As the market continues to frustrate, and with many of CTs loudest denizens still seeking safe harbor in stables, it’s pertinent to begin considering what the next wave of catalysts could be for the DeFi space. And while fads, such as OHM and Titano forks may come and go, and we patiently await a truly playable title in crypto gaming, real innovation is what will lead to the influx of the TradFi dollar, and resumption of the bull, or at least partially.

(Other issues must surely be addressed for this migration of funds to occur, interoperability, regulatory concerns, and security of funds being core, but only a small part of the necessary conversation).

Either way, we will not be discussing the limitations of DeFi in this post, no matter how urgent they may be, and will instead focus attention on Yield swaps, and why I think they’re one of the next major catalysts to nourish decentralized finance.

So, what are yield swaps? Well, to answer that question we should first look at Interest rate swaps and their effect (& use) in the legacy markets.

In TradFi, interest rate swaps are financial instruments that allow two parties to exchange future interest payments, without necessitating the exchange of the principal, underlying amount.

This form of derivative usually involves the exchange of a floating/variable interest rate, for that of a fixed (or vice-versa) and is generally reserved for larger financial establishments, and not the retail, plebeian class.

The benefits of this swap are that it allows one party, namely party A, to reduce exposure to the fluctuations of a floating rate (LIBOR), whilst allowing the secondary party to speculate, and thereby earn a lower interest rate than they would (or could) have otherwise received.

This type of IRS (Interest Rate Swap) is called a Vanilla swap and is the most common use of this instrument (by far) with the total market reaching a “substantial size”, to say the least…

Ok, so now that we know what an IRS is, how does this translate to DeFi, and the Yield markets found on-chain?

And the answer to this, again, can be borrowed from TradFi, where big players and institutions use swaps to hedge against possible fluctuations in the global interest markets, allowing for extra stability, reduction of interest rate risk, and yes, you guessed it…the potential for profitable opportunity.

If this form of derivative could be employed on-chain, in the much-more volatile world of DeFi yields, the potential application would be greater than simply hedging for acceptable profits, and could involve brand new derivative markets, allowing users to speculate on future yields, depending on their appetite of course.

Ignoring for a minute the impact that this new type of marketplace could have on users, it’s clear that DeFi itself would benefit, not only with the widening scope of its derivatives sector and the sheer number of possible activities available, but also due to the core services themselves, with this type of product no-doubt enticing the use of TradFi investors, and incentivizing the deployment of their funds onto the blockchain.

Whilst Yield swaps, IRS, and “those kinds of derivatives” may sound exotic to the degenerates currently inhabiting the on-chain landscape, the astronomical volume interacting with these instruments in the legacy markets serves to prove that by providing the basic tools, DeFi could finally, and properly, encourage the mass adoption of its services.

The image below allows us to imagine just one of the many use-cases Geometry imagines for this type of derivative in DeFi, allowing for the liberation of funds, and an increase in personal capital efficiency through better utilization of these on-chain assets.

In this example, the user of a DeFi protocol (Helix AMM) is able to leverage future yield from a portion of their LP holdings, in order to free up and redeploy funds immediately. On the opposing side, the bullish counterparty to this swap believes that more juice can be squeezed and that the offer has left attainable profit on the table.

And this is just one consideration that yield swaps could explore in this burgeoning future industry. By connecting two parties that otherwise would not have connected, these novel markets provide greater flexibility and a new depth to DeFi, allowing for unique systems of yield generation, preservation, and speculation.

The knock-on effect of this (or one of them, at least) is increased stability within the DeFi ecosystem, ensuring a balance by matching the Yield bear with a bullish counter-party, and providing participants of the protocol with an added layer of value protection.

To continue on this train of thought, we can begin to imagine the advantages felt by these users, with essentially, more ways to protect, manage, and grow funds on-chain, and increasing possibilities for the speculation on future yields.

As DeFi continues to evolve and mature, it will be exciting to watch the adoption of these products, and the platforms that continue to develop and deploy them. As i initially stated at the beginning of this dispersal of thoughts, the quest to onboard fresh blood, aka TradFi users, is not contingent solely on providing these mechanisms, but it will definitely help…

For anyone interested in understanding more about the current integration of these financial tools, I’d recommend a look at Helix.Finance, which launches on Ethereum next month with Yield and LP swaps.

