Voltz’s Growth Shows You May Need Speculators For Fixed Rates to Work in DeFi

Voltz has figured out a way to spark activity in the so-far sleepy fixed-rate game in DeFi: Make sure there are variable rates for speculators to play.

Voltz crossed the $10B mark in notional trading volume on March 30 and has jumped up another 15% to over $12B as of April 10. The protocol enables traders to swap between fixed and variable interest rates of major stablecoin markets like on lenders Aave and Compound, and the ETH staking rate.

Cumulative Notional Volume. Source: Dune

Further signaling increased activity, a key smart contract for Voltz was the third most used on Ethereum in terms of gas consumption as recently as March 30.

$18 Trillion Market

Voltz allows traders to lock in a fixed-rate loan by matching with counterparties who are borrowing at variable rates, and will take the gain or the loss at the loan’s maturity.

Voltz Protocol Overview

The interest rate swap market in traditional finance is established and huge, worth $18 trillion globally. It allows businesses to borrow at a predictable cost, while investors speculate on rate movements on the other side of the trade.

DeFi developers are just starting to figure out how to build this tool using smart contracts instead of banking custodians and intermediaries.

“If we really want DeFi to become the financial system for the whole of the world, we need to solve this problem,” Simon Jones, Voltz’ CEO and co-founder, told The Defiant in an interview last year. “What interest rate swaps do in [their] simplest form is they enable you to transition from something that is variable to something that is stable, seamlessly.”

Speculators Rule

But with DeFi still detached from productive businesses, Voltz’s success so far has been mostly thanks to speculators.

Jones told The Defiant in a follow-up email that the primary reason for the protocol’s growth is that traders are arbitraging different rates on stablecoins across crypto. He cited the varying rates on different deployments of Aave, as venues which traders can arbitrage.

“Rate markets in DeFi are so nascent there’s a tonne of arb opportunity for traders,” Janes said.

The protocol benefited from a vote from Uniswap governance on April. 4, which allowed Voltz to freely use code from the decentralized exchange’s influential V3 release.

Voltz combines aspects of the automated market maker model popularized by Uniswap, with what the project’s leaders call a Margin Engine, which holds the assets and settles the trades at their maturation.

Fixed-Rate DeFi

Voltz’ is one of a handful of projects in DeFi innovating with fixed interest rates products. But while crucial in the rest of financial markets, this corner of crypto has been slow to take off.

Allan Niemerg, co-founder of Yield Protocol, a fixed rate loan protocol, said fixed rate lending protocols haven’t gained traction in DeFi because “borrowers in the ecosystem are not necessarily very sensitive to interest rates for the most part.”

“If you need USDC and you want to put it in a farm, and you’re hoping to make 20% or more, maybe you’re not so concerned about whether you’re paying 4% or 5% interest,” Niemerg said. “You just want to get it done.”

Niemerg is working on introducing a variable rate component to Yield. “Having the floating rate can make the fixed rate better,” he said.

Next-gen Lenders

Teddy Woodward, co-founder of Notional Finance, another project enabling fixed-rate loans, said fixed-rate protocols are starting to solidify their position in the market.

“Second-generation lending protocols like fixed-rate lending protocols are only just now starting to settle on the models that are going to work long term,” he told The Defiant over email. Woodward named Aave and Compound as first-generation lending protocols which developers have integrated throughout the DeFi ecosystem.

Notional launched a third iteration, called V3, of its own protocol which enabled traders to arbitrage variable interest rates and fixed interest rates, on March 28.

Derivatives Volume

To be sure, in the case of Voltz’, its volume is enabled by derivatives, which traders are leveraging at 200 times their capital on average, said Jones, the Voltz CEO. So while the project has facilitated $10B of notional volume, liquidity providers (LPs) on the platform have only earned $403,000 dollars, according to a Dune dashboard.

Still, the chart for fees is also up and to the right, which is a rarity in the current DeFi market.

Voltz Fees. Source: Dune

With the momentum of Voltz, new releases by Notional, and ones on the way for Yield, a solid group of projects appear unhampered by the lack of interest in fixed rates in DeFi so far.

“My expectation is things will continue to get more and more sophisticated,” Niemerg said.