Wojak’s Adventures in the DeFi World Episode 2: Interest Rates
On why he desperately needs iGain IRS. And you too.
We know it. Wojak is an ETH fanboy.
Moon, Lambos, hopium, rocket emojis, diamond hands, and whatnot: to his eyes, ETH is THE fast-track ticket to financial freedom.
Or financial sovereignty. At least.
He religiously HODL. He faithfully stakes. He wholeheartedly believes in our-lord-and-savior Vitalik. And that Ethereum will be here to stay.
But that’s not enough.
He wants more.
1/2 — The problem with DeFi lending and borrowing
A bit of pseudo-history:
Being a lender is a straightforward concept. It is arguably the second oldest profession in the world. As old as human civilization.
There is no proper economic activity without some sort of borrowing and lending. In most societies and eras, they constitute the very backbone concepts underpinning advanced financial systems.
Productive people short of funds want to build new things. People with excess capital provide them with what they need, expecting a return for the service provided. Simple demand meeting a supply.
- Peer-to-peer usurious loan sharks yesterday.
- Bank-issued student loans, mortgages, and corporate bonds today.
- …And Decentralized Finance (DeFi) lending tomorrow.
Wojak, a forward-thinker, is aware of the massive tide change going on. And he wants to jump early on the DeFi bandwagon.
In comparison to traditional Centralized Finance (CeFi), DeFi provides a game-changing quantum leap in transparency, efficiency, anonymity, and accessibility.
In DeFi, ANYONE can be a lender, and ANYONE can be a borrower. Without handing over any sort of personal information or custody of funds.
That process is powered, automated and secured by smart contracts and protocols operating on open-source blockchains. The largest being Ethereum.
Aave and Compound are some adequate illustrations of state-of-the-art DeFi lending/borrowing protocols. Based on demand/supply equilibrium, those platforms estimate a “stable” Annual Percentage Yield (APY) promised to lenders and required to borrowers. Usually higher (1 to 10% or more) than what legacy banks offer.
How sweet is that? Farming fat and juicy stable yield on crypto assets.
Wojak likes that.
In fact, hundreds of thousands of Wojaks like that. Billions of US$ liquidity in crypto have already been locked to this day. And the number is booming.
However, there’s a rule of thumb in finance. Any financial product promising high rewards involves high (and sometimes hidden) risks.
We have covered elsewhere how impermanent loss could stealthily eat up all of Wojak’s liquidity mining gains (and make him lose sleep at night until he discovers iGain Impermanent Gain). And interest rate volatility is another unacknowledged hazard looming.
For instance, for lenders, high seemingly stable yields could drop after becoming “too” popular. And for borrowers, interest rates could skyrocket on a bull market where liquidity is could only be attracted to high yields. Considering we are in the crypto sector, with wild ups and downs, those fluctuations are likely subject to a higher order of magnitude.
DeFi lending Wojaks expecting stable returns are disappointed by lower APYs.
DeFi borrowing Wojaks expecting stable costs are disappointed by higher APYs.
And nobody’s happy. What to do?
2/2 — The missing puzzle piece of DeFi lending and borrowing: iGain IRS
This is the pain point iGain IRS (Interest Rate Synth) is solving.
It is an option trading platform providing a hedge for lenders and borrowers to “lock” future interest rates on platforms like Aave, by purchasing “Long” and “Short” tokens of interest rate.
Investors are then empowered and covered against interest rate volatility in DeFi protocols:
- A lender can secure his APY by purchasing Short tokens. Because when the interest rate is plummeting, the gain from the short position will exactly cover the loss from yield interest.
- A borrower can lock his borrowing costs by purchasing Long tokens. Because when the interest rate is surging, the gain from the long position will just cover the additional interest.
…that’s all!
On top of that, no deposit of the principal is required. Capital efficiency is then maximized.
And Wojak is happy!
Start hedging against interest rate fluctuations on iGain IRS here.
For more in-depth introduction to iGain IRS, check out our iGain IRS brief article.
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