Interest rate swaps will Catalyze a New DeFi Era, says Voltz's CEO

Interest rate swaps will “stimulate a new DeFi era,” says Voltz CEO – Mail Bonus

Interest rate swaps facilitate traditional financing. With a market capitalization of $ 1,000,000,000,000,000,000,000,000,000, it supports companies, banks and governments in managing their debt. By using this derivative, investors can exchange the interest on the asset with another party. It basically increases the flexibility and complexity of the international financial system.

Some argue that the complexity of implementing diversified interest rate swaps has hampered the DeFi industry’s ability to grow and become more complex.

The CEO of Voltz Labs, a pioneer in distributed interest rate swaps for DeFi, explained more about the importance of interest rate swaps and the impact of their incorporation into DeFi.

What exactly are interest rate swaps?

In traditional finance, an interest rate swap is a derivative contract where two counterparties agree to divide one flow of future interest payments into another. Both parties agree that they prefer the interest rate arrangement of the other, so they make an agreement to exchange future interest payments. Swap agreements are often used to exchange variable or “floating” interest rates for fixed rates.

If interest rates rise, floating rates will enjoy higher returns, while fixed rates would yield lower returns.

The effectiveness of interest rate swaps

Whether you are familiar with such swaps or not, they are an essential tool for many modern financial products.

Interest rate swaps “allow for a variety of uses, including speculation, risk management and product creation. According to Jones, this includes structured solutions for companies and mortgages with fixed interest rates for households.

Without interest rate swaps, it would be much more difficult to “meet the financial needs of the system,” he said.

The challenge of integrating exchange into DeFi

Things work differently in the unlicensed, distributed DeFi environment. Creating DeFi derivatives is a new concept that offers unique challenges.

Jones said, “you can not just copy and paste how it works in TradFi” when trying to repeat interest rate swaps in DeFi.

One of the reasons for this is the legal system that monitors counterparty risk in traditional finance. Such swap agreements entail the risk that the other party may default on its loan and thus prevent the other party from being able to collect what he owes. Traditional markets have a set of rules and regulations to deal with such situations if they arise.

There is no such foundation for DeFi. However, industry leaders can develop technology that makes this organization unnecessary.

“In traditional finance, when you swap with another person, you create counterparty risk,” Jones explained. To enable this, they developed a comprehensive legal system, which involved the hiring of rating agencies. On the other hand, DeFi is pretty clear. Instead of having a protocol for what to do when a counterparty fails, we have designed a system that removes counterparty risk, which means it can not fail.

In addition, he said that evaluating the usefulness of these devices and developing technologies to “deliver the same benefits in new situations with different limits” would require six months of research.

New DeFi era

What is the significance of DeFi interest rate swaps for the market?

According to Jones, the creation of financial products is surrounded by a “spectrum of complexity”. The introduction of interest rate swaps to DeFi will attract speculators, institutional investors and individual investors.

DeFi interest rate swaps provide the simplest level of complexity for fixed rate products. DeFi’s customers can now, for the first time, convert variable assets into fixed assets. Until recently, DeFi customers seeking returns were dependent on unpredictable interest rates.

Moving on to more complex financial instruments, the Voltz Protocol could “open up products such as interest rate caps, flooring, secured payments, fixed-rate mortgages and swaps. This enables DeFi customers to access a wider range of financial services and business opportunities.

Jones said that “teams are building many of these [DeFi financial products] in parallel with innovative uses, such as using fixed-rate assets as a form of collateral in stablecoin. With recent events in the cryptocurrency industry, it is certain that new methods of securing stablecoins will interest many. They could be very useful for the growth of diversified markets.

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About Nicolle

She is an Indian freelance writer. She loves to think, learn and write about everything related to Web3.

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