a yield of over 8% on stablecoins
The fUSDC and fDAI tokens can then be used as collateral on lending and derivatives protocols. All of this is similar to how liquid staking protocols like Lido issue tokens like stETH, which represent ether staked on their platforms at a 1:1 ratio, and can be used for yield farming.
Interest in tokenized US Treasury yields comes as lending rates for major DeFi platforms struggle after the chaotic crypto market of 2022 and the Federal Reserve continues to hike interest rates, potentially making traditional assets more attractive than DeFi.
According to DeFi Prime, the average interest rate on USDC loans is 1.68%. But traditional savings accounts at traditional financial institutions (TradFi) pay more, up to 4%, in this environment with rising interest rates. For example, CapitalOne bids 3.4% and Discover pays 3.3%. And these TradFi accounts are backed by Federal Deposit Insurance Corp. insurance. (FDIC) protected.
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