Bankless: 4 DeFi Fixed Rate Solutions in One Article

Crypto markets are volatile and fixed rate returns are uncommon.

This is a huge problem for creditors and debtors looking to match fixed-rate liabilities with fixed-rate assets. TradFi entities in particular need access to a convenient fixed rate solution for proper asset and liability management.

The ability to mitigate the risks associated with a particular investment is critical for every type of financial institution — banks, pension funds, insurance companies, and hedge funds — and is often done through derivatives, which provide risk management provides a highly capital efficient solution and often receives preferential accounting and disclosure treatment relative to balance sheet restructuring activities.

From the perspective of lenders in the financial markets, the lack of effective hedge against changes in ETH pledge yields makes it impossible for lenders to offer fixed rate products without being exposed to substantial interest rate risk. While the OTC sector has developed derivative contracts for ETH pledge yields, many market participants do not have access to these contracts, and they are off-chain, limiting use cases and making the protocol composable with the ecosystem DeFi offers System isolation.

Commercial banks looking to hedge against rising interest rates may choose to sell Treasury futures instead of selling Treasuries for cash. While the bank retains the interest in the sale, the use of futures contracts avoids the immediate transfer of cash or other assets between counterparties, thereby avoiding a taxable event for the seller.

Ordinary people (that is, people who don’t play by degen standards) also place a premium on mitigating volatility in their portfolios. In a bear market, when BTC is at $69,000 and ETH is above $45,000, you are likely to trade some amount of potential return for significant downside protection.

Unfortunately, we all set high goals and end up hurting ourselves. We’re all praying for the return of the bull market, but in the meantime, you have a chance to absorb more knowledge than Tai Lopez is sitting in his garage full of books and Lamborghinis.

Next time, you’ll learn about various fixed income derivatives and products to help you better manage your portfolio risk in the next cycle.

Fixed Rate Solutions for DeFi

Developers are already working hard to find solutions to curb volatility in the crypto market. Some have turned to fancy derivatives in their search for the next advanced DeFi product.

DeFi protocols are temporarily addressing these issues. Currently, there are four general solutions for getting a fixed rate:

  • Yield split
  • interest rate swap
  • Structured Finance and Transfers
  • fixed rate loan

Analyzing the fixed and variable returns provided by these unique approaches and their respective protocols will allow comparison of future returns between different strategies by adjusting the return on investment (ROI) of the income stream in proportion to the unique risk profile of the underlying asset .

So, let’s interpret it.

1. Yield split

The yield split protocol, as the name suggests, splits a yield token (such as rETH or stETH) into principal and yield parts with known maturity dates.

So, what exactly is yield and principal?

Imagine borrowing $100 at 6% APR, paying at the end of each month and repaying the loan in full when it comes due a year later. Every month, the bank interest is $0.50. If compounded monthly, these interest payments represent a gain of about 6.17% to the lender. At the end of the year, the borrower must also repay the principal (or loan amount) of $100.

The loan given in the example above represents an interest-only repayment structure, a type of debt instrument yield split agreement.

Importantly, an expiry date must be established to price the principal and yield tokens.

Until then, all earnings generated by the underlying asset will only be credited to earning token holders. At the expiration of the contract, the holders of the principal tokens will be able to redeem the principal tokens in exchange for the underlying collateral at a ratio of 1:1. Since the yield does not count towards the owner of the principal token, it will trade at a discount to the face value of the underlying.

The difference between the underlying asset and the principal token is actually the value of the yield token, which will be greater than zero until the contract expires. The formula for determining the value of the principal and yield tokens can be expressed as:

Yield token price + principal token price = underlying asset price

If the combined value of the yield and principal tokens is greater than the value of the underlying asset, there is an arbitrage opportunity and one can mint principal and yield tokens to sell in the market.

And when the underlying asset price is greater than the total value of the income and principal tokens, there will also be arbitrage opportunities, where two tokens can be purchased and redeemed in exchange for higher-valued underlying assets. Because of this, the total price of principal and yield tokens will closely reflect the value of the underlying asset.

The valuation of principal and yield tokens is affected by the yield produced and the time to maturity. Yields fluctuate over time. Therefore, when yields rise, the price individuals are willing to pay for yield tokens will increase, and vice versa.

