Introducing the Interest Rate Perpetual
TL;DR: We are building an exciting new DeFi product, the interest rate perpetual. With Pegasus, traders can get direct long and short exposure to DeFi yields & interest rates.
From the get-go, DeFi has been about bringing financial products, once only available to a select elite few, to the common person. DeFi platforms have taken “complex” financial products and built accessible, user-friendly trading experiences around them. On top of that, retail traders themselves have become incredibly sophisticated — demanding newer, more interesting financial products. A decade ago, retail traders didn’t have easy access to even stock trading. Now, they are trading perpetual futures on dYdX, options on Lyra and novel products like Squeeth on Opyn. That’s incredible, exponential progress.
We believe interest rate derivatives are the next set of products to continue this momentum. After all, there has been an explosion in yields and rates in DeFi. Money markets such as Aave & Compound have matured over the past year, offering more assets with deeper liquidity. As of Jan ’21, the Aave USDC pool has $3.7B in TVL, of which $3.2B is utilized. And the borrow rates in these pools fluctuate a fair bit — providing a new vector for traders to trade on. From Oct — Dec ’21, Compound’s USDC borrow rate fluctuated between 4% and 12% — a 3x difference.
That said, interest rate derivatives aren’t new to DeFi. Protocols such as Element, Sense, Notional & Voltz have built compelling offerings focused on bringing yield stripping & fixed rate products to DeFi. We are incredibly bullish on these protocols and believe that their fixed rate products are going to be integral in onboarding more outside capital into DeFi.
That said, the above protocols aren’t quite retail friendly. These protocols often only allow for speculation across a specific term. This means there’s often a trade-off to be made between user flexibility in terms of when/how long to enter a position and market liquidity being fractured between multiple different maturities. Current products also require traders to jump through multiple hoops to be able to short interest rates. We want to allow traders to open short positions as easily as longs.
Pegasus is focused on building a retail-focused, speculation experience that allows traders to get direct long/short exposure to rates in a user-friendly, flexible way. This is achieved through perps.
How it Works
Each market consists of a perp that tracks the value of an underlying interest rate. For the Aave USDC market, if the current annualized borrow rate is 3.6%, the price that the perp tracks is 0.036 USDC. If the annualized borrow rate goes up to 6%, the price tracked is 0.06 USDC. This tracking is done via funding rates as in other perp markets (e.g. dYdX). Traders can also take long and short positions with leverage.
The trading experience is similar to asset perpetual markets that traders are already used to — allowing for a familiar, seamless experience. At the same time, traders do not have to worry about expiries and terms as they would have to in some of the above-mentioned fixed-rate protocols.
That said, we envision Pegasus Finance as more than just a interest rate perp trading platform. We see it as a core DeFi building block on top of which a vibrant ecosystem of products/protocols will be built: The Pegaverse. Here’s what’s possible:
- Fixed-Rate Borrowing. A product could be built on top of Pegasus which bundles an Aave loan with a corresponding long position on Pegasus’ interest rate perp market. If interest rates rise, the increased interest paid is approximately offset by gains made through the long position.
- Locking in Yields for DAOs. DAO Treasury management tools can tap into Pegasus’ yield speculation markets to offload risk to speculators and lock in approximately fixed yields, allowing for easier financial planning.
- Interest rate swaptions. As more DeFi interest rate products get built, options on interest rates swaps would naturally follow. Pegasus could allow swaption protocols to hedge risk for their LPs, similar to how Lyra does it with Synthetix.
If any of the above sounds interesting to you and if you have any ideas on products that could be built in the Pegaverse — please reach out to us on discord. We’d love to find a time to chat! Building a vibrant community of talented individuals and an ecosystem of powerful protocols is a high priority for us!