As mentioned elsewhere in the documentation, Buttonwood’s Tranche protocol is a foundational set of contracts that can be used to build numerous financial instruments. One of these financial instruments is long-term debt, which is the basis for large sums of liquidity in financial markets.
Although short term lending and decentralized exchanges have found product market fit during the previous cycle, DeFi is yet to solve for medium to long-term borrowing. A main reason stems from the volatility of crypto, which is amplified due to a type of leverage known as margin leverage—quick and drastic drops in underlying collateral value commonly result in failure to meet margin calls, and lead to cascading liquidations.
Our first product, ButtonZero, is a long-term debt market. It features crypto-backed zero-coupon bonds, that unlike with existing protocols, are non-callable. This means ButtonZero can offer “safe borrowing” — zero liquidations, zero margin calls, and…zero worries.
For borrowers, ButtonZero allows retail users to “borrow like a king”, receiving the same rates as the largest foundations by simply depositing the right collateral asset (ETH, wBTC, & AMPL).
Borrowers can either deposit collateral and 'Sell Bonds' on the spot market, or place an 'Ask Order' and wait for a more desirable discount. Upon the sale of bonds, borrowers receive cash (USDT) with which they won’t have to pay back (or “top up”) for six months, no matter what fluctuations the underlying asset experiences. They also receive Z-Tranches, which we will touch on soon.
For lenders, ButtonZero lets them choose their risk tolerance in two ways:
  1. 1.
    Lenders select which collateral asset pool (BTC, ETH, AMPL) they want to lend cash (USDT) to
  2. 2.
    Lenders select the level of price risk they want to take: safe tranche (A) or riskier Tranche (B)
The discount that lenders receive is determined by the market environment and how much risk the lenders take on (in terms of collateral asset and tranche). The rate becomes fixed upon purchase of the bond.
Rather than buying bonds on the spot market, lenders can provide liquidity at a specified price. They then wait for the value of the tranche tokens to fall to their price, which triggers a bond purchase. Functioning like a limit order, this enables lenders to lock in a discount rate.