This Saturday, April 30th at ~9:30 EDT (1:30 UTC), Rari Capital suffered a re-entrancy attack which left their pools insolvent to the tune of roughly ~$80 million.

This attack included the FEI market that we’ve integrated here at Swivel — FeiRari Pool 8.

TL;DR:

As of now, May 2nd, ~90% of our user’s funds have been recovered, and ~198,000 FEI remain.

With the FeiRari community call happening tomorrow at 8:00 PM ET (0:00 UTC), the Swivel DAO is initiating recovery SIP (#006) preemptively at 12:00 ET to give our community time to learn what steps the FeiRari DAO will take next before making our own conclusions, while also expediting the normal SIP process.

The Vulnerability

Rari utilizes a fork of Compound’s money-market, which contains a relatively common re-entrancy vulnerability.

Compound itself limits exposure to re-entrancy by restricting approved tokens to ERC-20s, however many forks have failed to do so leading to lender losses in individual vulnerabilities across dForce/imBTC, CREAM, Hundred Finance, Voltage Finance, & DefiPIE.

Last month security researchers @samczsun, @hritzdorf, and @YSmaragdakis noted a similar vulnerability in Rari’s cToken contracts and were met by a very quick remediation from the Rari team: Report

During this remediation the Rari team utilized a global reentrancy guard on their cTokens, however in doing so their team failed to consider a potentially wider exposure scope and acknowledge that the Comptroller contract may need similar remediations.

The attacker was able to abuse an optimization for the transferring out of ETH, which had been added only one month after their audit last year, meaning unaudited code has been live ever since.

With this optimization and a lack of reentrant guard an attacker was able to:

1. Flash loan and deposit 150,000,000 USDC into Rari

2. Borrow ETH (triggering re-entrancy)

3. Reentrant call `ExitMarkets()`, resetting debt to 0

4. Repay Flashloan

5. Repeat

The Loss

The vulnerability has resulted in bad debt across pools: 8, 18, 27, 127, 144, 146, 156

While the Rari team at first believed this vulnerability was limited in scope, it appears to extend to their Arbitrum deployment as well.

The attacker’s address: 0x6162….6157f

Attack Transaction: 0xab48….76530 Arbitrum Attack Transaction: 0x3212....203ef

Total funds lost:

ETH: ~6,100 FEI: ~20,250,000 DAI: ~14,300,000 FRAX: ~13,100,000 USDC: ~10,100,000 UST: ~2,800,000 LUSD: ~2,000,000 USDT: ~130,000 RAI: ~32,000

Total: ~$80,110,000

Swivel’s Exposure

With the launch of our FeiRari market, we saw a handful of new faces from the FeiRari tribe come lend through our markets.

We had roughly ~2,000,000 FEI lent through our Rari that was vulnerable; however, with the vulnerability limited in its execution, significant amounts FEI remained in FeiRari Pool 8 for withdrawal.

That said, the moment the hack became public, we quickly rushed to inform our community of the vulnerability through Discord, and more importantly reach out specifically to those affected.

With the tight knit size of our community, and significant engagement we have had in the past, we were able to get into personal contact with nearly all of our affected lenders, and have already recovered nearly 90% of our user’s funds.

That said, roughly 1,780,674,870,194,790 fFEI tokens (~198,000 FEI) remain in our Swivel contracts, leaving us a few options for additional recovery.

The TRIBE’s Next Step

As of now the FeiRari community is waiting with breath held for the community call tomorrow at 8:00 PM ET (0:00 UTC) for more information on potential ways forward and their plans for recovery.

As of now, the FeiRari team has made no commitments, however have offered a very significant whitehat bounty of $10,000,000 for the return of funds.

The FEI team sent the attacker the following message through an ETH transaction:

We noticed you may be considering the no-questions-asked $10m offer. If you wish to take us up on this, please deposit the remaining funds to the Tribe DAO Timelock: 0xd51dbA7a94e1adEa403553A8235C302cEbF41a3c

Swivel’s Next Step

With a bounty representing 12.5% of the vulnerability itself, Rari’s attacker may yet return funds (and Swivel’s exposure is limited). However, erring on the side of caution we have begun to prepare our emergency withdrawal procedures.

We will be immediately launching SIP (#006) Maturing Our FeiRari Market Early, with votes beginning at 12:00 UTC on May 2nd, 2022. This timeline hopefully gives our community time to listen in to the FeiRari community call and weigh their path forward with regard to our own.

Potential Paths:

Fund Recovery:

The first path is the completion and early maturity of our Rari FEI market.

Assuming Rari Pool 8 has FEI for withdrawal once our withdrawal queue completes:

• zcFEI: Redeemable for FEI at a ratio of 99:100

• nFEI: Redeemable for FEI at a ratio of 1:100

• Redeemable FEI: Reedemable for FEI 1:1 (Calculated based on the exchangeRate at 0:00 UTC on 5-2)

The market itself would close until further notice, and an additional market would launch ASAP alongside our imminent Arbitrum launch.

