gm team! We hope you’re all as excited for 2022 as we are — it’s going to be a big year for DeFi and a big year for everyone involved with Voltz. 🚀
As you may have seen, our audits have started, which puts us on track to be on testnet later this quarter. We’re super excited to start getting community input on Voltz v1! We’ll be reaching out closer to the time with our bug bounty program and other ways you can support the Voltz launch.
In the meantime, we’ve put together this helpful TL;DR explaining the main use cases of Voltz. We will be releasing more helpful content leading up to our testnet launch, so follow us on Twitter to stay up to date or join in the fun on our Discord.
Voltz is a noncustodial Automated Market Maker (AMM) for Interest Rate Swaps. Put simply, this means Voltz allows you to trade interest rates with leverage. On Voltz, you can exchange ‘variable rates for fixed rates’ or ‘fixed rates for variable rates’.
To make this simpler, we describe one side as Fixed Takers (FTs), where you swap a variable rate and end up with a fixed rate of return. This provides traders with the ability to de-risk their portfolio by ‘locking in’ a fixed interest rate. Whilst we describe the other side as Variable Takers (VTs), where you swap a fixed rate and end up with a variable rate of return. This lets more sophisticated traders increase potential profit capture on the rates of individual assets.
The graphic below summarizes the relationship between VTs and FTs along with Liquidity Providers, but we’ll dive into each in more detail.
Fixed Takers (FTs)
Fixed Takers swap variable rates for fixed rates of return. For example, you may own an asset that has a variable rate of return, such as cDAI. If you don’t want the uncertainty of a variable interest rate on your DAI, but instead would like a fixed rate of return, you can initiate a swap on Voltz.
Let’s illustrate this with an example:
- Alice owns $10,000 worth of cDAI, which currently has a variable rate of return of 10% APY
- Alice doesn’t want to risk seeing that rate drop, so would rather fix the rate for 90 days
- Alice comes to Voltz and enters the 90 day cDAI pool, where the fixed rate is currently 10%
- Alice deposits her $10,000 worth of cDAI and locks in the 10% fixed rate for the next 90 days
In this scenario, if the variable rate of return on cDAI drops to 5%, Alice doesn’t care because she’s already locked in her 10% for the next 90 days.
Let’s just pause for a moment. What just happened may seem simple, but it’s a pretty big deal. Alice just took an asset with a variable rate of return and turned it into a fixed rate asset. This is one of the core powers of Voltz — for the first time in DeFi, the silos between fixed and variable rates have been removed. Or, in simpler terms, Voltz allows traders to remove uncertainty by fixing the interest rates on their variable rate crypto assets.
For those looking to use Voltz for more complex trades…
It’s important to add that this is not the only way to be a Fixed Taker. You can also enter swaps by depositing margin in the underlying asset (i.e. DAI, rather than cDAI). When you do this, you’ll be leveraging your position. The use cases for this are different, as you’re more likely to already have a variable liability that you’re looking to hedge (e.g. within your DAO Treasury). Or alternatively you may be a sophisticated trader, looking to trade rates on leverage. In future posts we’ll explain these use cases in more detail.
Variable Takers (VTs)
Variable Takers swap fixed rates for variable rates of return. In this instance, you’re effectively “selling” a fixed rate in order to get leveraged exposure to variable yield. You’d do this if you believe the variable rate of return will be higher than the current fixed rate price on Voltz AMM over the course of the term. We expect VTs to have a higher risk threshold than FTs, but VTs also have the potential to reap huge upside in profit.
Let’s play through another example:
- The current variable APY of cDAI is 10% and the fixed rate of the Voltz 90-day cDAI pool is also 10%
- Bob believes the rate of cDAI will increase to 20% and wants to lever his exposure to this potential upside
- Bob enters a swap by depositing $10,000 DAI in margin and choosing leverage of 15x
- This gives Bob a notional exposure of $150,000 to the underlying rate of cDAI minus the fixed rate of Voltz AMM at the point he enters the swap (i.e. 10% in this example)
If the rate of cDAI then immediately jumps to 20% APY, Bob just made a large profit. This can be calculated as follows (note, for simplicity we assume Bob enters the swap at the point the pool is created):
This means Bob deposited $10,000 as margin and 90 days later left Voltz with $13,699. If Bob were able to repeat this process through a full year by reinvesting his profit, he’d generate a return of over 250%.
The risk here is that if the rate drops Bob will lose money. So we expect VTs to be traders with a view on rates and how they’ll evolve relative to the fixed rate of the Voltz AMM.
It is worth highlighting that the fixed rate of the Voltz AMM goes down as more FTs trade. So as FTs trade, we expect VTs to be able to step in and extract significant value from the market in the form of levered exposure to variable yield.
Liquidity Providers (LPs)
Liquidity Providers provide the liquidity necessary for FTs and VTs to trade on Voltz AMM. Voltz AMM uses the concept of concentrated liquidity, which allows LPs to deposit liquidity within tick ranges. This gives LPs more customizability and increases the capital efficiency of their liquidity, which in turn increases fee generation potential. It also ensures Voltz AMM has deeper liquidity pools within preferred fixed rate (tick) ranges. LPs collect fees when trades are made using their liquidity. When corresponding FT and VT positions can be matched, the LP margin is recycled so it can be used to collect fees from Traders again.
Given these properties, LPs have substantial opportunity to generate fees when depositing liquidity within a range that has balanced amounts of FT and VT trading volume. The combination of concentrated liquidity, margin recycling and the margin engine means Voltz AMM is up to 3,000x more capital efficient than alternative models. Or in other words, it means LPs can generate more fees with less capital.
However, there’s even more upside for LPs. Voltz AMM only requires LPs to deposit one asset in order to provide liquidity for VTs and FTs to trade. This is because fixed interest rates and variable interest rates on e.g. a cDAI pool are both made in the same underlying asset (in this instance DAI). As a result, LPs don’t have the risk of impermanent loss since they’re only depositing one asset. This is replaced by a different risk that we refer to as Funding Rate Risk, which is explained more in the Voltz litepaper. But still — single asset LPing and no impermanent loss? Bullish.
LFG Voltz Fam! 🚀
Voltz is a noncustodial automated market maker for Interest Rate Swaps (IRS). The protocol uses a concentrated liquidity virtual AMM (vAMM) for price discovery only, with the management of the underlying assets performed by the Margin Engine. The combined impact of these modules means counterparties can create and trade fixed and variable rates through a mechanism that is up to 3,000x more capital efficient than alternative interest rate swap models. To learn more visit: voltz.xyz