Strips.Finance Whitepaper

Abstract

Strips Finance is the world’s first decentralized interest rate derivatives trading platform. Interest rate swaps (IRS) allow participants to swap variable interest rates for fixed interest rates. The IRS market is one of the most important pillars of finance. There are currently no great options to trade interest rates in decentralized finance, and Strips aims to solve this problem by building the first natively decentralized interest rate derivatives exchange on Ethereum. Strips will grow to be the premier marketplace for fixed income.

Interest rates touch every single aspect of finance. Strips finance aims to introduce interest rates trading for decentralized finance.

Background

Market Potential

Interest rate swaps are the largest traded OTC derivatives in traditional finance. A 2020 report by JP Morgan estimates the daily volume of OTC interest rate derivatives reached a staggering $6.5trn per day (yes, Trillion). Much of the volume of interest rates derivatives has been attributed to hedging and speculators. Interest rates derivatives have consistently maintained an 80% share of the global OTC financial derivatives market, with a notional outstanding of $435.2trn as of 2018 (JPM). By comparison, FX derivatives only account for 17% of notional outstanding.

We believe that as the DeFi market continues to grow, and attract more capital, there is an unmet demand for interest rate markets. By providing a venue to trade interest rates, we can help yield farmers, speculators, and institutional arbitrageurs to easily hedge their risk and lock in alpha.

Tradfi vs DeFi

The evolution of TradFi vs Defi

Strips is the final missing piece of decentralised finance.

Interest Rate Swaps: Fixed-to-Floating

The most common IRS contract is the fixed-to-floating model. In a fixed-to-floating contract, one party agrees to pay a fixed interest over an agreed upon term (i.e. 1.25% over 30 days) in return, they will receive a reference floating interest rate (i.e. yUSD vault yield over 30 days). In such a scenario, there is only an exchange of cash flows between the buyer and seller of the contract, and no necessary interaction with the underlying yUSD vault. Hence, it is possible to have a much bigger IRS market than the TVL in yUSD vault.

The Problem

The biggest unacknowledged risk in decentralised finance is the fluctuating interest rates that lenders and borrowers pay and receive. In addition, many yield farmers are familiar with project yields that collapse after gaining popularity. This is a far-reaching problem, and no satisfying solution currently exists.

A common problem which traders face is the volatile borrowing rates of USD. In a bull market, USD is very expensive to borrow and trade on leverage, or to capture arbitrage opportunities. As a trader, you are left with no choice but to pay whatever rate the exchange charges. During bull markets, the interest rate to borrow USD can jump from 20% to 100% overnight! However, that is precisely the time when you need dollars the most.

Likewise, if you are a USD lender at 80%, and are worried the interest rate may drop in the future, there is no easy way to lock in your interest yield for long periods of time without taking a haircut.

In addition, basis trading is one of the most common trading strategies utilized in the crypto market, yielding 20–50% returns a year. However, basis trading is simply a multi-step execution of an interest rate swap.

Furthermore, interest rate swaps allow speculators to take a view on the fluctuating interest rates in decentralized finance.

Real world example

Alice wants to enter a yield farm on Nerve.fi that is currently yielding a variable 115% APY. However, Alice is worried that the rate will drop in the future, and she would instead like to lock in 100% yield for 1 year. Alice enters strips.finance and sells the equivalent USD amount in NRV-3Pool perpetual interest rate swaps. After 1 year, regardless of where the yield on NRV-3Pool is, Alice will receive 100% in total yield, combined from her yield farming rewards and profits from her interest rate swap position.

Perpetual Interest Rate Swap

A perpetual interest rate swap allows users to trade any type of DeFi yield.

Funding rate

The funding rate is based on the reference pool/vault yield. For example, the funding rate for the NRV-3Pool market would be the Nerve.fi 3Pool reference yield. For simplicity, we have assumed daily settlement of pnl and funding. However, funding rates will be calculated per block in actual implementation.

Example: Lock in your yield

Alice enters the Nerve.fi 3Pool yield farm, currently yielding a variable rate of 115%. To lock in 100% return for a year, Alice goes on Strips Finance and sells the equivalent USD notional amount of perpetual interest rate swaps. After 10 days, Alice has received 2.68% of yield farming rewards. Alice has received positive funding of 0.05%. In total Alice has received 2.74% (100% annualised) in 10 days.

After 365 days, regardless of where the APY of the yield farm is, Alice will still get 100% in fixed yield.

Introducing Strips Exchange

Decentralized Interest Rate Exchange of ANYTHING.