FeiRari Recovery:

Depending on the response of the FeiRari DAO on tomorrows call, it may also make sense to continue the market as is, and trust in their recovery processes.

With significant PCV in both Rari/Tribe treasuries, and our funds specifically all in FEI within the FeiRari pool, our depositors likely will be able to redeem funds at or near face value.

The result would be that our market continues to operate as it has, with our impacted liquidity providers having earned significant rewards for their trust in our systems.

Conclusion

We will keep our community updated continuously as the situation progresses.

We were lucky to be able to recover 90% of our users’ funds, and given the current state of the FeiRari pool, we are very likely to recover 100% of user funds and continue operations as usual within the week.

I’d like to personally thank all our community members for sticking around through all this, and to those who we’re impacted and able to respond quickly, thank you for being here along for the ride!

We take security seriously at Swivel, and while no platform is ever bug free, and we cannot always guarantee the safety of our partner platforms, we strive to keep our lenders capital safe.

Keep your eyes out for a piece on our owndevelopment processes and how we ensure that our contracts avoid similar pitfalls and keep your money safe (Hint: Check out my recent talk with Yield’s Alberto — Link)

— Julian Traversa

About Swivel Finance

Swivel is the protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

As of today, March 24th, our first Swivel market has now matured!

And alongside the maturation of our first market, we’re pumped to offer a new, higher yielding alternative with our FeiRari integration! 🏎️🏎️🏎️

Our first FeiRari market is now live! Lend your FEI on our exchange, and stop on by our community with any questions!

Integrating FeiRari

At Swivel, we believe markets should be open, and risks should be yours to take (and manage). Rari’s Fuse aligns with this vision and enables anyone to instantly create their own lending and borrowing pool.

This disintermediation then allows individuals to identify exactly their risk tolerance, and allocate capital to pools that are right for them.

The result is a higher-yielding, and more volatile environment, one that is perfect for Swivel to integrate.

Our lenders can expect higher fixed-yields, and in times of volatility, Rari lenders can sell their future yield to protect themselves from rapid shifts in Rari’s rates.

While our rate-traders can expect more volatile and more profitable nToken trading opportunities. Just last week FEI’s rates went from 4.5%→11.5%, a 250% potential profit for any nToken traders.

The Official FeiRari Pool (Pool 8)

We chose to integrate Fuse Pool 8, the FeiRari DAO Pool, for a two key reasons. To start, the pool at this point simply has the most liquidity with nearly 50% of Fuse’s TVL sitting in Pool 8, making the pool a clear choice for integration.

However beyond pure liquidity, the quality of the assets in the market is high meaning that the potential risk for our lenders is relatively low, even compared to a low-risk market like Compound.

Pool 8 then represents a perfect compromise that allows our users to get access to high rates without exposing themselves to unnecessary risk.

The FEI token

For our first FeiRari market, it only makes sense that we would launch with the FEI stablecoin.

However, the reasons are beyond sentimental! Not only does the Fei DAO align with our ethos at Swivel, but the FEI stablecoin balances the same thoughtful design tradeoffs (compartmentalized risk) as the Rari Fuse product, making it an equally interesting integration for a yield tokenization protocol like Swivel.

The result is a marginally-riskier lending experience, with a much more dynamic market, and significantly higher lending rates.

Swivel’s June FeiRari Market

Our first FEI stablecoin market will mature alongside our current Compound USDC market on June 24th 2022.

This date coincides with the maturity of FTX’s futures, but moreover ensures our markets mature at the exact same timestamp as our friends at Yield Protocol, thus allowing our lenders to arbitrage rates and bet on their long-term convergence.

Token: FEI Stablecoin Token Address: 0x956F47F50A910163D8BF957Cf5846D573E7f87CA Maturity: June 24th, 2022 Maturity Timestamp (Unix): 1656039600

What’s Next

We’ve got a lot going on with our Rari market launch! Keep an eye out for more community competitions, but moreover a handful of proposals are hitting the polls over the weekend!

We’ve got ~65,000 USDC of fees, and only 150k of SWIV to buy back. So stop by our governance forum to share your thoughts on how we should effectively allocate our fees!

Redeeming matured positions 💸

With our first Compound USDC maturing today, March 24th, all zcUSDC tokens are now redeemable 1-1 for USDC, and zcToken holders begin to earn interest on Compound.

Conversely, nTokens for the March 24th maturity no longer generate interest.

For more information, check out our documentation on maturity!

Arbitrum ⚡& Layer 2’s

With the launch of Rari, we can now begin to look to other chains!

And all aboard… 🚂🚂 Next up is Rari’s deployment on Arbitrum! We’ll be looking to our community for input over the coming months, however our first stop for scalability will be both the chain with the most liquidity, and the protocol that aligns most with our vision.

We’ll be regularly updating on our progress, so stay tuned for further community and developer updates!

