Why Trade Rates?

Pegasus Finance
5 min readFeb 17, 2022


At Pegasus, we’re building a novel DeFi primitive: the Interest Rate Perpetual. It’s a perp that tracks the ETH value of an underlying interest rate (e.g. Aave USDC borrow APY). If the borrow APY is 6%, the perp is priced at ~0.06 ETH. If it’s 10%, the perp is ~0.10 ETH. Learn more here.

What this means for you, is that for the first time in DeFi, you can directly speculate on interest rates by directly longing and shorting Pegasus’s interest rate perp.

Why tf do I wanna do that?

After hearing this, you are probably wondering why in the world anyone would wanna do this. After all rates are generally single-digit and they seem boomer tradfi af (interest rate derivatives do 400T in volume annually in tradfi). Why would you as a degen want to trade that beta crap?

Trust me, rates can be hella fun.

Interest rates are volatile. Compound’s USDC Borrow APY fluctuated between ~4% and ~10% around Nov ’21. If you had longed the rate mid-Oct, you would have 2.5xed your capital within a month. If only Pegasus was around back then, eh?

Think that 250% gain is sick? Now, what if you had levered up 2x? How about 5x? 15x? Pegasus’s interest rate perp lets you do that with ease.

The Narrative Behind Rates

That said, trading rates go beyond just blind speculation — you don’t just long/short and inshallah. Rates have fascinating dynamics behind them. This means by trading rates you get to express your views on prevailing narratives in crypto. My smooth brain hardened from thinking about rates — I’m sure yours will too as you trade.

Let’s look at a couple of different types of DeFi rates and see what drives them up/down.

Borrow Rates

These are the borrow APYs on your favorite lending platform (Aave, Compound, etc.). They are fundamentally driven by demand for a pool’s token. Higher demand, Higher rate. Fascinating mechanics drive this demand.

Compound USDC Rate

If we look at the compound USDC rates, we see a rise in rates in Oct-Nov followed by a significant decline in rates. The rise Oct-Nov, coincide with the bull run and the decline thereafter coincide with the bear-ish sentiments after. So, the demand for USDC was probably driven by folks seeking to lever up more on crypto perps/other tokens. So by trading USDC rates, you are expressing your view on that very broad crypto market sentiment.

That might be a boring example. Doesn’t get the degen, sigma chad in you going. I get it. So, let’s get into the fun stuff.

Aave CRV Rate

Just look at that crazy volatile chart — looks like a goddamn mountain range. A core part of what’s driving that volatility is the Curve Wars. Learn more here. At a high-level, protocols & whales want access to Curve tokens, so that they can vote to drive more Curve token reward emissions to LPs of their preferred pools. Folks hence borrow CRV in those pools to get more voting power over reward emissions. These reward emissions are voted on a weekly basis which tends to correspond to those peaks in the rate chart.

So by trading CRV rates, you are expressing your view on how heated the Curve wars are going to be over a particular time period.

Aave AMPL Rate

If you thought the CRV charts were nuts, here’s something better.

AMPL is kind of a stablecoin that tries to maintain a peg to $1 by tweaking its supply. When the value of AMPL > $1, holders have their balances increase proportionally. When the value of AMPL < $1, holders have their balances increase proportionally. When AMPL breaches its dollar peg and folks borrow it in anticipation for the rebase back down to ~$1, driving the sudden rate spikes we see on the chart.

So by trading AMPL rates, you are trading on a prediction market on whether AMPL is going to lose its peg in the near term.

Funding Rates

Another class of rates in DeFi rates are funding rates in perp derivative exchanges. Funding rates are used to balance longs and shorts in perp exchanges. If the amount of longs exceeds the shorts, longs pay a funding rate on their position amount every couple of hours. How big the funding rate is depends on how big the imbalance is between longs and shorts. The opposite applies when shorts exchange longs.

Spot Perp Funding Rates

Here’s a look at BTC Perp funding on FTX.

Funding rates here basically reflect market sentiment on the future price of BTC. If it’s highly positive, the market is highly bullish on BTC. If it’s highly negative, the market is highly bearish on BTC. One could argue that the spot price of BTC itself is an indicator of the above, but there have been multiple cases where funding has been close to 0 but BTC prices have been relatively high. For you degens, funding rates are more volatile than the spot price of BTC. MUCH more fun.

Squeeth Funding Rates

Squeeth is one of the coolest latest inventions of DeFi. It’s essentially a perpetual on top of ETH². Folks can be long or short on squeeth. A more detailed treatment of Squeeth can be found here.

What’s interesting about squeeth is that its funding rate is essentially the (volatility of ETH)². Some big brains have posted about this here and here. What this essentially means is that when you trade a perp on the funding rate of squeeth, you are basically expressing your view on the volatility of ETH. Such a perp essentially functions as a volatility index, similar to VIX in tradfi.

Rates are Cool

If you made it here, you are truly a gigabrain, sigma chad. And I’m sure you are already itching to be a Pegasus Rate Tradoooooooooooooor. Our perp trading platform will be launching soon so follow us on twitter and hop into our discord.



Pegasus Finance

A retail focused interest rate perpetual on Optimism