Helix Docs Geometry.fi

Until the next,

DP

As the market continues to frustrate, and with many of CTs loudest denizens still seeking safe harbor in stables, it’s pertinent to begin considering what the next wave of catalysts could be for the DeFi space. And while fads, such as OHM and Titano forks may come and go, and we patiently await a truly playable title in crypto gaming, real innovation is what will lead to the influx of the TradFi dollar, and resumption of the bull, or at least partially.

(Other issues must surely be addressed for this migration of funds to occur, interoperability, regulatory concerns, and security of funds being core, but only a small part of the necessary conversation).

Either way, we will not be discussing the limitations of DeFi in this post, no matter how urgent they may be, and will instead focus attention on Yield swaps, and why I think they’re one of the next major catalysts to nourish decentralized finance.

So, what are yield swaps? Well, to answer that question we should first look at Interest rate swaps and their effect (& use) in the legacy markets.

In TradFi, interest rate swaps are financial instruments that allow two parties to exchange future interest payments, without necessitating the exchange of the principal, underlying amount.

This form of derivative usually involves the exchange of a floating/variable interest rate, for that of a fixed (or vice-versa) and is generally reserved for larger financial establishments, and not the retail, plebeian class.

The benefits of this swap are that it allows one party, namely party A, to reduce exposure to the fluctuations of a floating rate (LIBOR), whilst allowing the secondary party to speculate, and thereby earn a lower interest rate than they would (or could) have otherwise received.

This type of IRS (Interest Rate Swap) is called a Vanilla swap and is the most common use of this instrument (by far) with the total market reaching a “substantial size”, to say the least…

Ok, so now that we know what an IRS is, how does this translate to DeFi, and the Yield markets found on-chain?

And the answer to this, again, can be borrowed from TradFi, where big players and institutions use swaps to hedge against possible fluctuations in the global interest markets, allowing for extra stability, reduction of interest rate risk, and yes, you guessed it…the potential for profitable opportunity.

If this form of derivative could be employed on-chain, in the much-more volatile world of DeFi yields, the potential application would be greater than simply hedging for acceptable profits, and could involve brand new derivative markets, allowing users to speculate on future yields, depending on their appetite of course.

Ignoring for a minute the impact that this new type of marketplace could have on users, it’s clear that DeFi itself would benefit, not only with the widening scope of its derivatives sector and the sheer number of possible activities available, but also due to the core services themselves, with this type of product no-doubt enticing the use of TradFi investors, and incentivizing the deployment of their funds onto the blockchain.

Whilst Yield swaps, IRS, and “those kinds of derivatives” may sound exotic to the degenerates currently inhabiting the on-chain landscape, the astronomical volume interacting with these instruments in the legacy markets serves to prove that by providing the basic tools, DeFi could finally, and properly, encourage the mass adoption of its services.

The image below allows us to imagine just one of the many use-cases Geometry imagines for this type of derivative in DeFi, allowing for the liberation of funds, and an increase in personal capital efficiency through better utilization of these on-chain assets.

In this example, the user of a DeFi protocol (Helix AMM) is able to leverage future yield from a portion of their LP holdings, in order to free up and redeploy funds immediately. On the opposing side, the bullish counterparty to this swap believes that more juice can be squeezed and that the offer has left attainable profit on the table.

And this is just one consideration that yield swaps could explore in this burgeoning future industry. By connecting two parties that otherwise would not have connected, these novel markets provide greater flexibility and a new depth to DeFi, allowing for unique systems of yield generation, preservation, and speculation.

The knock-on effect of this (or one of them, at least) is increased stability within the DeFi ecosystem, ensuring a balance by matching the Yield bear with a bullish counter-party, and providing participants of the protocol with an added layer of value protection.

To continue on this train of thought, we can begin to imagine the advantages felt by these users, with essentially, more ways to protect, manage, and grow funds on-chain, and increasing possibilities for the speculation on future yields.

As DeFi continues to evolve and mature, it will be exciting to watch the adoption of these products, and the platforms that continue to develop and deploy them. As i initially stated at the beginning of this dispersal of thoughts, the quest to onboard fresh blood, aka TradFi users, is not contingent solely on providing these mechanisms, but it will definitely help…

For anyone interested in understanding more about the current integration of these financial tools, I’d recommend a look at Helix.Finance, which launches on Ethereum next month with Yield and LP swaps.

Helix Docs Geometry.fi

Until the next,

DP