Bessie Liu

<div id="highlights-block_6357f6b01683d" class="highlights">
 <ul>
 <li>Community members will be able to earn soulbound tokens through participating in on-chain activity</li>
 <li>Roughly 15,000 community members are active on Voltz’s Discord platform, according to Simon Jones, Voltz Labs CEO and co-founder</li>
 </ul>
 
</div>



Interest rate swap automated market maker Voltz has made the decision to move its community on-chain after a series of Discord hacks plagued Web3.&nbsp;



Members using the new open-source tool will be able to verify their identity in a programmatic and composable way, and will have the opportunity to earn so-called soulbound tokens through participating in activities and tasks within the community.



Based on their participation in DAO activities, these tokens can later be redeemed or minted at the end of each quarter.



The concept of soulbound tokens was introduced by Ethereum co-founder Vitalik Buterin. It could be described as a non-transferable NFT that represents an aspect of a user’s identity and their achievements in Web3. Ethereum layer-2 network Optimism <a href="https://cms.blockworks.co/blazing-an-optimistic-trail-on-ethereum/" target="_blank" rel="noreferrer noopener">was an early adopter</a> of the concept.



In an interview with Blockworks, Simon Jones, the CEO and co-founder of <a href="https://cms.blockworks.co/?s=voltz" target="_blank" rel="noreferrer noopener">Voltz Labs</a>, said the decision to move its community on-chain happened after a team member&#8217;s account was compromised.



“It put us in a position where we really began thinking deeply about our community and the fact that it all exists in what is a centralized single point of failure, where if one thing was compromised, you are at risk of losing a whole bunch of infrastructure that exists around your community,” Jones said.



By moving activity on-chain, Jones said that even if the Discord server completely falls apart, the community will still be able to exist.



“It kind of introduces an element of Sybil resistance because you are earning these tokens into a non-transferable single address wallet,” Jones said.



An estimated 15,000 community members are active on Voltz’s Discord channel today, according to Jones, and the process of moving them on-chain is something he sees as a “more Web3-native way of building a future.”



“As soon as you take something out of the centralized service, and you put it on-chain, it expands what can be built on top of it,” Jones said. “It’s the composability that is really exciting.”



Voltz locked in Aave- and Compound-based stablecoin rates <a href="https://cms.blockworks.co/interest-rate-swap-protocol-voltz-onboards-lido-and-rocket/" target="_blank" rel="noreferrer noopener">earlier in July</a> and has been steadily growing by 30% to 40% each week, according to Jones.&nbsp;



“It’s exciting that we&#8217;re not just innovating from a protocol perspective, but we&#8217;re also innovating from the perspective of building a community in Web3,” he said.



Updated Oct. 25 at 2:07 pm ET.



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In Search of a Discord Alternative, One Protocol Built Its Own

Brian Nibley

<div id="highlights-block_62eae404d273e" class="highlights">
 <ul>
 <li>In response to anticipation surrounding the Ethereum Merge, Voltz Protocol launched interest rate swap pools for staked ETH on Lido and Rocket</li>
 <li>Interest rate swaps (IRS) on staked ETH allow traders to bet on Ethereum&#8217;s ability to deliver higher yield post-Merge</li>
 </ul>
 
</div>



In a recent <a href="https://twitter.com/superphiz/status/1547643255335968771?s=20&amp;t=f8FqMmx4zzgAGNCMhvYVYA" target="_blank" rel="noreferrer noopener">tweet</a> from the Ethereum Foundation&#8217;s Tim Beiko, Tim laid out a four-step roadmap that places the Ethereum Merge date on the week of Sept. 19. The success of previous testnet launches has many Ethereum investors hopeful that the Merge will happen by the end of the year.



In response to this increased anticipation, <a href="https://www.voltz.xyz/" target="_blank" rel="noreferrer noopener">Voltz Protocol</a> launched interest rate swap pools for staked ETH on Lido and Rocket. These pools offer a different way to trade a 2022 Merge. Instead of previous tactics based on the price of ether, this one is all about yields.



Some market observers believe staking yields could rise by 2x to 3x. According to <a href="https://www.blockworksresearch.com/research/the-merge-what-effects-will-it-have-on-eth/" target="_blank" rel="noreferrer noopener">Blockworks Research</a>, a 4.9% yield could turn into 10.25% if total staked ETH remains the same after the Merge.&nbsp;



Read more: <a href="https://cms.blockworks.co/the-investors-guide-to-the-ethereum-merge/">The Investor&#8217;s Guide to The Ethereum Merge</a>



Of course, multiple variables could produce different results, including a postponed Merge. Regardless of thesis, bullish and bearish spectators have various tactics they can take to trade the Merge.



