InfiniFi Stablecoin: Revolutionizing Fractional-Reserve Banking on Blockchain
Introduction
The InfiniFi stablecoin [1] (IUSD) introduces a groundbreaking approach to stablecoin design by addressing a long-standing issue in traditional banking: the duration gap problem. This mismatch between liquid liabilities (e.g., depositors withdrawing funds at any time) and illiquid assets (e.g., loans or bonds) has historically plagued financial institutions, often leading to instability or bank runs. InfiniFi, a fractional-reserve stablecoin, leverages blockchain transparency and depositor-driven governance to solve this issue while delivering higher, sustainable yields without amplifying risk. By aligning incentives, reducing coordination failures, and incentivizing the tokenization of real-world assets (RWAs), InfiniFi aims to redefine how stablecoins operate in both decentralized finance (DeFi) and traditional finance (TradFi).
Background
The InfiniFi stablecoin was developed [2] by the Obyte team [3] which has originally developed a DAG.
The Purpose of InfiniFi
InfiniFi is designed with several key objectives:
Higher Returns with Controlled Risk: By optimizing asset allocation through depositor preferences, InfiniFi achieves better yields than traditional full-reserve stablecoins without compromising stability.
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Incentive Alignment: Depositors play an active role in deciding asset allocation, ensuring their interests align with the system’s long-term health.
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Mitigating Bank Runs: Transparent, on-chain mechanisms and automated liquidity pools reduce the risks of coordination failures and ensure fair exits during stress events.
Driving RWA Tokenization: By offering attractive returns, InfiniFi creates a financial incentive for bringing real-world assets like bonds, loans, and treasuries onto the blockchain.
These features position InfiniFi as a bridge between DeFi and TradFi, fostering a more efficient and inclusive financial ecosystem.
How InfiniFi Works
InfiniFi’s implementation combines innovative mechanisms to solve the duration gap and enhance capital efficiency. Below are the core components of its system:
1. Depositor-Driven System
InfiniFi allows users to deposit assets like USDC and receive iUSD, the protocol’s stablecoin. Depositors choose between two options:
Liquid Deposits: These allow instant withdrawals but offer lower yields.
Bonded/Illiquid Deposits: These require a lock-up period (e.g., 6 or 12 months) but provide higher yields and greater voting power in governance.
The longer the lock-up period, the higher the yield multiplier and voting influence, incentivizing depositors to commit to longer terms. This structure empowers users to shape the protocol’s asset allocation while balancing their need for liquidity.
2. Duration Matching and Self-Laddering
Traditional banks use top-down “laddering” to manage the mismatch between short-term liabilities and long-term assets. InfiniFi replaces this with a bottom-up, self-laddering model driven by depositor preferences. By aggregating data on depositors’ lock-up choices, InfiniFi can match liabilities (e.g., iUSD withdrawals) with assets of similar duration (e.g., 12-month bonds for 12-month bonded deposits). This reduces liquidity risks and allows the protocol to safely invest in higher-yielding, illiquid assets.
3. Fractional Reserve Deployment
Unlike full-reserve stablecoins that hold 100% liquid backing, InfiniFi employs a fractional-reserve model to boost capital efficiency. A portion of liquid deposits is co-deployed into illiquid assets, increasing returns for both liquid and illiquid depositors. This approach ensures that even liquid depositors benefit from the protocol’s yield optimization, while bonded depositors earn higher rewards for their commitment.
4. Risk Management and Insurance
InfiniFi incorporates robust risk management to maintain stability:
First-Loss Principle: Illiquid depositors, who have greater control and earn higher yields, absorb losses before liquid depositors. This aligns risk with reward.
Depeg Handling: During stress events, automated Curve-based liquidity pools allow depositors to exit at fair market prices, avoiding the opaque bailouts seen in traditional finance.
Protocol-Owned Liquidity: Over time, InfiniFi builds reserves and insurance backstops that strengthen with each stress event, enhancing long-term resilience.
5. Governance
InfiniFi’s governance model is depositor-centric. Voting power is weighted by deposit amount and lock-up duration, ensuring those with the most at stake have the greatest influence. A multi-role system—consisting of Allocators (who propose asset strategies), Verifiers (who assess risks), and Vetoers (who can block risky proposals)—manages asset allocation and treasury deployment. This structure balances efficiency with safety, as depositors with the most voting power also bear the most risk.
6. Ecosystem Role and Flywheel Effect
InfiniFi integrates with DeFi protocols like Aave, Pendle, and Lido to optimize yields in its early stages. It also partners with tokenizers to bring TradFi assets (e.g., bonds, loans, treasuries) on-chain. This creates a flywheel effect:
- More depositors join the platform, providing better duration data.
- Improved duration matching enables safer investment in high-yield assets.
- Higher returns attract more depositors and asset tokenization.
- Increased adoption strengthens the ecosystem, driving further growth.
This cycle positions InfiniFi as a catalyst for large-scale RWA tokenization, bridging DeFi and TradFi.
Key Innovations
InfiniFi’s design introduces several pioneering features:
Depositor-Directed Fractional Reserve: Unlike traditional banks, InfiniFi aligns incentives by giving depositors control over asset allocation.
Self-Coordinated Duration Matching: Depositor preferences predict liquidity needs, enabling efficient asset-liability matching.
Automated Depeg Handling: Curve-based AMMs ensure fair pricing during stress events, avoiding centralized interventions.
First-Loss Principle: Illiquid depositors bear initial losses, balancing risk and reward.
RWA Tokenization Incentive: Higher yields make on-chain assets financially attractive, accelerating tokenization.
Conclusion
InfiniFi represents a paradigm shift in stablecoin design, addressing the duration gap problem through a depositor-driven, blockchain-based approach. By combining fractional-reserve efficiency, self-laddering duration matching, and transparent governance, InfiniFi delivers higher yields while minimizing risks. Its integration with DeFi and TradFi, coupled with its focus on RWA tokenization, positions it as a transformative force in finance. As more users adopt InfiniFi, its flywheel effect will drive the tokenization of real-world assets, creating a more efficient, inclusive, and resilient financial ecosystem.