What's Next for DeFi? A word on Interest Rate Deri / Gaspard Peduzzi

Transcript

hi everyone uh just a disclaimer I had a presentation this morning about actually the also title uh what's next modified in terms of yield farming and everything there will be a bit of overlap with this presentation uh but this one is more focused on building those derivatives and how to make that 45 so my name is co-founder of 81 protocol um I have a computer science background and in 2020 surfing in the device summer we were thinking with a group of friends that we must build some tool to be able to Edge or speculate on the variation of those interest rates because they are crazy volatile and cannot be arbitraged more than moving liquidity directly there

um so there used defy on a regular basis approximately eyelid up to you say what's real okay and we would use defy but like who is using Define on a regular basis but apart from liquidity provision okay um clickering is not working I think that was my only slide oh no actually so thank you um yeah so big question here is is uh defy organic like compared to the volume inequality what is this liquidity used

for and that's a big question because a lot of criticism that we have usually is a defines just for yield farming and you don't have real usage and when you look at this protocol that seems to be used for real usage looking at how the liquidity is actually used a few steps away is actually usually for yield farming um so the question is actually a very legit one the purpose of this talk is to say that to make defy used we need to be it's still not working though okay interest delays we need to make it particular particular in terms of interest rates we had a lot of resonate during defy resonance during threat Phi we had so many news about interest rates in the last year so many things with

spangs I'll actually go through different use cases and like concrete cases but even if I we had extremely volatile of interest rates I mean like imagine that you're boring use this year two percent and someday Japan it jump up to 80 percent it's crazy volatility and you cannot have that kind of volatility if you're actually intending to use that financing an organical way because those costs need to be controlled and yet you have more certainty about the revenues as well and that's where interest rate derivatives come into play interest rate derivatives when you explain what we're doing to people they think it's very Niche but it's actually not Niche it's actually at the roots of Finance because interest rates is the time value of money the price of

liquidity and every defined protocol needs liquidity to function every business is handle the cash flow in a way that can make their activity profitable That's the basis of Finance most of the big companies use on a daily basis interest rate derivatives to be able to do what they do you when you go to a bank and do for example a loan at a fixed rate eventually somewhere else they will be interest rate derivatives involved and that's needed because you're evolving in the economy where interest rates are going and you need to Edge yourself against those and the same ways defined occurs you need liquidity for some things you need to be able to control those costs what is interest rate derivatives it's basically instruments that allows

you to manipulate the value of like the value change of interest rates it can be options swaps Futures you may have heard of bones for example like all those are instruments you can use and they are basically two side these are you can speculate volatility means interests or Traders you can speculate on those variations it's very volatile or you can Edge yourself against those because you're just a passive user and you want to take a loan and you don't want to get exposed to that or you want to control your revenues as well because based on that you can control your activity it's the biggest Market in traditional Finance um a case study um we maybe a lot of us had a called a like a cold times during a weekend where

we were thinking that maybe usdc was debugged not necessarily because you had usdc but also because maybe you were exposed to something that had the usdc and eventually The Dominoes affects the contagion is pretty high and that contagion initially happened because One Bank was a defaulting and why was it defaulting because that bank invested in bonds where the maturity was an average too long compared to their liquidity need so to decomposite that a treasury bone is basically a dollar that you buy that is locked until an expiry so the dollar that you will be able to be able to have at an expiry so it can be three months six months way longer and is the biggest discount on the dollar is

because that basically represents an opportunity cost on what you can do is that liquidity and so you can buy bones cell bones and bonds are like the basis the most basic instrument with rebound of the whole economy it's a bit like stack is for example like if you're building a protocol that gives you an ipy and is that is less than what you can have with ethereum staking it's probably not very profitable because that's the basic activity that you can have same thing with treasure bonds so that's something that banks for example invest a lot the liquidity on and of course when a lot of people want to Deputy debug either they have the liquidity available or they need to sell this Bond back and given an interest rates roses a

lot they were selling this one at an informal price that when they had initially and so hence the last and the default and so that replicated into Circle not having the liquidity may be for the UCC and then the whole economy so the domino effect of interest rate is huge and I think this year was a great example for that you can also have happy cases with interest rates for example a teaser they made a lot of money investing in short-term bonds they didn't had liquidity issue and they made a lot of profit from that and the example that they showed initially was the bank that shorted interest rates they also made almost 4 billion doing that a Victor a bit weird but um now Define how do we

do that defy because it's going to have treasury events in traditional Finance but we want to have this product for 85 protocols for all locals on lots of different assets and we need to have that information this way so this time came standard like for six to six uh the volt standard when which can be defined as a layer on top of which you can build derivatives and that's basically what we did two years ago with API we said well if we have an interest ring asset we can make basically split it into we set an expiry and we see the principle from the yield again and then the principle is basically basically a bond is the locked underlying that you deposited until the expiry and the yield again and the other way around is actually all the yield

that will be generated by this interest ring token that the holder can redeem progressively it's very simple but with the video that we built you can do that on a permissionless way so anyone can select an interest billing token select the duration and tokenize and create a pool for that and so people can create bones and trade yield independently once you have that you can build very simple products not crazy derivatives but also just fixed income products people can know by locked ease until a fixed duration we had um like there is a lot of food with the steak ease and the withrowing Hue and everything we actually had a discount during some times and the stake is because people were speculating well

