Why Cap? Financial Guarantees
Jan 12, 2026
Cap leverages the productivity of the US Dollar to generate reliable yield for alternative assets.
Given the US dollar’s position as the global reserve currency, it enjoys a deep and wide array for yield opportunities. Certain assets, like Gold, JPY, BTC, and ETH, are structurally less productive than USD, in the sense that their opportunity set for yield strategies is smaller.
This asymmetry has a notable impact on market premiums for these assets. Certain currencies and crypto assets generate lower credit premiums than the dollar. We propose that financial guarantees on USD-denominated loans can be used to transform this asymmetry into a yield source for such alternative assets.
This yield source is not new. For decades, global investors have sought to earn more on stronger, higher-yielding economies, often expressed through the carry trade. The dollar’s superior opportunities have been one center of gravity. What is new is that financial guarantees allow this yield differential to be captured without the fragility of funding trades, forward rolls, or mark-to-market volatility. This leads to a unique yield opportunity where returns are contractually fixed, collateral is not sold, and execution risk is substantially lower.
What are financial guarantees?
A financial guarantee is a legally binding agreement in which an underwriter guarantees repayment to the lender, and in parallel the borrower guarantees repayment to both the underwriter and the lender. If the borrower fails to repay, the underwriter has to repay the lender immediately. The underwriter can then seek recourse from the borrower.
This structure distinguishes financial guarantees from instruments like credit default swaps, where no such right of recovery exists for underwriters.
Financial guarantees as a source of yield
To understand why financial guarantees matter for alternative assets, we must examine the economics of debt interest rates. Any asset’s borrowing cost is the sum of a risk-free rate and a credit spread. The spread itself consists of default probability, recovery rate, and the profit margin earned by the lender.
Credit spread = Expected loss (Chance of default * (1 - recovery rate)) + profit margin
Credit spreads matter because they price risk: they determine how much extra return investors demand for taking on default risk versus a risk-free asset.
What differs dramatically between assets is the profit margin. As long as demand for USD remains stronger than alternative assets, the spread for USD will continue to be systemically higher. Cap harnesses this fundamental USD advantage for the benefit of alternative asset holders.
Specifically, alternative asset holders can earn USD credit spread exposure (the difference between risk free rate and the average unsecured borrow rate for USD) by underwriting USD-denominated loans with these alternative assets.
Let us examine the incentives for each of the participants. Consider a USD loan secured by BTC, where there is a USD borrower, a USD lender, and a BTC underwriter. The BTC holder’s incentives are satisfied if they can generate the unsecured lending rate of BTC for underwriting that loan. The USD supplier must also be paid at least the risk free lending rate for USD. Finally, the USD borrower is willing to pay the full unsecured borrow rate for USD, given that they are not posting any collateral themselves.
Interestingly, due to the nature of the assets put to work, the difference between the return on capital (unsecured USD debt premium) and the cost of capital (BTC underwriting cost and the USD risk free rate) reveals surplus. We call this Excess Value, represented in the formula below.
USD unsecured borrow rate - USD risk free rate - alternative asset unsecured borrow rate = Excess Value
Financial guarantee collateral also provides a unique advantage that increases Excess Value: it is unfunded. As a result, the collateral can be rehypothecated into risk-free strategies. Fiat currencies can be swept into government debt money-market funds; crypto assets can be staked. This creates an additional layer of efficiency, represented in the updated formula below.
USD unsecured borrow rate + alternative asset hypothecation yield - USD risk free rate - alternative asset unsecured borrow rate = Excess Value
ETH example
Below is an example of how this formula could be applied on a USD loan secured by ETH collateral. Consider the following input data:
USD unsecured borrow rate: 9-12%
ETH Proof of Stake (PoS) yield: 3%
USD risk free rate: 3-4%
Unsecured lending rate on ETH: 4%
Loan value: 100M USD
Overcollateralization ratio: 200%
Let us examine the Excess Value generated from the set up above.
The return on capital comes from borrow fees, or the unsecured borrow rate for the dollar. In this case, these would be an annualized amount of $9-12M. Of this amount, $3-4M needs to be returned to USD suppliers, who supply at the USD risk free rate.
Next, we examine the fees flowing to ETH underwriters. Underwriters are incentivized to delegate if their return is above 4% on the notional. Given that ETH at Cap is staked on shared security models, ETH underwriters already earn the PoS yield of 3%. As a result, only 1% needs to be covered to reach the 4% minimum. In this example, ETH collateral covers the value of the loan by 200%. So the return needed on the value of the loan is 2%. As a result, we take $2M for the underwriter.
$9-12M (Unsecured lending rate on USD) - $3-4M (Overcollateralized lending rate on USD) - $2M (Unsecured lending rate on ETH) = $3-7M in Excess Value
Excess Value can be distributed among market participants to exceed return expectations. How Excess Value is shared will be determined by market participants based on market forces.
How Cap differs from traditional financial guarantees
Cap builds on this foundation by improving the traditional guarantee model itself.
Automation
Traditional financial guarantees rely on legal agreements and slow legal recovery, introducing both counterparty and procedural risk. Cap replaces these mechanics with real-time on-chain collateral and instant slashing, ensuring that losses are covered immediately and transparently. Automation is also introduced on underwriting, with Cap’s programmatic rules allowing for the market to continually underwrite new loans without the need for a centralized team.
Transparency
Guarantee underwriting is historically opaque, dependent on private financial statements and internal models. Cap instead offers public, on-chain balance sheets and observable operator performance.
How financial guarantee yield differs from borrowing against one’s collateral
At first glance, one might ask why an investor cannot simply borrow against their own collateral to pursue USD-denominated strategies. Would this not generate a similar outcome?
In practice, the risk profiles diverge significantly. Borrowing against one’s own assets exposes investors to unique risks: the investor remains vulnerable to liquidation, adverse performance in their own USD strategy, and operational or security failures tied to their personal execution.
By contrast, underwriting a regulated financial institution reallocates these risks. Underwriters receive a contractually defined return on their posted collateral, backed by the creditworthiness of the borrower. Absent a complete borrower default, the underwriter’s payoff remains intact. The probability that a regulated financial institution defaults or enters insolvency is materially lower than the probability that an individual holder of cryptocurrencies incurs losses through liquidation or strategy underperformance.
Other benefits to Cap’s approach include additional functionalities, such as underwriters’ ability to impose programmatic constraints on borrower behavior and the streaming of stablecoin-denominated premiums in a continuous, block-by-block stream.
Challenges
Crypto yield markets remain immature. Many investors still expect high returns with little to no risk. This is fueled by momentary incentive programs that dot crypto capital markets and rely on inflationary token designs.
These programs are not scalable for extended periods of time. Eventually, tokens used in these incentives lose their value and capital exists. Instead, we should focus on real USD yield opportunities with well-understood risk profiles to build a more robust and scalable system. This then enables a structured product through which alternative asset holders can earn from these strategies. Cap’s ability to generate a scalable and durable yield without endogenous incentives will allow it to attract both capital and long-term underwriters.
Thank you for reading. This article is the second in our "Why Cap" series. The first article "Why Cap? A Delegator's Perspective" can be found here.