How it works

At its core, Strips Exchange is a cash-settled interest rate trading exchange. Users deposit collateral on the platform in order to trade various interest rate markets. Users select the reference interest rate they would like to trade (i.e. Nerve.fi 3Pool vault, Bitmex funding rate) and simply buy or sell the interest rate against passive liquidity provided by an AMM. Pricing is automatically adjusted by the AMM, which can be customized for each pool based on parameters.

Initially, users initially will be able to trade with up to 10x leverage.

As Strips Exchange grows, our future roadmap includes bond issuance, bond trading and other fixed income products.

Advantages

• Quick and easy trading interface
• Up to 10x leverage with potential upside
• Deep liquidity from AMM
• Easily speculate on the direction of the interest rates
• Perpetual contracts have no expiry dates
• Trade and earn rewards
• Stake in the insurance pool and earn liquidation fees and liquidation profits
• Participate in the AMM and earn rewards (interest rates are a mean reverting market)

Auto-liquidation Engine

When a trader’s account margin falls below the maintenance margin, the system’s auto-liquidation engine takes over the position, and unwind the position against the market AMM. Insurance can keep the remaining collateral. In the case when markets move sharply against the position and trader’s collateral cannot cover trader’s loss, the difference between collateral and loss will be covered by the insurance fund. In the worst-case scenario, if the insurance fund runs dry, all positions will be auto-closed and flattened against the AMM.

Insurance pools

To protect against liquidation losses, Strips exchange includes a protocol level insurance pool. STRP holders can stake in the insurance pool by depositing STRP-USDC LP tokens. In return for the protection of the insurance pool, the insurance pool receives:

• 5% of all realised profits of all market AMMs
• 5% of all trading fees paid
• Liquidation profits

Strips Treasury will initially seed the insurance pool of approved IRS markets with STRP-USDC LP tokens. Users can create new IRS markets but will not enjoy the protection of the insurance pool unless it is voted by governance. In return, operators will have a claim on the insurance pool. SIP holders will receive 100% of the insurance pool earnings.

Liquidators receive a 0.20% profit on liquidations. The remaining profits are then paid to the insurance pool.

How does Strips calculate the appropriate size of the insurance pool?

We look at multiple factors when determining the minimum size of the insurance pool:

1. The historical volatility of the reference yield pool
2. The age of the reference yield: newer yield pools are riskier (i.e. a new yield farm is riskier than the ycrvUSD yield farm)
3. The assets and liquidity of the reference yield pool: pools with lower TVLs are riskier
4. Qualitative risk assessment of the reference yield pool

Gamification

In order to improve the experience of trading interest rate swaps, Strips plans to simplify the process for users to trade interest rate swaps, including instruction tooltips, gamification, referral programs, and social media challenges.

In addition, we will hold various games and lotteries for STRP holders and traders to participate in. (i.e. traders can participate in a trade lottery and increase their chances of winning by trading more)

• trading badges (level up in terms of volume and % profitability)
• ‘confetti’ when they place their first trade or when they make their first win
• users get a gift box with a random reward the first time they place a trade
• ‘hit’ certain daily tasks
• chance of winning a lottery prize when they trade
• share positions in real-time to twitter

Strips Tokenomics (STRP)

The purpose of STRP is to reward users for using the protocol and participating in governance.

Ticker: STRP

Team tokens: 15% of tokens with 3 years vesting

Seed tokens: 10% of tokens with 3 years vesting

Private vesting: 10% of tokens with 2 years vesting

Treasury: 15% of tokens

Community: 50% of tokens

Maximum token supply: 100m

Distribution to early users

STRP tokens will be distributed to early users of the protocol through trading incentives, insurance farming incentives, and AMM LP incentives. We will also create incentives for participating in the governance of the protocol.

We believe in rewarding the early believers and users of the protocol, and will reward early adopters of the protocol. The Strips treasury will set aside token allocations for rewards for strategic partners and community engagement.

Creating new interest rate markets

To create new interest rate markets, you must deposit an initial amount of STRP-USDC LP tokens as collateral to bootstrap liquidity. New markets may not be protected by the insurance pool until governance vote.

STRP as collateral

We plan to use STRP, and USDC as collateral on the exchange, with the ability to add other assets as collateral subject to 75% approval from the community.

Governance

Strips will give token holders the power to shape the future of the protocol.

STRP holders can stake their tokens in return for voting tokens (vSTRP). vSTRP are tradable in the secondary market and can be used as collateral on the platform. vSTRP is also used to vote on new proposals. vSTRP can be delegated to others to vote on your behalf. Voting and active participation in the governance will be rewarded in STRP tokens. Delegated votes have a 25% reduction in their voting power to prevent any single entity from having outsized control of the protocol.

STRP holders will have the ability to participate in the on-chain governance of the protocol by proposing and voting on proposals.

vSTRP stakers will earn 20% of all protocol fees proportional to their staked amount.

Token Architecture