Down the Rabbit Hole: Voltz
Voltz protocol is a noncustodial AMM for Interest Rate Swaps (IRS). Learn more here.
Voltz protocol is a noncustodial AMM for Interest Rate Swaps (IRS). It employs a Concentrated Liquidity Virtual AMM for price discovery, and the Margin Engine handles the asset value and liquidations. The effect of these modules allows counterparties to establish and trade fixed and variable rates using a 3000 times more capital efficient mechanism than alternate solutions. The Voltz Protocol implementation is open source and is viewable here.
Architecture
The high-level architecture of Voltz Protocol is as follows:
The Factory, which is in charge of deploying Interest Rate Swap (IRS) pools, is the core of Voltz Protocol.
Each IRS pool is built over a yield-bearing pool for generating varying returns (e.g. Aave lending pool).
The swaps get settled based on each IRS pool’s inception and maturity date.
Each IRS pool is made up of these three important components:
- Margin Engine
- vAMM
- Full Collateralization Module (FCM)
The system uses a single contract to hold and disclose rate history for yield-bearing tokens. A completely on-chain Rate Oracle is an example of such a contract.
Periphery refers to a wrapper smart contract, allowing the Voltz Protocol users to add, delete, and modify data into an IRS contract and change position margin easily.
Positions in margin accounts with underlying tokens below the liquidation threshold stay at risk of being liquidated by a liquidator bots pool.
Voltz Factory
As specified above, Factory contract is Voltz protocol’s heart, and it has the following key responsibilities:
- Managing the approvals of external contracts to interact with Voltz protocol positions on the owner’s behalf
- Deploying IRS pools
Voltz vAMM Contract
The Voltz Protocol vAMM is only used for price discovery. It assists in determining the fixed rate of interest rate swaps.
The vAMM uses the constant product formula (xy=k), where (x) represents 1% fixed tokens and (y) represents variable tokens.
vAMM establishes the rate at which a trader can swap fixed-for-variable or variable-for-fixed cash flows. Given the vAMM’s axes, the following is the relationship between the vAMM price and the annualised fixed rate:
AnnualizedFixedRate = 1/ vAMMPrice
The vAMM is responsible for two main tasks:
- It allows traders to participate in Interest Rate Swaps.
- It allows liquidity providers to apply fixed rate ranges to the vAMM.
Voltz Margin Engine
The Margin Engine manages the underlying assets that traders and liquidity providers use as collateral. It permits cash flow movements between positions in an IRS pool at the pool’s maturity to satisfy active interest rate swap contracts entered into before maturity.
The Margin Engine is responsible for two things:
- Traders and Liquidity Providers can use the Margin Engine to add or remove underlying tokens from their margin account.
- Traders and liquidity providers can use the Margin Engine to settle their interest rate swaps after the IRS pool matures.
Full Collateralisation Module
Fixed Takers who want to collateralise their positions fully can do so using the Voltz Protocol by depositing underlying yield-bearing assets (such as aUSDC from Aave v2) into the Full Collateralisation Module (FCM) linked to the MarginEngine.
Because multiple underlying yield-bearing protocols have different mechanics that produce varied APYs, each underlying protocol supported by Voltz has its FCM contract logic.
When it comes to settlements, the FCM and MarginEngine work together in terms of the underlying tokens (e.g. USDC), which means that after the IRS pool matures, the positions in the Margin Engine can be settled with the FCM by invoking a function call in the FCM that performs a yield-bearing token withdrawal in exchange for the underlying tokens.
Working of Voltz
Fixed Takers (FTs) are one side of the coin, where you swap a variable rate for a fixed rate. Traders can use this to reduce risk in their portfolios by ‘locking in’ a fixed interest rate. Variable Takers (VTs) are the opposite side of the coin, where you swap a fixed rate for a variable rate. This allows more skilled traders to maximise possible profit capture on individual asset rates.
The link between VTs and FTs, and Liquidity Providers is summarised in the picture below.
Fixed Takers (FTs)
Set Takers replace fluctuating rates with fixed rates. For example, you might possess a variable-rate-of-return asset, such as cDAI. You can initiate a swap on Voltz if you don’t want the risk of a variable interest rate on your DAI and instead want a set rate of return.
Let’s use an example to demonstrate:
- Alice has $10,000 in cDAI, which offers a variable rate of return of 10% APY at the moment.
- Alice doesn’t want to take the chance of the rate dropping, so she’d rather lock it in for 90 days.
- Alice comes to Voltz and joins the 90-day cDAI pool, which has a fixed rate of 10% right now.
- Alice places a $10,000 deposit in cDAI and secures a 10% fixed rate for the following 90 days.
If the variable rate of return on cDAI falls to 5% in this scenario, Alice is unconcerned because she has already locked in her 10% for the next 90 days.
Let’s take a breather for a moment. What just transpired may appear to be insignificant, yet it is significant.
Alice just converted an asset with a variable rate of return into a fixed rate asset. One of Voltz’s primary abilities is to break down the barriers between fixed and variable rates for the first time in DeFi. To put it another way, Voltz allows traders to eliminate risk by locking in interest rates on their variable rate crypto assets.
Variable Takers (VTs)
Variable Takers make the switch from fixed to variable rates of return. You’re effectively “selling” a fixed rate to gain leveraged exposure to variable yield in this case. You’d do this if you think the variable rate of return on Voltz AMM will be higher throughout the term than the current fixed-rate pricing. We expect VTs to have a higher risk tolerance than FTs, but VTs also have the potential for significant profit growth.
Let’s look at another scenario:
- The current cDAI variable APY is ten percent, and the Voltz 90-day cDAI pool’s fixed rate is ten percent as well.
- Bob expects the cDAI rate to rise to 20% and wants to leverage his exposure to this potential gain.
- Bob swaps by putting $10,000 DAI in margin and selecting a 15x leverage.
- At the time he joins the swap, Bob has a notional exposure of $150,000 to the underlying rate of cDAI minus the fixed rate of Voltz AMM (i.e. 10 percent in this example)
If the cDAI rate suddenly climbs to 20% APY, Bob has just made a significant profit.
This implies Bob put down $10,000 as a margin and handed over $13,699 to Voltz after 90 days. Bob would make a profit of over 250 percent if he could continue this technique for a year and reinvest his profits.
The danger here is that Bob will lose money if the rate falls.
It’s worth noting that when more FTs trade, the Voltz AMM’s fixed-rate decreases. As FTs trade, we expect VTs will be able to enter the market and extract significant value in the form of levered variable yield exposure.
Liquidity Providers (LPs)
Liquidity Providers supply the liquidity that Voltz AMM requires for FTs and VTs to trade. It also ensures that Voltz AMM has a larger liquidity pool within its preferred fixed-rate bands. When transactions are made utilising their liquidity, LPs are paid a fee.
LPs can earn a lot of money by depositing liquidity in a range with a balanced quantity of FT and VT trading volume. Voltz AMM is up to 3,000x more capital efficient than other models because of concentrated liquidity, margin recycling, and the margin engine. In other terms, it means that limited partners can earn greater fees with less capital.
Conclusion
While a significant portion of cash and users will pass through the interface, developers will have an even greater chance to innovate on top of the Voltz Protocol’s fundamental contracts. The protocol is intended to serve as the foundation for financial infrastructure, allowing anybody to incorporate its yield and data into new apps and experiences.
