Bankless - Voltz Protocol | ALPHA LEAK with Simon Jones

Episode Date: June 12, 2022

Voltz Protocol is “a novel defi primitive, powering leveraged interest rate swaps. The first ever synthetic interest rate swap AMM, Voltz AMM utilizes concentrated liquidity, creating a market that���s c.3000x more capital efficient.” With close ties to Uniswap’s V3 model, Voltz aims to disrupt the interest rate swap market, which currently accounts for over $1 Quadrillion (four commas!) CEO & Co-founder Simon Jones joins this Alpha Leak to discuss the mechanics, roadmap, and token(?) for this exciting New DeFi primitive. ------ 📣 METAMASK | The Easiest Buy in Crypto https://bankless.cc/buy  ------ 🚀 SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/     🎙️ SUBSCRIBE TO PODCAST:                 http://podcast.banklesshq.com/    ------ BANKLESS SPONSOR TOOLS:  ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum  ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across  🏦 ROCKET POOL | DECENTRALIZED ETH STAKING https://bankless.cc/RocketPool  👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave  ⚡️ MAKER DAO | THE DAI STABLECOIN  https://bankless.cc/MakerDAO   🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  ------ Topics Covered: 0:00 Intro 6:00 Voltz Protocol 11:15 Interest Swap Markets 16:00 From Chaos to Order 18:45 Leveraged Interest 23:57 How Voltz Works 29:40 Voltz and Uniswap 34:30 Speedrunning Markets 39:22 Voltz Roadmap 43:04 The Magnitude of Yield 46:25 Liquidity Providing 50:08 Voltz Token? 52:07 Get Involved ------ Resources: Simon on Twitter: https://twitter.com/0xSimonJones?s=20&t=LfUW7pisIXvB6IXanyaWsQ  Voltz Protocol: https://www.voltz.xyz/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures 

What that does off the back of that is it actually unlocks a whole bunch of new products and services, which weren't possible until now. Welcome Bankless Nation to this AlphaLeak episode where we cover Volz Protocol. Volz is an interest rate swap AMM. It's got Uniswap V3 code in it, and it helps us arbitrage interest rates across Defi. Inside of one side of the Voltz protocol can go in variable interest rates, and out on the other side comes out stable interest rates. And Voltz is really a market maker. coordinator between these two types of market actors in Defi. Some people are willing to take the risk of volatile interest rates, and some people are willing to pay for that risk being reduced

and get stable interest rates. And Volz is an AMM that allows these two market participants to come together and meet in the middle and allows one person to get stable interest rates and one person to get variable interest rates and perhaps a bunch more yield. There's also the conversation of liquidity providing, since this is using Uniswob. V3 code, but instead of with assets, with interest rates, there's, of course, the possibility of being a liquidity provider and gaining a ton of yield. And Volz really is trying to position itself as like the curve of defy for interest rates, where a curve is where you go.

It's the epicenter of stable coin liquidity or like-kind asset liquidity. Volz is going to be, or trying to position itself to be the epicenter of interest rates liquidity in defy. And we don't really have a single central point of interest rate liquidity. While the interest rate swap market in Tradfai is like a quadrillion dollars, and I didn't just make that up, there is literally a queue. This is a line from Simon in the show. There's literally a queue in front of the volume and yearly interest rate swap market volume in Tradfai. And if there's one thing that we know that DFI produces, it's yield.

DFI is really good at producing yield. And Ave produces some yield for some assets. Compound produces some yield from some other assets. We have the ETH stake rate. We have the USC lending rate. We got the urine yield rate. We have all of these yield rates that are different from each other. And Volz can be a coupler, a center point of liquidity between all of these different yield rates,

allowing people to arbitrage them in a leverage fashion, because that's what Unisop 3 with concentrated liquidity does. The reason why I'm so bullish on volts is that it allows defy to set the market, the interest rate dynamics of the Ethereum economy, right? The interest rates of crypto are set by the market rather than the Fed, right? And so in the Tradfey world, interest rates are set by like 12 dudes in a closed room. There's no input. It's just like it's whatever they say. Under like a volts paradigm or really like, and this is why I'm, again, I really am bullish

on the future of volts. is that Volz allows the market to determine the interest rate. And so just kind of like how Uniswap v3 is an Oracle for prices organically. Like you put in dye into one pool, ether into one pool, and the market balance these things out. And naturally prices die versus eth. Volz can naturally price the interest rates of all defy. And so, you know, this is bullish for just a bankless, permissionless money and finance system where we don't have 12 dudes in a closed room.

determining the cost of money. Instead, we have a protocol to determine the cost of money, and that protocol could be volts. At least that is the bulk case for volts. Of course, I ask, Simon, is there a token coming? What about the token? When token? That question comes at some point during the show, so you'll have to stick around to hear about that. Just as a disclaimer, both Ryan and I have invested in the, as angel investors in volts in previous rounds. So we are access to the upside there. So that's the disclaimer there. So I want to to get right into the show with Simon, right after we talk about some of these fantastic sponsors that make the show possible.

