Table of Contents
Researcher
Special Thanks to Charlie Pyle(founder of hourglass) for reading and reviewing this article.
Key Takeaways
The most significant advantage of DeFi is the ability to turn previously intangible assets into tangible ones through tokenization.
Hourglass, which we will introduce today, uses blockchain technology to tokenize time.
Unlike other projects, it uses the ERC-1155 standard to store various types of assets in a single contract, allowing tokens with different maturities to be implemented in the same smart contract.
Currently, it is limited to FRAX, but over time, it will support more DeFi protocols, allowing users to use the time in various ways.
1. About Time, The Oldest Resource
“Remember that Time is Money. He that can earn Ten Shillings a Day by his Labour, and goes abroad, or sits idle one half of that Day, tho’ he spends but Sixpence during his Diversion or Idleness, ought not to reckon That the only Expence; he has really spent or rather thrown away Five Shillings besides.Remember that Credit is Money. If a Man lets his Money lie in my Hands after it is due, he gives me the Interest, or so much as I can make of it during that Time. This amounts to a considerable Sum where a Man has good and large Credit, and makes good Use of it.”
Benjamin Franklin-
Time has some peculiar properties unlike many of the other resources we enjoy. Unlike other resources, it is a resource that is constantly being consumed whether we are aware of it or not, and it is also a resource that is fairly given to us at the beginning of every day, regardless of our efforts. That’s why time is a resource that we often feel wasted in our lives, and sometimes it’s a resource that we waste mindlessly while lying in bed. But if you think about it, time is not just a resource that is embedded in our lives, it is also a commodity that is embedded in finance and markets.
“Interest is not the price of money, it is the price of time.” Eugen Von Bohm-Bawerk, an Austrian economist, said that the value of the same good changes depending on when people can have it, and the premium attached to that value is interest. Assuming that we value a present good more than a future good, there must be a premium on the future in order to give up the present for the future (assuming they are the same good, it is not surprising that most people value the present good more than the future good). For example, what could make me wait if I ordered an iPhone 15 and I’m an impatient person who wants it now? There could be a discount. If I have to pay $1,000 for the iPhone 15 if I buy it now, but only $950 if I wait a week, it depends on how much I want the iPhone 15 now, but if I value the $50 premium more, I’m willing to wait a week. This is the concept of “interest” that Bohm-Bawerk is talking about. While it varies from person to person, people universally value a present good more than a future good, so for the same good, there should be a premium on the future good, which is what interest is. The reason why interest is positive rather than negative is because of the universal tendency of people to value present goods more highly than future goods, Bohm-Bawerk explains.
If that’s too difficult, let’s take an example from everyday life. When we invest in crypto or stocks, whether we take out a loan or make a leveraged investment, we are basically consuming what we will have in the future. We can always raise those funds over time, but aren’t we taking on debt and making leveraged investments because the expected return on investment now is higher? The “interest” that accrues is the price we pay to pull and utilize a future good. Benjamin Franklin, whom I quoted above, talks about time in the same way. If the person who lends you money doesn’t take it back when it’s due, he says, he’s given you ‘interest’. This is because he has given you time to put the money to use better. In other words, we are unknowingly utilizing time as a commodity. The project I’m going to introduce today is a project that literally tokenizes time. If blockchain is a financial platform, and time is an asset, why not tokenize it as well?
2. Tokenization of Time, Hourglass.
Hourglass describes itself as the Time-Layer of the blockchain. Currently, Hourglass is divided into two parts: a new class of tokens called Time-bound tokens (TBTs) and the Hourglass Marketplace, which provides liquidity for the TBTs, which I’ll explain in a moment.
2.1 The problem faced by Defi protocols and the rise of TBTs
The most important aspect of DeFi is obviously liquidity, and from the perspective of a DeFi (decentralized exchange specifically), having liquidity is arguably the most important factor in the success of a DeFi, as the presence or absence of liquidity determines the trader’s experience. For this reason, decentralized exchanges have designed incentive structures to ensure that liquidity is tied to them as much as possible, either by issuing tokens to those who provide liquidity to them, or by sharing a portion of the fees generated by the exchange. The problem is that these liquidity providers can stop providing liquidity at any time. While it’s important for DeFi protocols to meet immediate liquidity needs, the uncertainty that liquidity providers could stop providing liquidity at any time in a volatile blockchain market is a huge problem for decentralized exchanges.