Investors will also be less willing to pay for yield tokens as the contract expiration date approaches, as the total amount of yield to be generated is lower.

Holders and buyers of principal tokens have essentially fixed their returns as they can hold the securities until their maturity and redeem them at that time in a known amount of the underlying asset. There are no interest rate fluctuations, as changes in yields — whether negative or positive — are borne by yield token holders.

Protocols using the principal/revenue token structure include:

  • Element Finance
  • Sense Finance
  • Swivel Exchange
  • Pendle Finance

Although there are minor changes, all of these are splitting the yielding assets into cost and yield tokens. This structure allows for leveraged floating rate speculation, where an individual withdraws principal and yield tokens from the underlying asset, sells the principal tokens, and buys more of the underlying asset, repeating the process until the desired float is reached Interest Rate Risk. Colleagues, this structure also allows users to lock in a fixed interest rate by purchasing principal tokens.

2. Interest rate swaps

Interest rate swaps — while prominent in the TradFi world — have yet to materialize in the DeFi market.

Voltz Protocol brought it to DeFi for the first time. The Voltz agreement is designed to provide a product similar to a traditional interest rate swap: the buyer agrees to pay a fixed rate and receive a variable rate from the seller. Buyers of interest rate swaps are called Variable Takers, while sellers of swaps are called Fixed Takers in Voltz’s terminology.

Margin is native to the protocol and greatly improves capital efficiency, enabling users to hedge with less capital, or amplify their exposure to interest rate fluctuations.

TradFi’s nominal derivatives market dwarfs the spot market. Likewise, the notional value of the Voltz interest rate swap market has the potential to dwarf the market value of its underlying assets. If this situation develops like the TradFi market, this will be a huge opportunity.

how it works

Fixed Takers (swaps sellers) in Voltz can fully collateralize their positions without exposing users to liquidation risk or the potential risk of increased interest rate changes.

Voltz further improves capital efficiency by calculating the initial and liquidation margin requirements by simulating the upper and lower bounds on the expected volatility of interest rates before a particular pool expires.

The oracle feeds the pool with interest rate information and determines cash flow allocations to swap buyers and sellers, while price discovery is done by virtual automated market makers. The nature of swaps means that Fixed Takers have a known and capped payoff. However, Variable Takers have unlimited upside risk to the growth of the variable rate offered by the underlying. The return matrix produced by this phenomenon incentivizes more speculation among the Variable Takers population.

Liquidity providers are critical to the protocol’s ability to provide a seamless trading experience for both parties mentioned above.

Voltz’s AMM is modeled after Uniswap, using the concept of centralized liquidity. Voltz’s LPs are immune to impermanent losses since only one asset is required for trading. However, they face losses from what the agreement calls “funding interest rate risk”, which occurs when an imbalance between swap buyer and seller activity and a movement of interest rates beyond the LP’s liquidity scale.

As a result, the LP now holds an out-of-the-money position. Funding interest rate risk effectively replaces the impermanent losses of spot market AMMs. This is a trade-off that must be considered and balanced against the ability to charge protocol transaction fees.

3. Structured finance and tiering

Tiered protocols take inspiration from traditional financial instruments, collateralized debt obligations (CDOs), the epicenter of the financial crisis, where there are different noteholders, each with different priorities for repayment.

Examples of graded agreements include:

Tranche Finance


The essence of these protocols is to segregate liquidity and risk into different pools. Both protocols establish senior (lower risk) and secondary pools (higher risk), with senior pools having priority over any cash flow from lending or yield farming activities, and subordinated pools’ credit enhancements. Guarantee; if the proceeds generated by the subject matter are not sufficient to repay the senior pool, the secondary pool participants will incur losses.

In exchange for guaranteeing senior pool participants, the secondary pool has the ability to generate additional returns if the total rate of return on the capital of the senior pool exceeds the rate paid to that pool participant. Participants of the Premium Pool earn a fixed interest rate and enter their positions at or below the current yield generated by the associated yielding token.

BarnBridge uses the following formula to calculate the yield offered to the premium pool:

Senior Pool Yield = Moving Average Yield * Subprime Loanable Liquidity / Total Pool Liquidity

Among them, “moving average yield” is defined as the three-day moving average yield generated by the underlying.