About Swivel Finance

Swivel is the protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

As of today, March 24th, our first Swivel market has now matured!

And alongside the maturation of our first market, we’re pumped to offer a new, higher yielding alternative with our FeiRari integration! 🏎️🏎️🏎️

Our first FeiRari market is now live! Lend your FEI on our exchange, and stop on by our community with any questions!

Integrating FeiRari

At Swivel, we believe markets should be open, and risks should be yours to take (and manage). Rari’s Fuse aligns with this vision and enables anyone to instantly create their own lending and borrowing pool.

This disintermediation then allows individuals to identify exactly their risk tolerance, and allocate capital to pools that are right for them.

The result is a higher-yielding, and more volatile environment, one that is perfect for Swivel to integrate.

Our lenders can expect higher fixed-yields, and in times of volatility, Rari lenders can sell their future yield to protect themselves from rapid shifts in Rari’s rates.

While our rate-traders can expect more volatile and more profitable nToken trading opportunities. Just last week FEI’s rates went from 4.5%→11.5%, a 250% potential profit for any nToken traders.

The Official FeiRari Pool (Pool 8)

We chose to integrate Fuse Pool 8, the FeiRari DAO Pool, for a two key reasons. To start, the pool at this point simply has the most liquidity with nearly 50% of Fuse’s TVL sitting in Pool 8, making the pool a clear choice for integration.

However beyond pure liquidity, the quality of the assets in the market is high meaning that the potential risk for our lenders is relatively low, even compared to a low-risk market like Compound.

Pool 8 then represents a perfect compromise that allows our users to get access to high rates without exposing themselves to unnecessary risk.

The FEI token

For our first FeiRari market, it only makes sense that we would launch with the FEI stablecoin.

However, the reasons are beyond sentimental! Not only does the Fei DAO align with our ethos at Swivel, but the FEI stablecoin balances the same thoughtful design tradeoffs (compartmentalized risk) as the Rari Fuse product, making it an equally interesting integration for a yield tokenization protocol like Swivel.

The result is a marginally-riskier lending experience, with a much more dynamic market, and significantly higher lending rates.

Swivel’s June FeiRari Market

Our first FEI stablecoin market will mature alongside our current Compound USDC market on June 24th 2022.

This date coincides with the maturity of FTX’s futures, but moreover ensures our markets mature at the exact same timestamp as our friends at Yield Protocol, thus allowing our lenders to arbitrage rates and bet on their long-term convergence.

Token: FEI Stablecoin Token Address: 0x956F47F50A910163D8BF957Cf5846D573E7f87CA Maturity: June 24th, 2022 Maturity Timestamp (Unix): 1656039600

What’s Next

We’ve got a lot going on with our Rari market launch! Keep an eye out for more community competitions, but moreover a handful of proposals are hitting the polls over the weekend!

We’ve got ~65,000 USDC of fees, and only 150k of SWIV to buy back. So stop by our governance forum to share your thoughts on how we should effectively allocate our fees!

Redeeming matured positions 💸

With our first Compound USDC maturing today, March 24th, all zcUSDC tokens are now redeemable 1-1 for USDC, and zcToken holders begin to earn interest on Compound.

Conversely, nTokens for the March 24th maturity no longer generate interest.

For more information, check out our documentation on maturity!

Arbitrum ⚡& Layer 2’s

With the launch of Rari, we can now begin to look to other chains!

And all aboard… 🚂🚂 Next up is Rari’s deployment on Arbitrum! We’ll be looking to our community for input over the coming months, however our first stop for scalability will be both the chain with the most liquidity, and the protocol that aligns most with our vision.

We’ll be regularly updating on our progress, so stay tuned for further community and developer updates!

About Swivel Finance

Swivel is the protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

As announced earlier this week, the restrictions on our guarded mainnet will be lifted today at ~8:00 PM UTC!

The moment we’ve all been waiting for is here! With nearly two years since Swivel’s initial origin as our founder’s first project at ETHDenver2020, and a year since we first established a community and began true development, we are proud to say, “The most capital efficient yield-trading market in web3–Swivel’s mainnet–is now open to the public!”

We’re live with two USDC markets, (and more soon to come):

• March 24th — currently 9.64% APR

• June 23rd — currently 3.44% APR

Liquidity Incentives

Alongside our mainnet launch, we’re announcing the immediate launch of our genesis liquidity incentives!

As described briefly in our litepaper, unlike most protocols, we believe that incentivizing TVL is relatively naive, and as an effective alternative, protocols can target volume.

With that in mind, we’re happy to share the details of our volume based orderbook incentives.

As visualized above, 50% of the SWIV token supply has been reserved to incentivize liquidity across our exchange.

These tokens will be distributed over roughly 4–5 years, with a target distribution of ~5,000 tokens per day for each market.

Of note, the liquidity incentive amounts and distribution structure will be subject to our community’s governance and may be revised over time.

