3 - 4 minute read
Decentralized finance protocol Voltz has recently introduced a new feature that allows users on the Avalanche network to trade interest rate swaps of the Secured Overnight Financing Rate (SOFR). This benchmark dollar rate is widely used throughout the global economy and enables investors to hedge their exposure to interest rate changes, while also allowing speculators to bet on whether the rate will increase or decrease.
According to a May 24 announcement from Voltz, this feature enables investors to access traditional finance products on DeFi rails, ultimately leveling the playing field between retail investors and large institutions. Simon Jones, CEO and co-founder of Voltz Labs, stated that “everyone is exposed to what the Fed decides to do, but only a handful of institutions have access to interest rate swap markets that allow them to hedge that exposure, until now.”
The importance of SOFR lies in its use as a benchmark to calculate other rates. It is heavily influenced by the Federal Funds Rate set by the Federal Reserve and was created to replace the older London Interbank Lending Rate (LIBOR). This interest rate is based on overnight loans paid by institutions when they use United States Treasury bonds as collateral. Because these loans are considered low risk, SOFR is often used as a benchmark.
In traditional finance, companies have used interest rate swaps based on SOFR for years to help protect themselves against rate fluctuations. For example, a company that wanted to borrow could use these products to protect itself against Fed rate hikes. By opening up the use case of this traditional finance product to a wider group of investors on the Avalanche network, the Voltz feature provides an opportunity for investors to hedge their exposure to interest rate changes.
This move by Voltz is just one example of traditional finance products making their way into DeFi. Securities broker-dealer INX has recently launched shares of Greenbriar Capital via Ethereum and developed a compliance-friendly wallet for institutions to go along with it. Similarly, Neobank has introduced a Soulbound token protocol to simplify the Know Your Customer process for DeFi and enable banks to integrate more with the growing Web3 ecosystem.
The Bottom Line
Voltz’s new feature allowing Avalanche users to trade interest rate swaps of SOFR offers investors on the network the opportunity to hedge their exposure to interest rate changes. This move also brings traditional finance products to DeFi, leveling the playing field between retail investors and large institutions. However, as with any investment, traders should carefully consider the potential risks involved before making any decisions.
