In a recent AMA, our founder Julian and strategy lead Clark joined the DefiAlliance community as they took a closer look at our protocols design incentives and use cases.
With a bit too many questions to include, we’ve picked a few to highlight.
Q: So what do you guys see is necessary to bridge the gap between DeFi and CeFi/TradFi? — Jacob
A: Before anything, regulators need to continue down the path they’ve been on with regard to understanding the underlying technologies and facilitating growth while also adhering to their mission statements.
Beyond regulation, we believe that traditional finance will only be able to cross over when they are provided products that meet the demands of sophisticated investors as far as certainty, security and stability. Once questions surrounding regulation, risks and insurance are addressed, the one remaining is just, “where can I get the best returns for my risk profile?” — Clark
Q: Are there other projects in the same space? Do you see them as competitors or partners? What differentiates Swivel? — Jacob
A: We’ve definitely seen other projects pop up within tokenized cash-flows. That said, with the way we see the DeFi cash-flow market developing, we believe there can be a tremendous network effect if we can all agree on common synchronized maturities. With maturities synchronized cross-protocol, we hope to enable an entirely new sector of cash-flow exchange within DeFi.
Regarding differentiation, depending on specifically the project you’re talking about there is a a lot. Short term, each protocol has taken different directions as far as limits to position fungibility. In our case, Swivel actually plans to have both fungible zero-coupon tokens (principal tokens) and fungible cToken vaults (interest tokens). There are then definitely a few other differentiators, but the big one is our orderbook, and the significantly enhanced capital efficiency it provides for all participants.
— Julian
Q: When you say "unique orderbook model" -- do you mean unique to DeFi or unique to TradFi in general? Why an orderbook model? — Jacob
A: So I say unique because of the specific instrument being traded. You don’t necessarily only have buyers/sellers, but people entering and exiting positions in various credits and debts. This creates a really dynamic supply/demand pricing mechanic that separate marketplaces of principal/interest tokens cant replicate.
As far as why... First and foremost, capital efficiency. An orderbook is simply the most capital efficient way to organize a marketplace and this market demands an orderbook more than most because:
Slippage is more impactful with large lending agreements or leveraged positions
Similarly, vulnerability to frontrunning and sandwich attacks is then unacceptable
Correlations between underlying prices/rates and derivatives are not accounted for in any AMM, making LPing risky as one cannot adjust their orders / capital allocation
And kind of back to my initial point, an AMM model would also arbitrarily require two separate markets for zero-coupon tokens (principal tokens) and interest tokens, whereas our orderbook allows these two markets to coexist resulting in a relative 2x increase in capital efficiency for liquidity providers. — Julian
Q: Can you cover some of the interesting use-cases that Swivel will support atm from a high level? What features are you considering for future versions? — Jacob
A: Our first focus is serving the market of users demanding the ability to manage risk and exchange fixed rate for floating rate, but in reality there are a ton of interesting derivatives that can be created within DeFi.
One interesting use case could be a fixed-floating swap serving ETH2 stakers. Such a service would provide tremendous value, as not only would stakers be able to lock in a yield, but in doing so they would be able to insure against variables within an on-chain staking service.
And a use case pre-ETH2 that isn't often mentioned is hedging against blocktime. Many people don’t realize that interest on Compound assumes blocks take 15s, however blocks currently sit around 13.1s. This means rates are realistically ~13% higher than advertised, but can vary more than advertised as well. When locking in a fixed-yield, lenders avoid this issue altogether.
Beyond these which could be applied to our current product, an immediate thought has always been floating-floating swaps between protocols. However, with the launch of Aave on Polygon, we’ve been considering a lot of interesting variations of floating-floating swaps that potentially serve the ability to effectively exit a lending position on one chain, while entering a position on another through derivative exposure. — Julian
Whats Next:
Test our v1 alpha testnet, out on Kovan!
If you haven’t checked out part 1 of our series on interest-rate derivatives and their potential application in web3, give it a quick read!
Keep an eye out for our community update this weekend and part 2 next week!
And join our discord community! We’re looking for community members that might want to take an active role in managing our communities growth, so feel free to show up and start conversation. You might just end up on team Swivel 😉.
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