Genesis Incentive Structure

Most contemporary orderbook based liquidity incentives are distributed based on a combination of liquidity snapshots that measure LP consistency, as well as volume based metrics (e.g. dYdX) that help identify market impact.

This combination unfortunately leaves most average users unable to capture incentives for their limit orders, as their minimal participation means they aren’t considered significant enough for rewards.

For our genesis incentives at Swivel, we are instead strictly rewarding volume (recorded on a daily basis).

If a user places a limit order and it is filled, they will be rewarded!

As shown above, for each market, there are 5,000 SWIV tokens allocated per day.

These tokens are then split proportionally based on the limit orders that have been filled in a given day.

In the example above, 0xmons traded 200,000 of 1,000,000 total nTokens that day. Given they committed 20% of the daily liquidity, 0xmons receives 1,000 SWIV tokens, 20% of the daily allocation.

Flexible Liquidity Incentives

Many protocols launch with aggressive incentives, and in the name of user acquisition commit to a long term incentive program that results in the rapid dilution of their token.

We believe that the mistake commonly made is not launching with aggressive incentives, but committing to a long-term static incentive structure.

That said, our liquidity incentives will undergo regular community review to ensure that our intended longer-term market participants are appropriately rewarded.

Toward the end of our second major reward epoch (April 7th), we will review the efficacy of our current incentives, present findings to the community, and discuss a proposal to test an alternative or continue with the current model.

Retroactive Distribution Update

For an updated list of all retroactive distribution recipients, see: Retroactive Distribution Link

The currently displayed rewards may be diluted as additional recipients are added. If your address was not included, and you believe this is a mistake,please make a retroactive distribution request: Retroactive Distribution Typeform

What’s Next

Come on by our Discord, drop some feedback and share your thoughts on strategy! There are a ton profitable strategies to bootstrap, from trading to incentive farming, so come hang out and share your alpha…

Or psyops and wait for others to bring the alpha to you. But bring some 🔥 and you might earn your way into t̷̨̒ḩ̵̥̒̚e̷͙̽̒ ̵̖̇͆b̶̝̍ö̸̦͂a̵̜̟̍̏r̵̢̙̈̕d̸́ͅr̸̰͂̓ỡ̴̧͙o̴͚̔̕m̵̗̿.

We’ll also be at ETHDenver next week to celebrate the launch and our projects ETHDenver anniversary! Come check us out during a couple panels, or just hang out and get help with your hacks!

We’ll also be hosting an AMA next Friday, live from ETHDenver! Make sure to get your questions on down to our Discord’s #AMA-questions channel!

About Swivel Finance

Swivel is the protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

The growth of money-markets like Compound, Aave & Yearn as well as newer entrants Rari and Euler has led to a new yield landscape that provides access to increasingly interesting and complex yield strategies.

ETH & stablecoin lenders will soon be able to earn significant (25%+) yield across simultaneous lending/staking/underwriting, however the volatility of these yields will be significant.

We officially launched our Guarded Mainnet on December 23rd as the most capital efficient solution to combat this rate volatility, and since have launched 2 Compound USDC markets — One maturing in March, and one in June.

These Swivel markets help rate-traders and lenders manage their risk and lock in fixed-yields, while others speculate on Compound’s USDC market rates. In only one month of our guarded mainnet, we’ve had ~$3,500,000 in volume on only ~1,000 whitelisted users (~50–100 DAU)!

Mainnet Launch Announcement

With consistent liquidity growth, the time has now come to open our mainnet up to the public!

We will be lifting our guarded mainnet restrictions on Thursday, February 10th at 5:00 PM UTC, finally bringing Swivel to the wider community.

This launch also marks the genesis of our liquidity incentive program, and represents the true start to our protocol’s progressive decentralization. For more information on liquidity incentives, stay tuned for a follow-up post on our token’s role in the Swivel ecosystem.

Retroactive Swivel Governance Token Distribution

We first introduced $SWIV in our last post on the Swivel DAO and the Swivel Safety Module.

As a quick TL;DR, the Swivel DAO, and SWIV Token’s primary use cases are to:

• Steward the protocol and gather community consensus regarding future technical development

• Ensure stakeholder consensus regarding key protocol function:

• Align incentives among all Swivel stakeholders through programs including liquidity incentives and development grants

• Provide an additional layer of safety to the lenders utilizing our protocol

As an extension of these goals, today we are announcing the retroactive distribution of SWIV tokens to our most important community members and stakeholders.

Retroactive Distribution: Does My Address Qualify?

The launch of our protocol would not have been possible without the cumulative effort of thousands of community members that have continued to contribute to our growth.

Starting with our genesis during Gitcoin Kernel, continuing through a year of iteration and community feedback, and bringing us to our current launch alongside early adopters and liquidity providers, we owe an enormous debt to the community that has gotten us to where we are today.

As a way to ensure these community members are represented in our governance, SWIV tokens have been retroactively allocated to these community members based on their proportional contribution.

