SWAP.RATE is a platform where you can hedge against or take advantage of the interest rate fluctuations in the DeFi lending and borrowing.
Simply speaking you can get an insurance for your existing DAI deposit.
How It Works
You can fix your floating rate on your deposit or loan by entering into an interest rate swap (IRS) — a special insurance contract — that will pay out the difference between the promised fixed rate and the realised rate at the time of maturity.
For example, Compound -is a platform where you can lend or borrow crypto and receive/pay a floating rate. This month rate can be 5% and the next month it can be 10%. Let’s say SWAP.RATE offers a fixed rate of 10% on the Сompound deposit, and you would like to take advantage of this offer. Let’s say the nominal of your Compound deposit is 100 DAI then only need to specify the nominal amount on SWAP.RATE and the maturity you are interested in locking your rate in, for example, it can be three months.
After three months, if the effective rate that you receive on your Сompound deposit is only 7%, you will get the remaining 3% from the IRS. However, if by the end of the three months, the effective Сompound rate on your deposit is 12%, then you will pay 2% into the IRS, ending up with 10% in either case.
To enter the contract, SWAP.RATE will freeze some collateral until maturity (which is normally one-tenth of your nominal) to guarantee the payment from or to you.
Why Interest Rate Swaps Are So Important
Interest Rate Swaps are one of the most important and biggest derivative markets in the world.
There is a very old and fundamental market of variable (a.k.a., floating or adjustable) interest rates. Most of them change overnight and reset every day based on supply, demand, liquidity needs of banks, and so on. An overnight rate is the interest rate that large banks use to borrow and lend from one another on the overnight market.
As suggested by the name, variable rates change every day, and financial institutions build their products on top of these rates. For example, in many countries, you can get a mortgage or make a deposit to a bank account with a floating interest rate. The advantage of such a rate is that when the rate goes down, you pay less interest on your loan. But of course, with lower rates, you also get less interest on your deposits.
Not everybody likes uncertainty, and many have started to agree to swap their upsides and downsides with one another. At the same time, many professional market players have started to enter into such agreements without a direct interest but with the desire to make money based on their predictions of the rate. Indeed, an IRS is a cool way to go above or under the underlying rate because you need to put down a small amount as collateral. If you are right about the rate’s behaviour over the future period, you will earn a significant return.
Not everybody likes uncertainty, and many have started to agree to swap their upsides and downsides with one another.
Let’s look at an extreme example: Somebody is offering to you interest rate swap with a 30% annualised fixed return. You would probably go into such an agreement and agree to pay away the floating rate together while receiving the guaranteed 30%. You are sure that you will get much more back than you will pay. You can use the same logic for a 25% fixed rate and for 20% but not for 1%. That’s how swap rates are defined every day — they are an aggregate market expectation of the floating rates in the future. There is typically a different expectation and a different rate for every maturity. The longer the maturity, the more uncertainty there will be, and you can typically expect a higher rate.
The swap curve is the curve that represents 12 points of maturity (next 12 months) and 12 interest rates for those maturities that are available at the moment on the market. Those 12 fixed rates are open offers from market participants which they agree to pay or receive in exchange for a floating interest rate if you enter into an IRS right now. The offer could be different in as little as one minute if the expectation changes a lot because of some news, an event, or anything else.
Like a bond yield curve, the swap curve helps to identify different characteristics of the swap rate versus time. The swap rates are plotted on the y-axis, and the time to maturity dates are plotted on the x-axis. A swap curve will have different rates for one-month floating rates, three-month floating rates, six-month floating rates, and so on. In other words, the swap curve shows investors the possible return that can be gained for a swap at different maturity dates.
The swap curve is used in financial markets as a benchmark for establishing the fund rate, which is used to price fixed-income products, such as corporate bonds and mortgage-backed securities (MBS). Over-the-counter derivatives, such as non-vanilla swaps and forex futures are priced based on the information depicted on the swap curve. Additionally, the swap curve is used to gauge the aggregate market’s perception (simply speaking, expectations) of the conditions in the fixed-income market.
What’s Happening in DeFi right now
DeFi has observed the stabilisation and maturity of floating rates, and the DeFi ecosystem is now ready for further development. That’s why we at Opium Team are ready to introduce the live swap curve. Users can enter straight into IRSs that complement their deposits or loans or can make a market by betting that the rate will go up or down. Directly take advantage of a small or high floating rate, entering into swap agreement.
Now you can also short Compound rate using SWAP.RATE
Indeed if you enter into the swap where you will pay compound floating rate and receive certain fixed rate you will benefit if Compound rate will go down!
SWAP.RATE is an Opium protocol-based product with a user-friendly and easy-to-navigate interface. But under this simple surface is a powerful and highly advanced mechanism that caters to the users’ needs in the best possible way.
You can make or accept an offer for an IRS and send a meta-transaction signed by the MetaMask (or other crypto-wallet) to the Opium off-chain relayer, which matches orders and running 12 maturity-based order books. Once an offer is matched, it is settled on the Ethereum blockchain in Opium Protocol smart contracts, and you will be charged collateral (10% of the nominal) at that time. At maturity, you will get your collateral back plus any additional interest owed to you if the effective floating rate is lower than the agreed fixed rate. If the effective floating rate is higher than the agreed fixed rate, you will get your collateral back minus the additional interest owed to the IRS.
How to Use SWAP.RATE
- Connect a wallet by signing a login message. Now there is available just MetaMask, but soon you will be presented with more options.
2. Choose a product (supply or borrowing rate) and a floating or fixed rate from the “PAY” section, then click ENABLE to unlock your tokens for the Opium contract.
3. Now you only need to specify the nominal amount on SWAP.RATE and the maturity you are interested in locking your rate in.
Place the order by signing an order message.
Orders are meta transactions that match with one another in the off-chain order book and settle on-chain.
Once created, the order goes to the ORDERS folder.
When two orders match, they go to the SWAPS folder.
If you have existing Compound deposits or loans, they will be shown inDEPOSITS/LOANS folder.
Explore SWAP.RATE yourself and share your opinion
SWAP.RATE has open APIs. If you are a developer, you can work directly with our order books and for example hedge your floating rate exposure in real time.
Contact us email@example.com