Opium Team is continuously working on connecting main lending/borrowing protocols and creating swap curves, that are an underlying primitive for the financial system. We have added two swap curves for Aave(deposits and loans) on our platform. It was a great pleasure working with the Aave team that actively cooperated and advised us on their smart contracts.
Reminder: the platform is fully decentralized and is based on the Opium Protocol, which is audited and open-sourced. Once logged in, you can choose a maturity date and create an order (that will be matched in the off-chain order book), or you can also pick up an open order from the curve. At maturity, you will receive the difference between the accumulated floating rate and the selected fixed rate.
Aave Protocol is a decentralized, open-source, and non-custodial money market protocol. Depositors earn interest by providing liquidity to lending pools, while borrowers can obtain loans by tapping into these pools with variable and stable interest rate options. Aave protocol is unique in that it tokenizes deposits as aTokens, which accrue interest in real time. It also features access to Flash Loans, the first uncollateralized loan option in DeFi. With 17 different assets, 6 of which are stable coins, Aave Protocol is the most diverse lending pool in the Ethereum ecosystem.
I. Hedging deposits and loans (fixing your rate)
If Alice wants to fix the interest rate on an Aave deposit, she can do it now! In this case, she would need a “paying floating-receiving fixed” swap. At maturity, she would need to pay the effective floating rate (as the name of the swap implies), which she receives from the Aave deposit anyway, and she receives fixed interest from the swap. So, whatever the Aave deposit rate is going to be, Alice will end up with fixed interest!
So, whatever the Aave deposit rate is going to be, Alice will end up with fixed interest!
II. Getting the best out of Aave interest rate fluctuations (with 10x leverage)
Bob sees that the fixed interest rate is currently quoted at 5% at Swap Rate for the next three months. If he thinks that it is, in reality, going to be more than 5%, he can invest 100 DAI into the interest rate swap that pays a fixed 5% and receives the variable rate. If Bob is right and the accumulated variable rate will be, let’s say, 7% on maturity, he will make a 20% return [(7% receiving — 5% paying)*10 leverage] on 100 DAI invested (annualized numbers). Due to the natural leverage of 10x, Bob made a significant return by being long the Aave deposit rate!
Due to the natural leverage of 10x, Bob made a significant return by being long the Aave deposit rate!
At the moment, a couple of simple market makers run on our platform, providing statistical arbitrage between supply and borrowing rates. Simply speaking, the difference between those rates is very stable and almost constant. Whenever a market-maker provides a swap for the supply rate, they can offer an attractive swap for the borrowing rate and vice versa.
We invite other teams to use our APIs for both hedging their exposure at Aave and market-making of swaps. Swaps help to make the whole system more stable. Indeed, if the variable rate becomes volatile, users will not run away from their deposits and loans because they are hedged.
According to estimates, the size of the global interest rate swap market was more than 500 trillion USD in 2019 in nominal terms and 12 trillion gross.
Interest rate swaps are essential primitives of the financial system and a very significant part of the global derivatives market. According to estimates, the size of the global interest rate swap market was more than 500 trillion USD in 2019 in nominal terms and 12 trillion gross.
We deployed Swap Rate recently, but we have already had a lot of interest in market making and have also seen a natural demand for hedging. We believe that, after a while, interest rate swaps will be a fundamental part of the DeFi community.