~4.5% of our token supply will be distributed across:

• 0.5% Guarded Mainnet Lenders

• 1% Verified Community Contributors (Verified Feedback & Content)

• 1% Gitcoin Kernel Alumni & Mentors

• 2% Compound, Aave, FEIRari (Fei + Rari) & Gitcoin On-Chain Governance Participants

A full list of all currently recorded addresses is available here:

SWIV Retroactive Distribution

If your address was not included, and you believe this is a mistake, please fill out this form: Request Link

Earning Your Allocation

**SWIV **has been allocated to historical users of our guarded mainnet based on a snapshot ending 2–08, 2022, at 08:00:00 UTC. Additional allocation tiers depend on a number of qualifying contributions (described above) since our inception.

To claim SWIV, historical users and contributors must first meet progressive milestones to unlock their rewards.

For every $2,500 traded (in notional value), 100 SWIV tokens are unlocked for distribution. Rewards will be distributed with the completion of our first liquidity incentive epoch on 3–10.

For more information, stay tuned for a follow up post as mainnet launches!

In line with restrictions on the availability of SWIV in the United States, retroactive mining may not be available to users located in, or incorporated or otherwise established in, or a resident of, the United States or any other prohibited jurisdiction. Any accounts that were clearly associated with bot activity speculating on a future airdrop are also excluded from retroactive rewards. Any displayed rewards on a testnet or before 2–10 are not representative of claimable tokens.

What’s Next:

Tokenomics and Liquidity Incentives

For more information on the SWIV token, and its role in our ecosystem, stay tuned for our follow up article as we launch!

Rari & Layer-2’s

With only two markets live on mainnet, one big question we’re asked is… What launches next?

Stay tuned for an upcoming overview of plans for our upcoming Rari integration, as well as our thoughts on everything L2.

We’ll be looking for the community to help decide what to launch next, so keep up with things over at our Governance Forum!

ETHDenver

We’re headed to Denver!

Swivel was started as a hackathon project at ETHDenver 2020, and we’re paying it back as a sponsor of this years ETHDenver 2022 at Denver’s Sport’s Castle.

Come and meet the team throughout the event to either hang out or get help on your hacks, and check out our Founder, Julian Traversa, speaking a few times throughout ETHDenver and Gitcoin’s Schelling Point!

About Swivel Finance

Swivel is the protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

Today, we’re announcing the Swivel Governance Token – SWIV, together with an overview of its purpose in the Swivel ecosystem and its utility in our governance and safety modules.1

NOTE: No distributions have been made, and our token is not yet live. For more information on our token’s distribution/release please stay tuned for a follow up article!

Swivel began nearly two years ago as a hackathon project started during the infamous “Black Thursday” crash. Since then, we’ve survived through the bear market, found an incredible community, launched multiple testnets, and this past week captured our first ~$1,000,000 in volume during our Guarded Mainnet Launch (with only ~100 whitelisted users)!

That said, DeFi’s greatest strength, its permissionless nature, allows grassroot communities to iterate openly and build increasingly interesting financial primitives. Swivel’s long-term goal has always been to push this advantage and create a platform where the most “technical” traders and risk-adverse lenders can both utilize these primitives to create a positive sum.

With this goal in mind, we believe that it is best to decentralize the protocol’s governance as soon as possible to ensure that the community has a proper say in the protocol’s initial growth, and future stewardship.

The Swivel DAO & SWIV

With our guarded launch opening to more users every day, and the cap to be fully lifted in the near future, we are taking the first steps in decentralizing our protocol – establishing an initial DAO structure, and with it, the Swivel Governance Token.

The Swivel DAO, and SWIV Token’s primary use cases are to:

• Steward the protocol and gather community consensus regarding future technical development

• Ensure stakeholder consensus regarding key protocol function:

  • The initiation of new markets

  • The modulation of fees (with the goal of preventing wash-trading and other abusive practices)

• Align incentives among all Swivel stakeholders through programs including liquidity incentives and development grants

• Provide an additional layer of safety to the lenders utilizing our protocol

We will be releasing more detailed information about the genesis SWIV token distribution in the next couple weeks!

The Swivel Safety Module

No matter how many times a protocol may have been audited or how much capital a smart contract might secure, some risk of insolvency or “shortfall” event will always be present.

We plan to mitigate these risks with a combination of various bounties and external insurance programs. However, the primary mechanism for securing deposits on Swivel will be an incentivized smart contract for Swivel Governance Token holders to backstop any smart contract / shortfall event risks.

As a reward for taking on this risk, Swivel Safety Module stakers become the primary beneficiary of fee accrual and other protocol revenues.This model allows us to reward the stakeholders that believe in our protocol most, while also ensuring that the users of our protocol are exposed to minimal risk.

Stay tuned for more information on the Swivel Safety Module (SSM) in the coming weeks!

What Else Is Up?

A lot is happening in the Swivel community & ecosystem!

We’ve got our first AMA tomorrow 1/7 at 9:00 PM UTC! Drop your questions in our Discord’s #AMA-Questions channel!

