Interest rate swaps are a staple of the Wall Street marketplace. They’re now making their way to the crypto industry.
Strips Finance, a decentralized finance (DeFi) project, will continue developing its decentralized iteration of its interest rate swaps product thanks to a recent $8.5 million token round led by Multicoin Capital. The round was also joined by Sequoia Capital, Morningstar Capital, and Fabric Ventures.
These products enable two parties to exchange, or “swap,” streams of interest. The most common type of swap is one that involves a fixed interest rate and a floating or variable interest rate. The goal of trading these rates boils down to one thing: risk management.
Variable interest, as the name implies, can fluctuate, which can cause issues for both those paying the interest and those receiving it. In the first scenario, the interest rate may rise above expectations, costing significantly more than anticipated. In the second, the interest rate could fall, depriving the recipient of a valuable source of revenue. In the financial world, each of these events can be regarded as a clear risk.
However, if you’re a skilled analyst, you might be able to predict when a variable rate will rise or fall in the near future. And if you can figure it out, you can use interest rate swaps to take advantage of these changes. In some cases, for example, your fixed-rate mortgage may end up being less profitable than switching to a variable rate for a period of time.
These fluctuations are magnified in the world of DeFi, where lending and borrowing rates can change by a full point in just 24 hours. Unfortunately, there are few tools for mitigating, let alone profiting from, these risks.
“Interest rate markets remain one of the most significant unrealized opportunities in DeFi.” Markets are currently extremely volatile because traders lack an effective way to hedge out variable-rate volatility, according to Multicoin Capital managing partner Tushar Jain in a prepared statement.
Strips Finance is attempting to solve this issue.
What exactly is Strips Finance?
Strips Finance is essentially constructing the next segment of the lending and borrowing market.
This market is worth more than $44 billion on Ethereum alone, with market leaders Aave and Maker accounting for more than half of that total.
However, the inability to hedge rapidly fluctuating lending and borrowing rates makes this sector particularly risky. In contrast, if you borrowed or lent at a fixed rate, you may miss out on opportunities to reduce your interest payments or increase your yield.
“While there is a burgeoning market in DeFi for variable lending and borrowing protocols, with over $200 billion in TVL, the fixed-rate market is still in its infancy,” said Strips Finance founder Ming Wu. “To get there, we need to first build a strong interest rate swap exchange that will serve as the foundation for new fixed income products.”
Wu and the Strips Finance team will use the new funding to expand their decentralized exchange and build interest rate products on top of it. The project will also raise funds by launching its native STRP token in less than a week. Token holders can earn trading fees for staking the token, profit from the platform’s insurance pool, and much more.
Users, particularly those interested in speculating on the direction of Aave’s interest rates, can anticipate the platform’s launch in November on the layer-2 scaling solution Arbitrum.