Interest Rate Swaps: Unlocking DeFi's True Potential

Transcript

Morning, everybody. Uh, super excited to be here talking to you today. I just want to start off with a real simple question of why are you all here? I'm here because I think DeFi has the potential to change the lives of billions of people. And what I'm going to be talking about today is not what we built, but actually what it unlocks for DeFi as we look to build the world's financial system. I'm Simon. I'm the CEO and co-founder of Voltz Labs.

Um, and we have created a protocol that has brought interest rate swaps to DeFi for the first time. For those that aren't familiar with interest rate swaps, it's actually one of the biggest markets in the whole of the world. In traditional finance, it actually makes up a cartoonishly large quadrillion of notional traded each year. And in DeFi, uh, uh, until we launched, that number was zero. But we launched 5 months ago, and since then we've been growing about 30% each week. But like I said, I don't want to talk about what we've built. Instead, I want to talk about what it enables for the ecosystem.

And in order to explore that, we actually have to, uh, consider the limitations that exist in traditional finance and why we even need DeFi in the first place. And unfortunately, when we look at traditional finance, the truth is that it doesn't really work for the majority of people. In fact, there's a statistic that always surprises me, which is that about 20% of the world's population don't even have a bank account. But actually, the issues are a lot broader than just that 20% and actually exist at a much more, like, structural level.

And I just want to take a minute right now to say that none of this is a swipe at anybody that works in traditional finance. instead actually I think it's important and and arguably responsible of us to look at the ecosystem that exists that has been built up over time, right, with the technology that was available at the time, right, and acknowledge that there are limitations associated with that system. So, if we start going into those limitations, I think one of the biggest with traditional finance is that the institutions are in control of the sector. And if the institutions are in control, what that means is it means that you as an individual, you are in not in control. You're not in control of

your money, you're not in control of your finances, and ultimately you're not in control of your life. And alongside the institutions being in control, actually these systems that we have are extremely opaque. Right, you basically have to work at one of these institutions to be able to find out what's going on within the institution. And what that means for you as an individual is it means that you are at a disadvantage from an information perspective relative to those institutions. And then alongside that, um, whilst the institutions don't necessarily try and limit access, what they do not enable is they do not enable equal access and opportunity no matter where you're born

in the world. And what's really interesting is DeFi is actually the polar opposite of this. Um, instead of the institutions being in control, the ecosystem puts the user in control. The user is actually at the center of the ecosystem and protocols give out ownership to the users such that they can vote in the way in which the ecosystem continues to be built. Alongside that, instead of the ecosystem being opaque and closed source, it's the opposite. It's transparent, it's open source, it provides an information rich environment where the rules of the system are known to everybody.

And then alongside that, instead of limiting access, actually DeFi is built for the whole of the world, and it provides equal access and opportunity, no matter where you are born. And what's really exciting is that whilst at a structural level, there are these kind of really big changes that can be achieved with DeFi, actually when you go a layer beneath that, the fundamentals of the technology are actually better than what we have in traditional finance, too. So, even seemingly simple things, like 24/7 markets, instant settlement, self-custody of your own assets, and then arguably one of the biggest, which is the efficiency within which we can create a financial sector.

Like, why would you employ thousands of people to create an exchange when you can actually just have a smart contract create that exchange and run autonomously to infinity? So, based on these reasons, it's pretty clear why we There's so many people in the world that want to see DeFi built. I think it's also worth saying at this point that I don't necessarily see these two worlds as completely mutually exclusive. I think that there is opportunity for traditional finance to operate on top of DeFi rails.

But, what I do think is important is I think it's important for an individual to have the option to be able to interact with those rails directly. And I think this is important because at its core, what DeFi enables is it enables financial freedom. It puts you in control, it puts you in control of your money, it puts you in control of your finances, and ultimately in control of your life. And the direct comparison that I like to draw with this is actually to freedom of speech. Where freedom of speech is in many ways become a cornerstone of modern society. And I kind of find it crazy that we fight tooth and nail for freedom of speech, but we just seem to be

willing to accept that we do not have financial freedom. But DeFi provides an opportunity to change that. But in the same way that we acknowledge the limitations of traditional finance, we also should acknowledge the limitations that exist in DeFi today. And one of the biggest ones is that DeFi is extremely volatile. In fact, it's arguably been synonymous with volatility. And what I have here in this chart is I actually have borrow lend rates on a bunch of different protocols where you can see those rates jumping from 2% to four four over 40% and then back down to 2% within a few days.