<h3 class="wp-block-heading">Previous ETH merge trading tactics</h3>



Before launching interest rate pools for liquid staked ETH, traders had three fundamental approaches to trading the Merge. They could either stake ETH, buy staked ETH at a discount in an arbitrage trade, or use options. The first two tactics are for bullish investors who are waiting for Ethereum to one day merge with the proof-of-stake Beacon chain. It&#8217;s a play not confined to a specific time frame.



Using options, however, allows traders to bet on the Merge before the option expiration date. But unlike the first tactic, options trading has nothing to do with predicting future yields. It is a trade that predicts the future price of ether. While the Merge is undoubtedly a significant event for the cryptocurrency, it isn&#8217;t the only variable affecting its price. A successful Merge may even be a sell-the-news event.&nbsp;



But even if the price of ether drops post-Merge, interest rates on staked ETH may still rise, benefiting anyone holding staked ETH or staking ETH.



<h3 class="wp-block-heading">Trading ETH staking yields</h3>



According to Voltz Labs, interest rate swaps (IRS) on staked ETH allow traders to bet on Ethereum&#8217;s ability to deliver higher yield post-Merge. But unlike holding staked ETH, it offers investors the potential to access leverage on those yields. Voltz Protocol was one of the first to pioneer this financial instrument in DeFi. The experts at Voltz Labs sat down with Blockworks to explain this trade in greater detail.



On the Voltz Protocol, IRS trading has two sides. One is a fixed taker (FT), where traders swap a variable rate for a fixed rate of return. On the other side of the trade is a variable taker (VT) who swaps a fixed rate and winds up with a variable rate of return.



For example, if a trader is bullish on the Ethereum Merge having a positive impact on rates, and wants to expose their yield to leverage, they would consider taking the variable rate. To do this, they would deposit ETH as margin to cover the fixed rate of their position. If variable rates go up beyond the fixed rate they have “sold”, they would generate yield.&nbsp;



Voltz Labs emphasized that leverage plays an important role in IRS trading, primarily because movements in rates tend to be small. Therefore, the variable taker’s ability to make an attractive return in this scenario may depend on the leverage used on their deposit. They explained that adding leverage means more potential upside, but it also increases downside risk, making these tools better suited for experienced traders.&nbsp;



On Voltz Protocol, traders only need to deposit the underlying token (ETH) to enter positions in the stETH or rETH pools. This is due to the way the protocol synthetically conducts the swaps, allowing for a high degree of capital efficiency as well as flexibility for traders, liquidity providers, and developers. Moreover, <a href="https://www.voltz.xyz/resource-centre/safe-leverage-on-voltz" target="_blank" rel="noreferrer noopener">Voltz Risk Engine</a> helps traders analyze the risk of using leverage.



If a trader is bearish on the Merge&#8217;s outcome, they would consider a fixed taker position. In this instance, they would take the fixed rate offered on Voltz Protocol. This could offer a hedge in the case that the Merge is not able to deliver on yield expectations.&nbsp;



<h3 class="wp-block-heading">Betting on a 2022 Merge</h3>



Since the two staked ETH IRS pools expire at the end of 2022, variable takers are essentially betting on a 2022 ETH Merge. If staked ETH yields do go up this year, variable takers in these pools could see attractive rates of return.



A recent <a href="https://www.voltz.xyz/resource-centre/the-true-way-to-trade-the-merge" target="_blank" rel="noreferrer noopener">Voltz Labs’ post</a> on trading the Merge expands upon the opportunities and risks of interest rate swaps and walks through a sample trading strategy.



The Merge is arguably a make-or-break moment for the Ethereum protocol — so much so that alternative layer-1 blockchains have emerged in doubt of its promise to deliver sustainability. The outcome will likely not be so black and white, but the stakes are undoubtedly high. These new staked ETH IRS pools offer experienced investors with a rich and comprehensive understanding of the Merge the ability to put their thesis to the test.&nbsp;



This content is sponsored by Voltz Labs.