What if you could lock up your liquidity provision for a certain time? Of course, this doesn’t mean that liquidity will be abundant, but at least you won’t have to run a decentralized exchange with the uncertainty of not knowing when liquidity will run out. In the case of Frax, when staking LP tokens, you already have to decide how long you want to stake the LP. The duration ranges from a minimum of 1 day to 3 years, with the goal of rewarding LPs for holding them for a longer period of time, so that more capital is tied up for a longer period of time. From the protocol’s point of view, this removes uncertainty. However, from the liquidity provider’s point of view, another problem arises as their capital is not guaranteed to be liquid until it expires, which makes it difficult for liquidity providers to provide long-term liquidity to Frax. This is where TBT comes in.
2.2 Introducing TBT
TBT stands for Time-Bound Tokens, which are assets that are staked in DeFi protocols, but they are different from traditional assets because they promise to be staked for a “specific time.” Let’s take the example Hourglass gave. If Alice has 10 Frax Ethereum (10 frxETH) and promises to stake it on the Frax protocol for about a month, Hourglass will issue TBTs in exchange for 10 frxETH and a value equal to the expected return for a month. In this way, the Frax protocol is guaranteed 10 frxETH of liquidity for at least a month, and Alice gets an additional reward by doing so because she clearly defined the time frame. This can be seen as placing a value on time, as LP tokens don’t have a “promised time” to provide liquidity, whereas TBTs have a definite “promise” to provide liquidity for a certain period of time, which is what gives them value. If it’s clear that Alice will hold 10 frxETH for a month, there’s no reason not to issue TBTs.
2.2.1 ERC-1155
Another interesting aspect of the TBT is that, instead of using a token standard that is widely recognized, such as ERC-20 or ERC-721, it uses a lesser-known standard called ERC-1155. What is ERC-1155? Before discussing the differences between ERC-1155 and ERC-20 & ERC-721, it’s worth pointing out the characteristics of the token standards we’ve used in the past, such as ERC-721 and ERC-20. First of all, ERC-20 is a standard that all utility tokens follow, and ERC-721 is a standard that assets called NFTs follow. What they have in common is that deploying smart contracts limits the type of assets that can be included in a single smart contract. In the case of ERC-20, different smart contracts are required for different types of tokens, and in the case of ERC-721, a single contract can only be deployed for groups of NFTs such as collections. In contrast, ERC-1155 allows a single smart contract to hold many different types of assets, including utility tokens, NFTs, or semi-fungible tokens somewhere in between. This is why ERC-1155 is referred to as a “Multitoken Standard”.
So why does TBT need ERC-1155? The reason is that TBT has different yields on different assets at different maturities. In other words, they are LP tokens for the same asset, but they are not fungible because the other parameters are different. To put it another way, even if the assets are issued through the same smart contract, they have 1) different yields (the more you lock up, the higher the yield) and 2) different redemption dates (since the lock-up period is different, the redemption date is naturally different). Therefore, the ERC-1155 standard allows a single smart contract to contain assets with different parameters.
2.2.2. Future of TBT
According to Hourglass, the initial version will start with Frax, which already has a fixed term for staking, and then expand to include more protocols. (Frax already accepts LPs with expirations, so what Hourglass does is make those assets tradable.) Later, even if it’s not a protocol that already accepts staking for a fixed period of time, like Frax, Hourglass will provide a solution that reduces the opportunity cost for liquidity providers and provides predictable liquidity for protocols by making their tokens tradable with an expiration date on the LP offering.
2.3 TBT Marketplace
If you’re locking up LP tokens for a certain period of time and rewarding them proportionally based on that period of time, as is the case with Frax, you can’t renege on that promise even if your circumstances change. You’ve already made that commitment.
To offset these drawbacks, Hourglass has created a marketplace to trade these tokens in addition to the TBTs described above. The TBT marketplace trades TBT differently than other exchanges, by matching cryptographic signatures to create an atomic swap (it’s built on top of Seaport, so if you’re wondering how this marketplace is technically implemented, see the Seaport description).
