Crypto-Native Fixed Income: Duration and Convexity by Construction on the EVM

Abstract

Decentralized finance has built fixed-rate and yield-bearing instruments, but not a fixed-income architecture in which duration and convexity arise endogenously from continuously updated collateral-policy logic. Every existing protocol that expresses rate sensitivity either imports it from a traditional financial asset, derives it from an automated market maker price curve, or constructs it as a synthetic derivative position. None generate rate sensitivity endogenously from on-chain collateral architecture. This paper shows that a deterministic collateral release schedule defined on a state-aware policy surface is sufficient to endow an on-chain debt instrument with computable modified duration and asymmetric rate sensitivity by construction. We introduce the Amortizing Collateral Bond (ACB), a crypto-native debt instrument whose financial characteristics emerge from collateral policy architecture rather than from any imported traditional finance instrument. The ACB's modified duration is derived analytically from its release schedule and a protocol-implied discount rate. Asymmetric rate sensitivity—the property that the instrument loses more from rate rises than it gains from rate declines, analogous to the convexity profile of a mortgage-backed security holder—arises from two state-machine-enforced mechanisms: a prepayment option that compresses price appreciation when rates fall, and regime-dependent release schedules that extend duration when rates rise. Neither requires a counterparty or clearing house to enforce the option schedule. We further introduce the Prepayable Vault with Embedded Callable Option, which makes the convexity compression explicit and parameterizable, and Duration-Tranched Vault Certificates, which generalize the structure to multi-tranche pools tranched by rate sensitivity rather than credit quality. In Stage 2, we generalize the discount rate from a protocol-implied single rate to a composite on-chain rate index constructed from observable lending, staking, and funding markets—enabling multi-maturity duration computation and an empirical low-correlation claim against the Treasury curve. We show that this composite index admits a term structure adequate for duration analysis across maturities, and argue that its structural drivers are distinct from those of the Treasury yield curve—not as a portfolio-level diversification claim, but as a property of the rate surface itself. The empirical correlation between the two surfaces is low over the 2022–2024 period; we are explicit that this independence is structural rather than permanent, and that it degrades as institutional capital integrates the two surfaces. We engage directly with the market-readiness constraints—rate surface liquidity, hedging ecosystem development, and the adoption sequencing problem—and frame the contribution honestly as a proof of existence for crypto-native fixed income rather than a complete market design. The paper further introduces the Collateralized Amortizing Obligation (CAO)—a crypto-native structured vehicle with duration-stratified Senior, Mezzanine, and Equity tranches enforced by a deterministic waterfall. The CAO is not a tokenized collateralized mortgage obligation (CMO) or collateralized loan obligation (CLO): its collateral is entirely on-chain, its tranche duration profiles are computable from the policy surface architecture, and its return drivers reference a rate surface with structurally distinct drivers from traditional finance (TradFi) rate markets. Full issuance mechanics, atomic settlement, and the Convexity Swap as the Equity tranche hedging instrument are developed in Paper III. The architecture developed in Paper I is the necessary prerequisite. A well-defined, continuously updated policy surface is the precondition for any of these instruments to be constructible. What follows shows what becomes possible once that precondition is met.