038 – The Voltz decentralized finance protocol now allows Avalanche users to trade Secured Overnight Financing Rate (SOFR) interest rate swaps, a benchmark dollar rate used throughout the global economy.
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The new feature allows investors to hedge their exposure to changes in interest rates and speculators to bet on whether the rate will rise or fall, according to a May 24 Voltz announcement seen by Cointelegraph.
The SOFR is the overnight lending rate paid by institutions when using U.S. Treasury bonds as collateral. It was created to replace the old LIBOR (London Interbank Lending Rate) rate. Since loans secured by Treasury bonds are considered very low risk, the SOFR is often used as a benchmark for calculating other rates. The SOFR is heavily influenced by the Federal Funds rate set by the Federal Reserve.
In traditional finance, companies have been using SOFR-based interest rate swaps for years to hedge against rate fluctuations. For example, a company looking to borrow money could use these products to hedge against Fed rate hikes.
This traditional financing product available on the Avalanche network, potentially opening up its use case to a broader group of investors.
Simon Jones, CEO and co-founder of Voltz Labs, said the new feature would help level the playing field between retail investors and large institutions. “Everyone is exposed to what the Fed decides to do, but only a handful of institutions have access to the interest rate swap markets that allow them to hedge that exposure, until now,” he said. In his view, the launch of the Voltz protocol makes “traditional financial markets accessible on DeFi rails.”
Traditional financial products have been slowly but surely making their way into DeFi. Securities broker INX launched shares of Greenbriar Capital via Ethereum on April 3 and developed a compliance-compliant wallet for institutions. On April 27, Neobank released a Soulbound token protocol to simplify the “Know Your Customer” process for DeFi. Neobank expects the protocol to enable banks to further integrate into the growing Web3