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The Voltz decentralized finance protocol now allows Avalanche users to trade interest rate swaps at the Secured Overnight Rate (SOFR), the benchmark dollar rate used throughout the global economy.
The new feature allows investors to hedge their exposure to changes in interest rates and speculators to bet on whether the rate will go up or down, according to a May 24 Voltz announcement seen by Cointelegraph.
SOFR is the interest rate on overnight loans repaid by institutions when they use US Treasury bonds as collateral. It was created to replace the old London Interbank Lending Rate (LIBOR). Since loans backed by Treasuries are considered very low risk, SOFR is often used as a benchmark for calculating other rates. 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 protect themselves from rate fluctuations. For example, a company that wanted a loan could use these products to protect itself from Fed rate hikes.
The Voltz feature makes this traditional financial product available on the Avalanche network, potentially opening its use cases to a wider group of investors.
Related: Avalanche Introduces ‘Evergreen’ Subnets to Connect Institutions to the Blockchain
Simon Jones, CEO and co-founder of Voltz Labs, said the new feature will help level the playing field between retail investors and large institutions.
“Everyone is at risk of what the Fed decides to do, [но] only a few institutions have access to interest rate swap markets that allow them to hedge these risks so far,” he said. In his opinion, the launch of the Voltz protocol makes “traditional financial markets available on DeFi rails.”
Traditional financial products are slowly but surely making their way into DeFi. Securities broker-dealer INX launched Greenbriar Capital shares via Ethereum on April 3rd and developed a user-friendly wallet for institutions that can go along with it. On April 27th, Neobank released the Soulbound token protocol to simplify the Know Your Customer process for DeFi. Neobank hopes the protocol will allow banks to better integrate with the growing Web3 ecosystem.