In the world of conventional finance, market participants can exchange future interest payments with each other. This is often done as a way to hedge losses, manage credit risk, or speculate that interest rates will rise or fall depending on future market conditions. These swaps can occur in the form of solid-to-liquid swaps, liquid-to-solid, or liquid-to-liquid swaps, each of which is a type of derivative contract. When the swap occurs, the parties do not take ownership of the debts of the other party. Instead, under a derivative contract, interest rates are exchanged while the cost of the loan (national asset) remains with the original party.
In a so-called “vanilla swap”, one party gets risk protection at a fixed rate of interest, while the other gets the chance to profit from a lower floating rate of interest. For example, a small entity may be willing to sell the risky variable interest rates to a larger entity willing to take on the risk of fluctuations in interest rates. In return, the smaller organization will get a fixed rate of interest, which allows for better financial planning. The volume of the OTC derivatives market is huge – according to the latest data from the Bank for International Settlements, the face value of interest rate derivative contracts recently reached 488 trillion dollars.
Unfortunately, the interest rate swap market has not changed significantly since the 1980s. Since then, it has suffered from high bank fees and high settlement costs, often as a result of monopolistic institutions dominating the market. For this reason, Decentralized Finance (DeFi) is seen as an obvious solution to get rid of intermediaries with a comprehensive and scalable solution, including the Ethereum-based Tempus protocol.
DeFi switch solution
Tempus is built on top of the Ethereum (ETH) network, which is a decentralized secondary return market that allows users to lock or speculate on their earnings. An essential part of the protocol is the TempusAMM smart contract, a customizable AMM that allows users to participate in Yield Tokens (YBT) in a pool with a fixed maturity date and either earn a fixed rate of interest or speculate on future earnings for the sake of profit. . Once deposited, YBT Tempus splits these tokens into payout tokens and tokens. Users can then exchange these tokens for each other using TempusAMM. In this way, Tempus allows parties to access an unreliable version of traditional interest rate swaps.
David Garay, co-founder of Tempus, said: “The AMM acts as an indicator of the perceived return of the market on our pools and is the counterparty to every trade. The source of fixed income in our protocol is users who trade all their profits to Managers through AMM and redeem them with the principal amount of the underlying asset at maturity.”
In practice, these switches are built on stable clusters of Balancer v2. Exchange fees are also paid to liquidity providers who are compensated in two ways: through exchange commissions and income from providing liquidity.
Each group follows different rules and has a different due date, and it all depends on the underlying protocol. Tempus also has a simplified user interface that is easy to access so that users have minimal hurdles to manage returns.
More information about TEMPUS here
Additionally, the platform addressed concerns about fragmented yield farm liquidity, where stack coins and other support tokens are needed to create automated market makers (AMMs). As a general rule, half of these pools should be in the support code and the other half should be a returnable agricultural asset. As a result, liquidity providers only earn half the liquidity they would otherwise earn. Tempus handles this, for example, by converting ETH to stETH using Lido. From there, the liquidity will be channeled against capital and return. Tokens offer a fixed interest rate, while tokens offer a variable interest rate. Users can then switch between these two icons as they see fit, depending on their risk profile.
Future profits for the masses
Using Tempus as an Ethereum-based protocol, the team is preparing for the upcoming launch of Ethereum 2.0.
We have identified strong institutional demand for risky flat rate investments in ETH 2.0, which will be our main focus in the coming months. Risk-averse investors want more confidence in future investment returns,” says Garay.
Tempus was launched on the Ethereum mainnet on December 15, 2021 and is currently live.