Disclaimer: Nothing in this sponsored article and Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockworks is not a fiduciary by virtue of any person&#8217;s use of or access to the Site or Content.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



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A Different Way to Trade the Merge

<div id="highlights-block_62a01c9c0e8c1" class="highlights">
 <ul>
 <li>When trying to replicate interest rate swaps in DeFi, &#8220;you can&#8217;t just copy and paste the way it works in TradFi,&#8221; Voltz Lab CEO says</li>
 <li>New DeFi financial products allow for a greater range of financial services and trading capabilities for users</li>
 </ul>
 
</div>



Interest rate swaps grease the wheels of traditional finance. With a market size of $1,000 trillion, it helps corporations, banks and nations manage their debt. Investors who use this derivative can exchange an asset&#8217;s interest rate with another party. Fundamentally, it provides scalability and complexity to a global financial system.&nbsp;



Some argue the inability to create decentralized interest rate swaps has inhibited the same scalability and complexity needed for the <a href="https://cms.blockworks.co/the-investors-guide-to-defi-2-0/" target="_blank" rel="noreferrer noopener">DeFi</a> sector to grow.



For more on the importance of interest rate swaps and the implications of their inclusion into DeFi, we spoke with Simon Jones, CEO of <a href="https://www.voltz.xyz/" target="_blank" rel="noreferrer noopener">Voltz Labs</a> — a pioneer in decentralized interest rate swaps for DeFi.&nbsp;



<h3 class="wp-block-heading">What are interest rate swaps?</h3>



An interest rate swap in traditional finance is a derivative contract that consists of two counterparties agreeing to exchange (or &#8220;swap&#8221;) one flow of future interest payments for another. Both parties agree they would prefer the other&#8217;s interest rate arrangement, and so they both enter into a contract to swap future interest payments with each other. Swaps usually involve the exchange of a variable or &#8220;floating&#8221; interest rate for a fixed interest rate.



A variable rate will see increased returns if interest rates rise, while a fixed rate will see diminishing returns relative to the variable one.



<h3 class="wp-block-heading">The significance of interest rate swaps</h3>



Whether you&#8217;re familiar with such swaps or not, they provide the necessary mechanism for many modern financial products.



Interest rate swaps &#8220;support a wide set of use cases across speculation, risk management, and product construction. This includes structured products for corporates and fixed-rate mortgages for retail,&#8221; Jones said.



He added that it would be much more difficult to &#8220;address the financial needs of the system&#8221; without interest rate swaps.



<h3 class="wp-block-heading">The challenge of introducing swaps into DeFi</h3>



Things work differently in the permissionless, decentralized world of DeFi. Constructing DeFi derivatives is a relatively new concept that presents some unique challenges.



Jones noted that when trying to replicate interest rate swaps in DeFi, &#8220;you can&#8217;t just copy and paste the way it works in TradFi.&#8221;



One of the reasons for this involves the legal framework surrounding counterparty risk in traditional finance. Such swaps come with the risk of the counterparty defaulting on their debt, in which case, it would be difficult for the other party to collect what they are owed. In traditional markets, a set of rules and regulations are put in place to deal with such a situation, should it arise.



No such framework exists for DeFi. But industry leaders can build systems in such a way as to make that framework unnecessary.



As Jones put it, &#8220;when entering into a swap in traditional finance, you have counterparty risk since it&#8217;s a swap with another party. So they created a whole legal framework, including the use of rating agencies, to support this. DeFi, however, is very different. Instead of having mechanisms for what to do when a counterparty fails, we’ve built a system that removes counterparty risk, meaning it can’t fail in the first place.&#8221;



In addition, he added that considering the utility these instruments provide and working out ways to &#8220;deliver the same utility in an environment with different constraints&#8221; took about six months of research.



<h3 class="wp-block-heading">A new era of DeFi</h3>



What do interest rate swaps in DeFi mean for the marketplace?



According to Jones, &#8220;a spectrum of complexity” surrounds financial product construction. Introducing interest rate swaps to DeFi will open a flood gate of participants ranging from sophisticated speculators to institutions and retail investors.&nbsp;



On the most basic end of that complexity, interest rate swaps in DeFi unlock fixed rate products. For the first time, DeFi users can now take assets with variable rates of return and turn them into fixed-rate assets. Until recently, DeFi users seeking yield have been subject to interest rates that can fluctuate wildly.



Moving toward more complex financial instruments, <a href="https://www.voltz.xyz/#mission" target="_blank" rel="noreferrer noopener">Voltz Protocol</a> can also “unlock products like interest rate caps, floors, covered call payouts, fixed-rate mortgages, swaptions,&#8221; and more. These allow for a greater range of financial services and trading capabilities for DeFi users.



Jones noted that &#8220;teams are building many of these [DeFi financial products] alongside more innovative uses, such as using fixed-rate assets as a form of stablecoin collateralization.&#8221; With recent events in the crypto space, new ways of collateralizing stablecoins will surely interest many. They could be a big help for the development of decentralized markets.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



This content is sponsored by <a href="https://www.voltz.xyz/" target="_blank" rel="noreferrer noopener">Voltz Labs</a>.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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