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An overview of Voltz Protocol for traders and liquidity providers
Voltz Protocol is a game changer for DeFi - creating an interest rate swap market for the first time. This will unlock a wide range of new trading strategies, liquidity provider opportunities and new products for fellow devs to build. By creating this new rates market in DeFi, Voltz Protocol will act as the catalyst for a wave of new products in the sector, helping DeFi become the financial system for the whole of the world.
To help you get up to speed, we’ve put together this TL;DR of the general concepts that underpin Voltz Protocol. In future articles we’ll do deep dives covering a Trading Guide, LP Guide, Builder Guide and details of the AMM mechanic. To stay up-to-date, follow us on Twitter or join in the fun on our discord.
Voltz Protocol is a noncustodial Automated Market Maker (AMM) for Interest Rate Swaps. This means Voltz Protocol allows you to trade interest rates, with leverage. On the protocol, you can exchange ‘variable rates for fixed rates’ or ‘fixed rates for variable rates’.
To make this simpler, we describe one side as Fixed Takers (FTs), where you swap a variable rate and end up with a fixed rate of return. This provides traders with the ability to de-risk their portfolio by ‘locking in’ a fixed interest rate. Whilst we describe the other side as Variable Takers (VTs), where you swap a fixed rate and end up with a variable rate of return. This lets more sophisticated traders increase potential profit capture on the rates of individual assets. The graphic below summarizes the relationship between VTs and FTs along with Liquidity Providers, but we’ll dive into each in more detail.
Fixed Takers swap variable rates for fixed rates of return. For example, you may own an asset that has a variable rate of return, such as cDAI. If you don’t want the uncertainty of a variable interest rate on your DAI, but instead would like a fixed rate of return, you can initiate a swap on Voltz Protocol.
Let’s illustrate this with an example:
In this scenario, if the variable rate of return on cDAI drops to 5%, Alice doesn’t care because she’s already locked in her 10% for the next 90 days.
Let’s pause for a moment. What just happened may seem simple, but it’s a pretty big deal. Alice just took an asset with a variable rate of return and turned it into a fixed rate asset. This is one of the core powers of Voltz Protocol - for the first time in DeFi, the silos between fixed and variable rates have been removed. Or, in simpler terms, Voltz Protocol allows traders to remove uncertainty by fixing the interest rates on their variable rate crypto assets.
It’s important to add that this is not the only way to be a Fixed Taker. You can also enter swaps by depositing the margin in the underlying asset (i.e. DAI, rather than cDAI). When you do this, you’ll be leveraging your position. The use cases for this are different, as you’re more likely to already have a variable liability (e.g. within your DAO Treasury) that you’re looking to hedge. Or alternatively you may be a sophisticated trader, looking to trade rates on leverage. In future posts we’ll explain these use cases in more detail.
Variable Takers swap fixed rates for variable rates of return. In this instance, you’re effectively “selling” a fixed rate in order to get leveraged exposure to variable yield. You’d do this if you believe the variable rate of return will be higher than the current fixed rate price on Voltz Protocol AMM over the course of the term. We expect VTs to have a higher risk threshold than FTs, but VTs also have the potential to reap huge upside in profit.
Let’s play through another example:
If the rate of cDAI then immediately jumps to 20% APY for the next 90 days, Bob just made a large profit. This can be calculated as follows (note for simplicity we assume Bob enters the swap at the point the pool is created):
Variable Rate through term - Fixed Rate of AMM when entered Swap * (Term / 365) * Notional
20% - 10% * (90/365) * 150,000 = $3,699
This means Bob deposited $10,000 as margin and 90 days later left Voltz Protocol with $13,699. If Bob were able to repeat this process through a full year by reinvesting his profit, he’d generate a return of over 250% APY.
The risk here is that if the rate drops Bob will lose money. So we expect VTs to be traders with a view on rates and how they’ll evolve relative to the fixed rate of the Voltz Protocol AMM.
It is worth highlighting that the fixed rate of the Voltz Protocol AMM goes down as more FTs trade. So as FTs trade, we expect VTs to be able to step in and extract significant value from the market in the form of levered exposure to variable yield.
Liquidity Providers (LPs) provide the liquidity necessary for FTs and VTs to trade on the Voltz Protocol AMM. Voltz Protocol AMM uses the concept of concentrated liquidity, which allows LPs to deposit liquidity within tick ranges. This gives LPs more customizability and increases the capital efficiency of their liquidity, which in turn increases fee generation potential. It also ensures Voltz Protocol AMM has deeper liquidity pools within preferred fixed rate (tick) ranges. LPs collect fees when trades are made using their liquidity. When corresponding FT and VT positions can be matched, the LP margin is recycled so it can be used to collect fees from Traders again.
Given these properties, LPs have substantial opportunity to generate fees when depositing liquidity within a range that has balanced amounts of FT and VT trading volume. The combination of concentrated liquidity, margin recycling and the margin engine means Voltz Protocol AMM is up to 3000x more capital efficient than alternative models. Or in other words, it means LPs can generate more fees with less capital.
However, there’s even more upside for LPs. Voltz Protocol AMM only requires LPs to deposit one asset in order to provide liquidity for VTs and FTs to trade. This is because fixed interest rates and variable interest rates on e.g. a cDAI pool are both made in the same underlying asset (in this instance DAI). As a result, LPs don’t have the risk of impermanent loss since they’re only depositing one asset. This is replaced by a different risk that we refer to as Funding Rate Risk, which is explained more in the Voltz litepaper. But still - single asset LPing and no impermanent loss? Bullish.
LFG Voltz Fam!