🔀Interest Rate Swap

Interest Rate Swap allows risk-off investors looking for fixed yield to share (or lend) liquidity to risk-on investors looking for enhanced yield. This is achieved by yield tranching that allows risk-on and risk-off investors to become counterparties for one other.

Essentially, Interest Rate Swaps turn a zero-sum game between risk-on and risk-off investors into a positive-sum game wherein one side “provides liquidity” to the other.

This is made possible in DeFi with our tranching module. Tranching splits yield-bearing positions into different tranches with different risk levels. Each yield-bearing position is divided into two kinds of tranches:

1. Fixed tranches for conservative investors looking for stable yield.

2. Variable tranches for risk-on investors seeking enhanced (leveraged) yield.

The yield from the underlying asset flows into the fixed tranches first to ensure consistent returns. Any leftover yield is then allocated to the variable tranches, where additional leverage is applied to boost returns. Compared to the fixed tranche, the variable tranche might accrue more yield, less yield, or no yield.