And clearly if the ecosystem is that volatile, we're only ever going to be able to serve a narrow subset of people's financial needs. So we need the ecosystem to be stable. And at times I almost think it's easier to explain this by analogy. So if you imagine DeFi is this massive house that we're trying to build, at the moment the foundations of that house are extremely unstable, which clearly limits our ability to build the house. So we need the foundations to be stable.

And it's And it's most macro level, this is what volts enables. What an interest rate swap does, right, is it at a macro level enables you to transition from something that is variable, i.e. unstable, to something that is fixed, i.e. stable, and therefore enables stability to exist throughout the And to add a bit of color to this, Voltz is nothing more than a set of smart contracts. You can see that in the middle of this circle here. And then when you have these three different actors that interact with those smart contracts, it creates a marketplace for interest rate swaps.

But I think just coming back to the house and coming back to those foundations, now that the foundations are stable, we have the ability to build the house. Right? And the other way of saying that is that it has opened up a whole spectrum of new product opportunities that can be built on top of this low-level infrastructure that we have now in DeFi. And the reason I've got the chart on the left-hand side, that actually shows the growth of Voltz Protocol since we launched 5 months ago on the 1st of June.

And that growth has been about 30% each week on average. But what's really exciting is actually the first product only went live last week. And there's a whole bunch of teams now in the pipeline building new products that take this low-level infrastructure, right, such that DeFi can start serving the financial needs of the whole of the world. And at this point, I actually just want to pull in a story about my It's one of my friends. He's called Matty. He's a very good friend of mine. We used to live together in London for best part of 4 years. Um by his own admission, I don't think he did particularly well at university.

But he is a real hustler, and he managed to hustle his way into an investment bank, and then he managed to hustle his way to the trading floor, and then he managed to hustle his way from London across to New York, where he met his girlfriend called Katie. And the two of them had been essentially planning their lives together. And they within that they had started saving up to buy a home. Relatively aspirational thing to do in New York, but about 6 months ago they got to the point where they had enough money to actually go out and buy a 6 months ago rates started going up, right? And then all of a sudden they couldn't afford the mortgages to buy their home.

And the reason I'm telling this story is twofold. Like first of all, uh clearly Matty is just representative of many other people in the world, but what it highlights is it highlights the fact that as an individual you are not in control in traditional finance. So, I don't even want to get into a debate as whether the rate rise was right or wrong. The point is that as an individual you have no say in that decision. And I think the second point within that is that uh it actually highlights the limitations associated with traditional finance and the fact that those limitations have like real impact on people's lives.

So, what if we had these types of products in DeFi? Well, what's really exciting is this is not some sort of fairy tale. Actually, only 4 weeks ago somebody bought a house on OpenSea. You can actually see it here, obviously in the top right of the image. You can see the attributes of it. It's in Colombia. It's got two and a half rooms, over 4,000 sq ft. And you can actually see the sale at the bottom here, where someone bought it for $175,000. And what's interesting is that it they they bought an NFT where the NFT represented ownership of the actual real house in the real world.

So, as an ecosystem we have now facilitated the purchase of a house on chain. And the next step for us is to finance the purchase of the house on chain. And if we go back to that slide I had before where rates were jumping from 2% to 40% and back again, clearly people weren't about to take a mortgage out with a variable rate loan in DeFi. But now that we have vaults, fixed rate mortgages as one example of the many, right, that have been unlocked off the back of us having this infrastructure in the system, right, fixed rate mortgages on chain are actually not too distant a reality.

And that's where really I want to wrap up, which is just to conclude um uh what vaults enables for the ecosystem is it enables stability to exist. And with that stability, it has massively expanded the financial needs that DeFi can serve, which has opened up a whole world of new product opportunities. And a lot like with that stability, what that therefore means, right, is that DeFi can start delivering on its full potential.

Thank you. Awesome. Thanks so much, Simon. Love the example. I'd love to ask you a question. We all understand the way that it will go. We all understand that property rights on chain and the ability to purchase them via crypto and blockchain will happen. But from an investor's perspective, what are the key things uh are the indications that need to happen in order for us to realize that that timing is actually now. So, we understand it will happen. The biggest thing in investing is that being too early is like being wrong. So, how and what do you look at to see that mass market and that traction occur? Is there anything that you can explain to our audience which would help them in order to put that trade on?

I I I Well, I think the thing is we're we're at that inflection point, in my opinion. Right, we we now have the first purchase of a property on chain. Like that like I said, the next step is to start financing it. And really the way that I look at it is I think a lot of people have thought of crypto over the past few years as just a digital asset. But actually what I care about a lot more is the infrastructure that we can build. All right, and if we think about DeFi as financial infrastructure, it is now getting to that inflection point, right, where it can really start being used as the financial system Yeah, love that example. A big round up for my boy Simon. Thank you so much, Simon. Thank you.