Tomorrow is also the last day of our #Techsplanation Contest! Get your informational or interesting Swivel / lending content in now!

And most importantly, our Guarded Mainnet Launch is live! Drop your address in #Key-Requests, participate in the events mentioned above, and be an awesome community member to increase your chances of getting a Key!

About Swivel Finance

Swivel is the decentralized protocol for fixed-rate lending and tokenized cash-flows.

Currently live on Rinkeby and on Mainnet, Swivel Finance provides lenders the most efficient way to lock in a fixed rate as well as trade rates, and liquidity providers the most familiar and effective way to manage their inventory.

Website | Substack | Discord | Twitter | Github | Gitcoin | Careers

For our initial release, Swivel v1 will facilitate trustless interest-rate swaps, allowing cautious lenders to lock in a guaranteed yield, and speculators to leverage their rate exposure, placing Swivel in a unique spot within the market.

While we have been hearing demand for fixed-rate lending for some time, and we expect that fixed lending demand will continue to grow, at Swivel we feel that rate hedging and speculation will be the impetus for industry expansion. That said, as the practical source for both fixed-rates and significant rate exposure, we expect that those looking to hedge borrowed positions or speculate on rates will be especially excited to take advantage of the opportunity that Swivel v1 introduces to the Ethereum ecosystem.

Our Story:

In the days before the world stopped leaving their homes, my co-founder William Hsieh and I started working on Swivel, then DefiHedge, at ETHDenver2020. We left ETHDenver with a ton of initial momentum, finished our basic on-chain proof-of-concept and, with some potential investor encouragement, then began working full time on Swivel.

Coming off that push and looking for an opportunity to legitimize the project, we then joined Gitcoin’s Kernel Fellowship Genesis cohort, an experience that has been integral to getting where we are today. Kernel of course accelerated our development, but more importantly introduced us to a community of developers and thought leaders that have been invaluable. Between contributions to our liquidity incentive design from Status’ Andy Tudhope and continuous input from Kernel mentor and now Swivel contibutor Thomas Klocanas, we came out of Kernel with a novel protocol design and the guidance we needed. Further, thanks in part to the investor platform Kernel provided, we were able to come out of demo day with the support of our earliest investors, Imran Khan and Qiao Wang.

And then came crypto twitter! I had recently written an article on fair launch mechanism design and decided to join in on a casual thread started by Multicoin’s Kyle Samani. Apparently I made an impression and Multicoin didn’t hesitate to reach out. Both parties quickly came to the conclusion that Multicoin’s investment thesis aligns with Swivel’s intentions and within a few calls *magic was in the air*. With the support of Multicoin and our prolific DeFi angels, we were then able to be discerning when selecting the rest our support leading to the spectacular group of investors seen below.

Funds:

Multicoin Capital

CMS Holdings

Electric Capital

DeFiance Capital

Divergence Ventures

Angels:

Alex Pack

Imran Khan

Qiao Wang

Ash Egan

Stani Kulechov

Whats Next:

A lot… We’re elated and humbled to have received the support that has gotten us where we are today, but this is just step one.

Hiring:

With the funding provided in this round we can begin scaling our team for the push towards our mainnet release. This is a rare opportunity to get in on the ground floor and make a real impact on the world’s future financial infrastructure and we are hiring our first teammates remotely around the globe. If you know anyone that might be interested in a position, we are now offering an additional $1000 referral bonus, just reach out to Juliant@DefiHedge.finance or through our jobs portal!

Announcements:

We have placed 1500 USDC in a wallet with a freshly generated mnemonic. We have already hidden parts of the mnemonic around all things Swivel Finance and over the coming weeks will be revealing the final hidden words providing hints to any that remain unfound!

The clue for the first mnemonic word is: 13-12, 1-5, 6-16, 17-3, 5-1, 1-5. (within this post!)

For confirmation that you did, in fact, find one of the hidden mnemonics and to confirm their order, dm @TraversaJulian on twitter.

Stay tuned for continuous development, design and research updates and keep an eye out for hints along the way.

Join us on our new Discord and follow us on Twitter to stay in the loop and make sure you dont miss any clues,

—Julian Traversa, Swivel Finance

It happened that not only had the team at CherrySwap released a pooled interest-rate swap mechanism at ETHBerlin 2019, but Paradigm’s own Dan Robinson released a primitive for decentralized zero-coupon bonds around early September 2019.

Since that point, a number of additional products have been proposed, namely UMA’s yTokens, Opium’s SwapRate, SwapNet/Notional, Yield Protocol, and our efforts at DefiHedge.

The large implementation differences between each of these protocols may not be clear, but broadly speaking each project can be categorized as either a collateralized zero-coupon bond, or as a direct, collateralized peer-to-peer swap.