I prefer to sit on my stake is at a discount because I don't know when I will be able to get it back well bones are operating more or less the same way it's like so extremely good collaterals because for a lot of protocols that need liquidity at an expiry they can do just like the banks in the previous example they can buy a set at the discount because it will be unlocked at this defined expiry so it's fixed income product because you sell yield and we created layout to Marketplace for that meaning that actually you're generating interest don't have a let's say you deposited a million dollar a navi you have a quite irregular revenues because of that you can say well actually I need to use the yield already now I will sell q1 and Q2

of my future yield you go in the yield Marketplace in a few click you can sell your interest you fit your interest over two quarter for example just one click that's selling in advance fixing basically know what you earn kind of marining that makes the ecosystem as well way more practicable because then you have also the other side you want to take a loan you think the interest rate will go in like real estate between a margin but you cannot afford to have for example a liquidity crisis an interest rate interest rate going way too hard and then your position gets liquidated anything so that's also something that building a layer of derivatives on top of existing Landing Market we can bring this primitive tokenize it creating a

Marketplace for it and then people can trade directly to interest and so you as a borrower you can actually have fixed rates lending in a way more efficient and permissionless manner which you cannot do if you integrate that at the lowest level like Ave is doing for example and then eventually that's how interest rate derivatives are progressively making ecosystem more efficient why because if you look at Ave for example again you have a huge spread between lending and board then you have another protocol coming on top of doing peer-to-peer matching then you don't have any spread and then you have apine being being built on top of waffle it allows you to trade those interest rates and to fix them swapping viable against

fixed whether you're a lender a borrower and that allows us so to do a lot of Market Arbitrage because a lot of time you can see on different lsds on different protocols for the same asset you have very like a lot of variation between interest rates and those derivatives also allows you to take your leverage exposure on those so reduce like improving the Arbitrage by an important factor um thank you if you have any question I'll be more than happy to answer them as I mentioned we so AP1 is existing 2020. we worked on the V2 since 1.5 year um and that will allows you it will be fully open this month I can already invite Um send a better invite to anyone that

wants some and you can integrate that into any protocols any pools in a very very easy and permissionless way thank you [Applause] yes thank you uh great presentation I have just uh quick questions about the users actually how are you thinking about who is going to use it because even the base plain vanilla swaps for interest rates are basically used by institutional investors right I mean is it usually you know inter Bank transactions and this just like feel more like you know retail

usage so how are you thinking about like you know your customers and and what is the overall traction of the you know of the project thanks so do you mean how do we get institutions or no I mean uh who is actually going to use it you know because uh for institutional investors they already have solution right they use it on daily basis so if you want to have institutional crypto investors yeah I I just uh I'm just like trying to figure out what is the market how is the market and who is actually going to use it because it seems I don't know from outside a bit complicated and I think in the threat fire world you already have

solution for that I'm just like you know trying to figure out like of course you know there thank you very much for the question there are actually two as two aspects uh two different answer to that the first one in terms of current user base uh it's also a question for the holifier right like who is currently using defy in the current uh tools that you have available there fixed income product are actually very simple by their use even without having those protocol existing for the people who are making speculation as I'm explaining for example for stake is so those products that are easy to be used but the current retail defy user base that has a a very diverse spectrum of financial knowledge and necessary like a very

Advanced one uh it's still for those user category we're building those simple interface simple product we already had interest for that in ob1 we currently have like it's easier to edit now but it's mostly let's say bonds and people that want to speculate a bit on the version of those interest rates and that's even the case with the current user base now there are like two different other users the protocols most of the liquidity usually of defy protocols come from other device protocols and that's the same with apine those derivatives they make extremely good collaterals that's why we choose the tokenization approach in the layer approach so we prefer to be at a lower level and be integrated as collateral in other protocol so that's another answer and bringing the the two first into

perspective um once you have actually of all those layers of protocols and once you have interest rate derivatives that's where you start to be efficient that's where you start to be efficient and even truly more efficient than transfer and that's where you can have those other actors and the current challenge modify in my opinion is actually to be relevant for those people that can have access to maybe product with higher efficiency but that comes with different layers different products and it's not just a liquidity issue because uh you know if you have less liquidity to handle it's actually easier to make it efficient in some ways so so it's not just a liquidity issue it's it's that layer approach where you have Morpho because even for institutional actors why would you want to play with a lending Market that have like one person spread between

lending and boring that's huge that doesn't exist traditional Finance so you need those product to arrive and interest rate derivatives I think in my opinion the next step to make the because you can actually have control over what you earn and what you spend um that was like very easy to understand concept but imagery does let's make it practicable for the bigger sectors as well so still today a lot of device not organic but interest rate derivatives will make it so all right thank you [Applause]

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