In contrast, Tranche Finance votes the fixed rate offered to all fixed rate recipients through governance tokens, which means that the rate is not fixed and can change at any time. Changes in fixed rates may benefit or not benefit senior pool participants.

The previous iteration of BarnBridge V1, while designed to protect the returns of premium pool participants, did not explicitly guarantee a fixed rate, nor was it offered because premium pool participants faced potential return curtailment after the variable rate offered by the underlying dropped significantly. True fixed rate.

4. Fixed rate loan agreement

Like the variable-rate lending protocols offered by Aave and Compound, fixed-rate lending protocols also allow users to take out over-collateralized loans.

Unlike a variable-rate lending agreement, however, the lender and borrower would agree to a fixed rate, and the resulting transaction would look similar to a zero-coupon bond issued by the borrower.

Loans can be liquidated, similar to variable rate lending agreements, but when the loan matures, the borrower pays the lender a fixed rate. Additionally, a pre-specified maturity date means that lenders cannot access their funds until the loan matures, and borrowers face the repercussions of prepaid loans, which is in contrast to the lender’s on-demand withdrawals in variable rate agreements (if any in terms of liquidity) and the ability of borrowers to fully liquidate their positions at any time.

In a fixed-rate lending agreement, the borrower may incur a repayment penalty or be forced to borrow until the contract expires in order to close a position.

A fixed rate loan agreement includes:

Notional Finance

Yield Protocol


Benchmark performance

At this point, you might be thinking…

How can I add fixed rate derivatives and lending strategies to my portfolio to surpass my benchmark for passive income creation in crypto – ETH staking return?

I will use this detailed analysis of validator returns to establish a baseline scenario for ETH stakers.

Since this analysis was conducted prior to the merger , I scaled the upper and lower quartile boundaries (optimistic and pessimistic reward rate scenarios) to account for current Ethereum staking yields .

Going back to the notion that “staking Ethereum can be thought of as a placebo bond, and the interest rate may one day be used as the spread of the ETH reward rate”, think of this reward rate as the risk-free rate, or the lowest that savvy DeFi investors will accept The rate of return is meaningful.

While all of the above protocols allow users to take fixed-rate positions, only a few (Voltz Protocol, Element Finance, Sense Finance, Notional Finance, and Yield Protocol) offer products that I think can be fair with the ETH staking reward rate Comparison.

For more details around the method and project inclusion framework, please scroll to the bottom to see!

From this, we compare the estimated ROI of staking ETH over the duration of a fixed-rate strategy with the rate of return offered by a fixed-rate instrument.

Bankless: 4 DeFi Fixed Rate Solutions in One Article

Fixed rates in red represent strategies with lower returns than pessimistic expectations. Orange flat rates indicate that the strategy met or exceeded pessimistic expectations, but failed to exceed expected staking returns.

Those strategies shown in light green met or exceeded the expected variable ROI for staking, while those shown in dark green met or exceeded the most optimistic staking expectations.

Since liquid staking derivatives and ETH-stETH stable pools have variable returns that differ from the Ethereum staking reward rate, we can assume that they have different risk profiles.

For rETH and stETH, the risk of slashing is lower than for staking Ethereum alone, and both protocols offer slashing insurance to protect user deposits. Also, staking with Lido or Rocket Pool is much easier than running a validator yourself, and users without 32 ETH have a chance to stake. Investors trade marginal returns for these guarantees and conveniences, accepting yields below the risk-free rate.

Providing ETH-stETH liquidity for Curve, represented by the steCRV principal token, is also different from the risk situation of simply staking Lido. The increased returns represent the smart contract risk from Curve, in addition to the native smart contract risk within Lido and the risk of impermanent loss. While Curve is battle-tested, the high-return situation suggests that investors are simply uncomfortable with a deal that accepts returns that are lower than current variable rates. If not, we would expect yields close to the current variable ETH staking reward rate. To illustrate these differences in the risk profile of various major assets compared to Ethereum staking, the expected variable ROI resulting from the staking reward rate analysis is risk-adjusted.

Unfortunately, I have to announce that all the media attention on Voltz has brought intellectual capital to the protocol. As degenerate as the app looks, the fixed ROI from interest rate swaps on rETH and stETH is surprisingly close to the expected ROI from staking with Lido or Rocket Pool.