This article highlights these differences, and identifies the projects that we expect will dominate their niche:

DefiHedge: Fixed-Rate Lending & Rate Swaps

Yield: Fixed-Rate Borrowing

Zero-Coupon Bonds:

“A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.” — SEC Glossary ¹

As an alternative to traditional methods of yield payment through interest, decentralized zero-coupon bond models allow users to collateralize their capital in return for a coupon that can be redeemed at maturity.

Through collateralized lending, decentralized zero-coupon bond writers gain leverage on their capital, while committing to pay the debt created by their minted zero-coupon bond upon the coupon’s maturity.

Should these borrowers wish to lock in a fixed rate, they can then sell their coupon, knowing that upon maturity they should be able to repurchase it around expected maturity price, repaying the debt that is owed.

This then allows other users to buy the coupon at a current depreciated price, with the guarantee that they will be able to cash it in for full value at maturity, creating a marketplace for fixed-rate lending.

UMA & yTokens:

Based off Dan Robinson’s 2019 working draft, UMA, “A Protocol for Building Synthetic Assets”, began development of the first working implementation of this sort of collateralized zero-coupon bond, released in August and currently live on Balancer.

UMA’s implementation, as an early primitive, provides a product that works as described. Users can collateralize their funds to mint yUSD, and yUSD of a given maturity is tradable against USDC through a “traditional” AMM on Balancer.

While UMA’s approved collateral currently limits the application of this infrastructure, future users could utilize yTokens to perform a pseudo interest-rate swap. Should aTokens from Aave be approved as collateral, users can mint and sell yUSD, locking in fixed borrowing rates using their yield generating tokens as collateral (though this greatly increases liquidation risk).

Much like other AMM projects, UMA’s implementation has a number of drawbacks:

• High liquidity requirements (Lending, Borrowing, Liquidation, Balancer Liquidity Provision)

• Necessitates slippage

• Requires a number of transactions for most use cases (5 for one swap)

• Inefficient allocation for liquidity providers

• Limited leverage

Additionally, UMA’s liquidation mechanism is particularly punishing for the liquidated party, and requires constant vigilance to contest any liquidation attempts.

That said, UMA’s yUSD still provides a first to market product and a relatively low risk profile.

SwapNet / Notional:

Swapnet, originally named Neutrino Swaps and recently rebranded as Notional, retains much of the same design as UMA’s implementation.

Users deposit collateral to mint tokens that correspond to future cash flows, “fCash”, similar to the minting of yTokens. Users can then trade fCash below price parity using a simple AMM, locking in their rate.

While Notional does not mention their intended rate-swap implementation, based on other similarities it can be assumed that they too plan to allow for the collateralization of yield bearing tokens (e.g. Chai, cTokens, aTokens), facilitating a pseudo-swap.

Given the similarities, Notional’s implementation then retains the primary drawbacks of UMA’s model:

• High liquidity requirements (Lending, Borrowing, Liquidation, AMM Liquidity Provision)

• Necessitates slippage

• Requires a number of transactions for most use cases (5 for one swap)

• Inefficient allocation for liquidity providers

• Limited leverage

That said, Notional’s proposed liquidation mechanism, while simple, may be preferable.

As opposed to a custom mechanism that requires vigilant users, or a system that heavily punishes those who are liquidated (>10% haircuts), Notional simply market sells assets using Uniswap, involving slippage but taking no liquidation cut.

Yield Protocol:

Yield, funded by Dan Robinson’s current employer, Paradigm, is an extension of Dan’s initial 2019 design for decentralized zero-coupon bonds.

Given the other zero-coupon bond models pay homage to Dan’s design, Yield shares much of its basic infrastructure with it’s compatriots.

Users can post collateral and mint yTokens, redeemable at maturity for full face value. These yTokens can then be bought or sold using Yield’s custom AMM, allowing users to lock in fixed rates on their lending or borrowing.

With the two previous models imitating the initial Yield design, Yield retains many of their drawbacks:

• High liquidity requirements (Lending, Borrowing, Liquidation, AMM Liquidity Provision)

• Necessitates slippage

• Requires a number of transactions for most use cases (5 for one swap)

• Limited Leverage

However, unlike the other zero-coupon bond models, Yield implements a custom AMM formula that accounts for the time-based price action inherent to maturity based lending marketplaces.

This improvement provides a consistent rate over time in the absence of trades and allows liquidity providers to allocate capital without exposing themselves to constant time-based arbitrage.

This leaves Yield as the apparent winner within zero-coupon bonds, however it should be noted that Yield also presents the highest risk profile due to their auction-based liquidation mechanism (e.g. Maker on 3/12/2020).

Direct Collateralized Swaps:

Using more traditional mechanisms, direct collateralized swaps allow two users to match with one another while arbitrating swap duration and rate.

For every swap there is a fixed and floating side, and once two orders have been matched, collateral is posted and funds are committed to a yield generating protocol.

Without a need for a collateralized lending layer, these protocols tend to require less liquidity and involve slightly less risk. Additionally, both current models also implement a form of CLOB, which tends to result in less slippage and further reduces liquidity requirements.