For example, if Alice, who issued a TBT earlier, wants to sell her frxETH/ETH LP tokens worth 10 ETH before the promised date, she needs to match up with a buyer who wants to buy her TBT. Of course, the buyer won’t want to pay the full 10 ETH either, since they won’t be able to move the asset for a month, so they’ll want a discount based on their opportunity cost, and they can submit an order with the amount of discount they want.
(Buy/Sell Modal | Source: Hourglass Doc)
What’s interesting here is that TBT orders, unlike other orders, expire. Eventually, the price I was willing to buy yesterday will be different from the price I am willing to buy tomorrow (so is the price I am willing to sell), because the discount rate will decrease over time (the opportunity cost of holding the asset will gradually decrease). It’s like the iPhone 15 example I gave at the beginning. You might be willing to pay $50 for an iPhone 15 if you can get it right now, but in a week, you might want to pay less than $50 for it. That’s the price of time. Hourglass is an attempt to add the additional good of time to the DeFi marketplace, creating a place for that asset to be traded. To summarize, TBT is a way to pay a premium for giving up a current good in exchange for a future good, and the TBT marketplace is a place where people who want to give up a future good and take it now, and people who want to buy a future good at a cheaper price, exchange assets.
3. How to use Hourglass
For now, Hourglass only supports frxETH/ETH pools on Convex (LP tokens of frxETH/ETH staked through Convex, which can currently be minted on Curve), but the company plans to add more asset classes in the future.
First of all, if you click the staking button on Hourglass, it will take you to the page above, where you can see that the APY changes as time increases. Therefore, the longer the maturity, the higher the cost. If you go to Curve and create LP tokens, you can decide how much you want to hold, and then enter the vault for that time. After staking your assets, you will receive TBT tokens.
Once you have earned TBT tokens, you will see your reward history as shown above, with the expiration date of your TBT tokens and the size of your assets. Rewards will appear on the page on the last day of each month. You can apply for rewards each time.
4. The Future Painted by Hourglass
DeFi is one of the most prominent use cases for blockchain. However, its adoption has been slow because it is still a work in progress. But Hourglass’ TBT offering is noteworthy because it reduces some of the pain associated with DeFi protocols while giving liquidity providers more options. For now, Hourglass only offers TBT for FRAX, but as mentioned above, Hourglass’ goal is for all DeFi protocols to have “predictable” liquidity and for liquidity providers to have the opportunity to earn additional rewards by locking up their assets for a certain amount of time. And that’s not all. In the absence of TBT, existing DeFi protocols (especially lending protocols like Maple Finance) inherently have a hard time accurately matching the duration and quantity of liabilities and assets. In other words, when users deposit into a protocol, they don’t have a set timeframe, so they can withdraw at any time (whereas liabilities can be demanded to be repaid at any time), but they have a set number of assets that they can leverage (whereas assets need to be held for a relatively long time), which is a mismatch. If users are constantly withdrawing their assets while the protocol is unable to dispose of its assets in a timely manner, the protocol will experience liquidity problems and may even go bankrupt. Hourglass will eventually enable DeFi protocols to solve liquidity problems by putting a time limit on crypto assets, allowing them to match the duration of their liabilities with the duration of their assets. By solving many of the problems that DeFi protocols have faced in the past, Hourglass is likely to become an essential infrastructure layer for the DeFi market to move forward.. Moyed, one of the co-founders of Four Pillars, looked at Hourglass and later mentioned that the TBT Marketplace could be a tool to measure the stability or reliability of a particular DeFi protocol. Apparently, for DeFi protocols with unstable liquidity or unstable operations, users who have locked up LP tokens will be more willing to liquidate their positions at a higher discount rate, and for protocols with solid liquidity and trust, the discount rate will not be as high because users are more likely to lock up their positions, applying market logic. I think it’s a very interesting perspective, and I wonder if people can come up with various financial products based on this information.
As a fan of products that make the DeFi market more capital efficient(Liquid Staking Derivative is definitely one of them), this is a project I’ll be following closely. I’m excited to see where Hourglass goes from here.
Thanks to Kate for designing the graphics for this article.