Sorry, no obvious arbitrage opportunities, efficient market theory, or anything like that.

But it seems normal to me. However, the protocol allows speculative market participants to place bets based on what they believe the market will move, and provides the only opportunity of any protocol that allows sophisticated market participants to hedge risk, both upside and downside, at an efficient rate.

If you believe the staking reward rate will decrease, please accept the fixed rate offered by Voltz. For users who are bullish on the staking reward rate, they can also leverage the variable interest rate provided by the protocol. Element’s fixed-yield ETH product has slightly underperformed the expected ROI for staking, but the similarity in yield compared to the variable staking reward rate offered by principal tokens provides a hedge for risk-averse investors ability to fluctuate. Element Fixed Yield provides an end result similar to using the Voltz protocol, but utilizes a different investment vehicle.

Notional is special when it comes to fixed lending. Fixed income on fixed-rate loans issued at earlier and longer maturities was lower than pessimistic expectations. In addition, the fixed-rate loan maturing in September offered an annual interest rate that was 111% higher than that offered on the December note.

If this isn’t an inverted yield curve, I don’t know what is. Horrible market crash imminent? Maybe, but we’ll leave that to economists.

Additionally, Yield Protocol also failed to provide an ideal fixed rate for ETH lending. The inefficiency of the fixed rate lending market may be a direct result of the current market uncertainty and volatility, as lenders must lock their ETH to maturity: in a bear market, flexibility and liquidity are critical to the health of a portfolio important.

alpha in fixed income

While multiple potential arbitrage opportunities stand out, perhaps the most enticing is the ETH fixed yield with Sense Finance until May 31, 2027. Fixing the return on ETH at 7.21% per annum is a great opportunity not to be missed.

When scaling stETH’s risk profile, this fixed rate exceeds the most optimistic future rate of return. Although gas fees may increase, it will temporarily increase the staking reward rate. However, it is also possible that the increase in rewards will be offset by the increase in the number of validators, reducing the yield of ETH.

Also, at this time, the beacon chain’s withdrawal function is not enabled, which means that if the gas fee is further reduced, the number of validators will remain fixed, artificially depressing the staking yield because the number of validators can only respond to gas increase in costs.

The Voltz Protocol provides the best solution for mitigating interest rate risk for participants who wish to obtain “market” pricing for yield derivatives.

Actual market pricing enables entities to hedge portfolio risk without forcing them to take a speculative stance on the direction of interest rates. Instead, it allows the conversion of staking variable-rate cash flows into a fixed rate of return that is competitive with the expected ETH staking return.

The ability to fix interest rates in DeFi is critical for the industry to be adopted by traditional financial institutions. The recently launched Voltz protocol is an important innovation in the decentralized fixed-rate derivatives market, not only because the protocol provides capital efficiency, but also because it provides accurate pricing for interest rate swaps, especially in contrast to currently offered compared to alternative fixed income products.

In addition to interest rate risk management applications, the market inefficiency of the entire fixed rate protocol presents an opportunity for savvy DeFi users to generate an accessible, low-risk source of returns compared to staking ETH.

Additionally, these products provide DeFi users with another source of speculation and enable a whole new degen behavior of trading interest rates instead of token prices.

As crypto becomes mainstream, the prominence of the fixed-rate market is likely to increase.

While the range of practical use cases for yield derivatives today is relatively limited, the rigidity of the crypto market will align the demand for fixed rate products in DeFi with that observed in the TradFi market.

Method description

  • Due to Swivel Exchange’s front-end rejection, I didn’t analyze Swivel Exchange because I couldn’t gather information about the current offerings.
  • Pendle Finance was excluded as it only offered fixed rates on volatile LP pairs.
  • Tranche Finance was excluded from the analysis because, despite offering a fixed-rate ETH product, it yielded a meager 15 basis points at the time of analysis, a stupid trade for any investor.
  • BarnBridge and HiFi were excluded as neither offered any form of fixed-rate ETH opportunity.
  • Notional Finance and Yield Protocol’s variable rate calculations assume that users will stake ETH with Lido, as it represents the highest yield for liquid collateral derivatives listed in this analysis, making this yield reasonably available as capital for ETH lending opportunity cost.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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