SwapRate.Finance

In early 2020, Opium.Team, a protocol for general decentralized options, expanded their product line to incorporate direct collateralized swaps.

While SwapRate lacks a whitepaper or significant documentation, as the first mainnet attempt at direct swaps, they are still worth mentioning.

Once fixed and floating orders are matched, funds are committed to either Compound or Aave, in addition to 10% locked nominal collateral.

Unlike DefiHedge, SwapRate features fixed-rate borrowing and a reduced collateral requirement through the implementation of a liquidation mechanism contained within the base Opium Protocol.

That said, these features come at considerable cost as the risk of liquidation conceptually removes the safety provided by fixed rates; Should the rates vary too much, or your collateral experience volatility, you are at significant liquidation risk.

SwapRate also comes with added overhead and potential contract risk given its additional routing through the Opium Protocol.

DefiHedge:

Coming full circle to our product, a proof of concept has been live on Ropsten since Spring 2020 and we are working towards a hopeful Q4 2020 mainnet release.

DefiHedge may be similar to SwapRate in that they both directly match users, and both require collateral, however beyond that they share no similarities.

Without touching upon their major differences in UX and exchange design, DefiHedge does not cover fixed-rate borrowing, and DefiHedge requires 100% like-kind collateral (e.g. 1000USDC at 5% for 1 yr must be matched by 50USDC).

Once two users are matched, funds are pooled and then minted into interest-bearing tokens. Funds from that point are unable to be accessed until the agreement is complete, at which point one party is returned their capital and fixed yield, while the other is returned the remaining floating interest.

This removes the need for collateral liquidation within DefiHedge agreements, allowing for the only truly “trustless” decentralized swap model.

DefiHedge additionally features negative maker fee’s, which significant reduce market liquidity requirements, especially in emerging/nascent markets. When users compete as makers rather than taking available liquidity, the market is forced inwards, spread reduces and liquidity concentrates.

This results in the most efficient system possible for fixed-rate lending or interest-rate swaps, as users can avoid slippage all together while taking advantage of our low contract overhead, additional maker incentives and reduced market spread.

Workflow for a floating swap using a Zero-Coupon Bond:

1. Dai to cDai

2. cDai collateralized to yDai

3. Sell yDai for Dai to lock in fixed rate

4. Purchase yDai

5. Repay yDai/Remove Collateral

6. cDai to Dai

Result: 6 Transactions for .75x leverage

Workflow for a floating swap using DefiHedge:

1. Place maker order, displacing tx on taker

2. Either wait for other user to release funds or pay the tx fee to release yourself

Result: 2 Transactions for 10-100x leverage

Other:

With the current rate of development, I expect to need to add to this category in the future, but for now this primarily covers the pooled swap design.

CherrySwap:

Another project coming out of ETHBerlin 2019, CherrySwap is the first project that attempted to allow anyone, no matter how little capital, to participate in swaps through pooled liquidity.

CherrySwap’s implementation requires multiple stages. In the first, liquidity providers lock up Dai in return for CherryDai, which is immediately minted into cTokens to earn interest.

Once the lockup stage is complete, other users can begin to take long or short positions as the pooled liquidity takes the opposite side of any given position.

As the pooled liquidity is utilized, rates change such that the pool is intended to stay liquid, however the current design only requires 125% initial collateralization and features no liquidation.

This results in a unique product that is worth mentioning and worthy of future consideration or development, although it’s current limitations and vulnerabilities leave it unfit for production.

Conclusion:

• UMA & SwapNet are effectively the same with slight differences in liquidation/AMM design

• Yield’s time-based AMM makes it the best product for fixed-rate borrowing

• Zero-coupon bond models require additional liquidity layers & involve slippage (removing “fixed” elements)

• DefiHedge offers the lowest risk profile, least transaction overhead and further reduced liquidity requirements

• DefiHedge alone provides significant floating-side leverage

Citations:

1. U.S. Securities and Exchange Commission. "Zero Coupon Bonds." Accessed Sep. 13 2020.

2. Robert Leshner and Geoffrey Hayes. “Compound: The Money Market Protocol.” Feb. 2019.

3. Hart Lambur. “UMA – Universal Market Access.” Dec. 2018.

4. Stani Kulechov. “AAVE Protocol Whitepaper.” Jan. 2020.

5. Dan Robinson and Allan Niemerg. “The Yield Protocol: On-Chain Lending With Interest Rate Discovery.” Apr. 2020.

6. Allan Niemerg. “Introducing yDai.” Aug. 2020.

7. CherrySwap Team. “Liquidity-pool-as-an-automatic-swap-market-maker.” Nov. 2019.

8. Opium Team. “Opium Protocol Whitepaper.” Sep. 2020.

9. Notional Team. “Notional Whitepaper” Apr. 2020.

10. Julian Traversa and William Hsieh. “DefiHedge: A Marketplace for Fixed Rate Defi Lending and Interest-Rate Derivatives v0.2.0” Sep. 2020.