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Swap.rate and the importance of security deposits within the platform
Swap.rate is a product from Opium, which also makes the OPIUM Protocol.
DeFi projects can have a floating interest rate, which means that you receive 10%, but, in fact, the amount ends up being 5% (or vice versa, higher than expected at 12%). Let's say we invest in Compound. To date, the rate is 5% and next month it could become 10%. Suppose Swap.rate offers a flat rate of 10% on a complex deposit and we want to take advantage of this offer. The denomination of our complex deposit is 100 DAI, which we lock into Compound for a certain period, let’s say 3 months.
If after 3 months the rate we receive on the deposit is only 7%, then the remaining 3% will be transferred from the IRS (interest rate swap) from Swap.rate. And if by the end of three months the deposit rate is 12%, then Swap.rate will take the remaining 2%. In any case, we still get our 10%.
Swap.rate also asks for a security deposit (usually 1/10 of the face value) to guarantee payment from us or to us.
This is important because there are many floating rate deposits, both in fiat and crypto. If you can correctly predict the behavior of the rate, you will make money either way.
Swap.rate is another financial instrument based on the analysis of other instruments (now Aave and Compound). Strictly speaking, it is not the most profitable on the market. However, it’s low risks could draw attention to it.
Suppose someone offers you a fixed interest rate swap of 30% per year. You will likely enter into such an agreement and agree to pay the floating rate together with the guaranteed 30%. You are confident that you will receive much more than you pay. You can use the same logic for a flat rate of 25% and for 20% but not for 1%. This is how swap rates are determined every day - they represent the aggregate market expectation of floating rates in the future. Typically, there are different expectations and different rates for each maturity. The longer the maturity, the more uncertainty there will be and usually, a higher rate can be expected.
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The article is written by Anton Vasilev and Mr. Anton Dziatkovskiy, the co-founder and CEO of Platinum Software Development Company.
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