Fixed rates in DeFi

Transcript

always dream to speak in a in a room full of people. This is my first conference. I'm super happy to be with you. Um, who knows about fixed rates? Yeah, one person. No, two people. Okay, that's cool. Um, so it's a 15 minutes talk. So I will try to give an overview of the main um designs in fixed rates. I'm just going to start the timer for myself and I would give you an intro. All right. So my name is Camil.

I'm co-founder and CEO at contango.exchange. This is a futures protocol. I will come back to it a little bit later in the presentation. And um basically the first question is to to wonder why we need fixed rates in DI. I think you all know we have a lot of um designs for variable rates. a compound, um Evan Maker. But the reality is that in Trafy fixed rates are way bigger than variable rates.

Okay, this stat is quite interesting. 120 trillion. The number is staggering. And I have to stay here. Okay, cool. Okay. And um what we need is to on board trafi in defi, right? We're all here to build. We all believe in defi. So we need this building block. It's quite new. I think the new protocols just arrived like maybe two maximum three years ago, but like most of them it's more like two years.

And I'm going to show you four designs and I will try to explain them with one D diagram each. Okay. So the first one is the zero coupon bond mechanism. Who knows about bonds? Yay. So bonds to make it easy is like a debt that is issued for example by a corporation or someone that wants to borrow money and zero coupon they're quite interesting because instead of making periodic payment there's only one payment at

maturity. Okay. So this mechanism is very elegant. It's quite easy indeed. You have like tokens that represent zero coupon bonds and you have two sides. You have like fixed rate lenders and fixed rate borrowers. The easy one is the lender. Okay, you have tokens like in a pool that trade at a discount. So for example at 0.95 when you know that at maturity will be one. You can always redeem at a value of one at maturity. So if you buy at 0.95 it means that you are going to make a 5.3% interest rate. Quite easy. You buy you wait for expiry. Now on the

other hand when you're a borrower you have to do an extra step. Usually the the protocol will hide this for you. So you can you need to be like over collaterized. So you are going to put your collateral into a borrowing vault and then you are going to mint this um zero coupon token and then selling this token in the market allows you to have a borrowing position. Okay, so quite straightforward the two sides of the market with zero coupons. Um there are like several protocols out there. The main ones are National Finance and Yield Protocol.

And indeed last time I check yesterday on D5 P the highest TVL for fixed rates is on national. Okay we touched like maybe 1 billion TVL and market peak. Right now we're are like around 100 million. Next one. Yield stripping. Who knows about yield stripping? One person. Yay. Two. Cool. three. So this one is is interesting and quite elegant and a lot of protocols indeed are building uh on top of this mechanism.

Um so you have a user maybe an LP that comes and deposit 1k and what the protocol would do is to land this 1k on a variable rates protocol such as avar compound. Okay then the protocol is going to mint two tokens. There is a principal token and there is a yield token. The principal token is there to allow fixed rates lending. So this principal token can be sold and the buyer has exactly the same mechanism as the zero coupon bond uh one

we saw before. Okay. So you buy it at a discount. You wait for maturity and this is how you make a yield. On the other hand, you have the yield token. Uh when this is minted like it could be exchanged and it has a value which decreases with time and basically this is how you can have a variable rate because this is the the part which is going to collect the variable rate paid by for example compound or a okay you have different protocols using like this high level design element finance we have some people from tempus there's There's AP1 here. You have 88 MPH. So,

it's quite trendy. There's quite a lot of them in the in the D5 space at the moment. Uh, one drawback maybe is that you don't have borrowing at a fixed rate. It's only around lending for the moment. I know several protocols are trying to to think about this and yeah, we hope that we're going to have a more complete approach in the future. Next one, it's called interest rate swaps. This one um has a lot of potential in our view. It's very elegant by design. Uh

it's very new. There's only votes to our knowledge uh in this space. um they just raised and went live like a few months ago. But the the design is very interesting. Basically, you can be on both sides of the market. You can either have a variable rate token. So for example, you have a C die uh token and you can bring it with the floating rate, the variable rate and the IMM will allow you to swap this for a fixed rate. So you can bring variable, you get fixed. The beauty is that you can do that on the other side

of the market. You can also bring fixed and get variable. Okay, so this is very interesting because you don't need a lot of capital to trade on this. There's like huge leverage. I think at the moment is already 10x and you don't need like be collateral. So it's very capital efficient. Okay. Um same thing though still no borrowing but very capital efficient and interest rate swap are super interesting. Like I have to make like a parenthesis here.

Usually when you go to a bank and you want for example a fixed rate on your mortgage, usually what the bank is doing is exchanging a variable rate against a fixed rate in the interest rate swap markets. I'm guess like this is really a very strong pillar of traditional finance and yeah, we're super excited to to see this in in our space and we hope we're going to see more protocols around this to make everybody grow. Next one and last one is what we call perpetual interest rate swaps. Um, interestingly we had

like strips finance being there. Um, apparently they shut down the their um their UI. I think there was like a communication saying that they will come back with a new version, but this is still super interesting to understand how it works. Um, you also have miso in this uh segment. So here it's more about taking your position on a variable rate vault. So again like compound or a you deposit you get like a floating rate for example at 3.05%. And then what you're going to do

is to go on a per but a per where you can trade the rates. So basically what you are going to do is to hedge yourself. Okay. So you have your you have a floating you know you have a fixed at 3.26%. So you can go short the burp you're long on the variable but you're sure to lock your 3.26% no matter what for the amount of time you want. Okay. So this is extremely powerful because you have a lot of flexibility in the way that you want to engage with your hedge or how you want to get a fixed rate out of

it. Cool. That's the four designs. Here is a a summary of the different protocols. what I would like to really mention and like let's make it very clear I'm biased okay because I'm going to explain you what we do at contango so I'm going to focus on the fact that most of the protocol they don't have fixed rate borrowing guys it's time to build we need it make it happen please so we only have zero coupon bonds mechanism but these mechanisms they are not very capital efficient you need to overcolaterize your boring position. So

really we need to make this happen. Um then as I mentioned before the interest rate swap it's where you get like super good capital efficiency leverage and we hope that this is going to grow. Now I have to sell you uh the protocol. So I'm going to explain you what is contango. Contango is like a beautiful design that offer experable futures. Okay, experable futures. There are these futures that have a maturity date. In fatfy you only have experable

futures. Okay, per is something that comes only in the crypto space. It's wonderful. You can put like high leverage, but you have a funding fee and if you are medium or long term, you don't have the right control of your cost. So the industry needs experable futures and we're the first one to bring it with interest rates. Okay, we offer synthetic futures. So if you go back to your textbook of financial engineering, it's very straightforward. If you want to go long on an east die futures position, what you can do to have a synthetic future is to borrow at a fixed rate. So I borrow die at a fixed rate. I swap my die for east and then I land

east at a fixed rate. And if you do that, you have an experable futures. So if the interest rates fixed interest rate market continues to grow this kind of design is going to have higher and better liquidity than CFI counterparties like Binance we're coming after you like it's very clear so please build more fixed rates attract more liquidity so this way like we have a good shot at it Um this is it really. You can follow us either at the protocol level or on the

personal level. Uh we're going live uh in the summer with a release on arbitum and then on mainet with both national and yield protocol. I hope you learn a bit about fixed rate or at least enough for you to to dig deeper and to build even more. 13 minutes. I'm on time. I'm super proud of me. I can see some smiles in the face of some people. So, that's good. Any question?

You you Okay, cool. Thank you. [Applause]