What are Perpetual Interest Rate Swaps?

TL;DR

  • Firstly, perpetual swaps are a great way to trade with very little capital
  • Perpetual Interest Rate Swaps (Perpetual IRS) never expire
  • Longs profit when interest rates rise
  • Shorts profit when interest rates fall
  • You can trade interest rates without tying up capital
Go long if interest rates rise, go short if interest rates fall. It’s simple.

The Problem Space

If you want to bet on the price of Bitcoin going up, there are many options available to you. You could buy Bitcoin from a spot exchange like Binance, or you could buy futures on FTX. However, if you want to bet on interest rates going up, there aren’t many options available for the user to choose from. You could invest your capital into a yield farm, hold it until the interest rate falls below what you feel is fair, then withdraw your money. Or you could buy yield tokens that expire. However, both approaches are not optimal for the speculator that wants to profit handsomely from interest rates going up or down. Alternatively, for traders who don’t want to deal with the complexity of expiration dates, we have a more accessible option that dominates the crypto markets: **the perpetual swap**.

The Solution — Perpetual Interest Rate Swaps

The perpetual swap is not a new financial instrument. Its origins trace back to 2016. The idea was simple: a way to buy or sell with very little upfront capital. It has no expiry and offers leverage. At Strips, we have invented a new perpetual interest rate swap with all the same features that allow people to speculate on interest rates.

While perpetual swap prices may differ from the underlying interest rate, the funding rate mechanism encourages buyers and sellers to bring the price back in line. Buyers will pay a funding fee if the current interest rate is below their entry price, and they will receive funding if the current interest rate is above their entry price. Now, add the fact that you can take on a position with varying amounts of leverage, and you can start to see why using perpetual interest rate swaps are so attractive.

How Does It Work?

  1. Perpetual IRS does not expire. You can keep your positions open for as long as you like.
  2. Longs and shorts receive or pay funding each day based on the floating rate. It’s just like margin trading, for interest rates.
  3. Buyers receive profits when fixed-rate rises.
  4. Sellers receive profits when fixed-rate drops.

Show Me An Example

Let’s say you believe that AAVE USDC fixed rate on STRIPS will increase from the current 4% to something like 6%. You go on Strips and buy an interest rate swap on USDC interest rate on AAVE to express that view.

Example 1: long $4,000

At the start of November 2021, the interest rate of USDC on AAVE is 4%. You believe that USDC interest rates will go higher. You put on a long $4,000 position on fixed interest rates at 4%. At the end of December, the fixed interest rate increases from 4% to 6%. Your profits are then:

Position: $4,000
November fixed rate: 4%
December fixed rate: 6%
Strips Perp IRS:
1x leverage --> profit +33% 🙂
5x leverage --> profit +166.6% 😃
10x leverage --> profit +333% 😋
AAVE:
Deposit USDC --> profit +0.5% 😢

Example 2: short $4,000

On the opposite side, you believe that interest rates will go lower. You can short $4,000 position on fixed interest rates at 4%. At the end of December, the fixed interest rate has increased from 4% to 6%. Your profits are then:

Position: -$4,000
Entry fixed rate: 4%
Exit fixed rate: 6%
Strips Perp IRS:
1x leverage --> profit -33% 😟
5x leverage --> profit -100% 😥
10x leverage --> profit -100% 😥
AAVE:
Deposit USDC --> profit -2% 😢

What’s Next?

Strips will be holding events in the future to show off the first perpetual interest rate swap market to the world. We plan to become the biggest interest rate derivatives marketplace in DeFi and more. Our vision is to replace the existing archaic infrastructure used to settle $6.5 trillion of interest rate derivatives in traditional finance with much better superior settlement technology on the blockchain. Keep an eye out for our latest updates on Twitter, Telegram, Discord.

Disclaimer

Any past performance, projection, forecast or simulation of results is not necessarily indicative of any investment’s future or likely performance. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Strips Finance.

Strips is currently hiring for several roles. Interested applicants can email their resume and cover letters to jobs@strips.finance.

To learn more, please visit the project’s website at https://strips.finance/ or follow the project on

Twitter | Telegram | Discord

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