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Welcome Bankless Nation to this episode of AlphaLeak. On today's episode, I'm talking to Simon Jones, co-founder and CEO of the Voltz Protocol. And Voltz recently just went to Mainnet. So Simon, congratulations on that. No, thanks. It's super exciting. Simon, for the listeners that haven't heard of Voltz Protocol or what that is. Can you just explain the high level, explain like I'm five, what is the early explanation for a Bolt's Protocol? Yeah, sure. So the really high level is that we have built out a protocol that effectively brings interest rate swaps to defy. And I guess to talk to the significance of that first. So if you just look at traditional finance as an example, interest rate swaps, they're just a core pillar to a well-functioning financial system. And to put that

in context, there is a kind of almost cartoonishly large quadrillion of notional exchange each year in Tradify Interstrait Swabs. I mean, it literally starts with a queue. And it's that large because it supports such a wide spectrum of use cases, both across risk management, across speculation, but then also across the construction of a whole bunch of different products, both for corporates and for retail. And at the moment in DFI, we don't have this piece of infrastructure. And what that does is, is kind of through it not existing is it limits the amount of products that we can actually build in order for defy to be able to become the financial system for the whole of the world. So by us bringing this to defy, that is what we ultimately really hope starts to happen.

So let's keep things really basic here. What is an interest rate swap market? What is that? Yeah. So there's basically a number of different actors that exist on the protocol. So we have LPs because it's an AIM, but. just to ignore that for a second and talk about the traders, you are either a, what we describe as a fixed taker where you are selling a variable rate of return in exchange for a fixed rate,

or you're what we describe as a variable taker, where you are selling a fixed rate of return in exchange for a variable rate. And if I just talk about two kind of really simple use cases for that, so if you're a fixed taker and you have an asset that produces a variable rate of return, like C-Di, for example, and you don't want that variable rate, what you can do with Volt's protocol is you can deposit C-Di as margin, which effectively enables you to sell a variable rate into the protocol, and in return, you are then converting that into a fixed-rate asset. So you are selling variable in exchanging that for a fixed rate,

which if we just look at that very simple use case, like an interest rate is what market actually opens up a very wide spectrum of use cases, but if you just look at that really simple one, what's really interesting is for the first time in defy, that has actually removed the silos between fixed and variable rates. You have a variable rate asset with a click, you convert it into a fixture asset. If we look at the other side and again,

take a really simple use case, so in this instance, you're a variable taker, you are selling fixed in exchange for variable. The fixed rate of return that you're selling away, if you're essentially wanting to go along the variable rate, so for example, if you believe there's another ball market around the corner and the rates on C-di are going to increase, you can actually get levered exposure to that variable rate as it increases at a time. So the idea here is that there are some

market participants that desire a fixed rate and they will pay some amount of cost in order to access that risk-reduced rate. And so if you lock in 4%, you have removed a lot of risk because you've removed the volatility of the fluctuations of the interest rate. And then there are people who are willing to be paid for taking that risk, who are willing to take the variable rates because being paid to take the variable rates comes with a higher yield, although you just don't know what that yield is because it's variable, but you also don't really care because you're willing to take the variance and the risk and collect what is, like, not a direct payment of a fee, but it's a backdoor fee in the sense that.

you get to charge higher interest rates if you are the one taking the risk of the variance and you are charging people who are de-risking what the yield is by getting a fixed fee. Am I on track here? Yeah, kind of vaguely. I mean, there's a bunch of different actors that will exist on the protocol. But it is highest level. There are people who are more risk-averse and therefore they are willing to sell away a variable rate in exchange for fixed. There's people who are, kind of on that use case, more kind of risk-loving who are basically able to take advantage of the fact that there are these more risk-averse actors in the market. Keeping things, again, a high level, can we talk about why this market is so big in Tradfai? Like a quadrillion, people don't know how to think

about the word quadrillion. That's a very large number. Why is it so big in the traditional markets? Yeah, it's really big because it supports such a wide spectrum of use cases, which exists across kind of three main buckets. So there's risk management, there's speculative, and then there's also the construction of a whole bunch of different products, both for corporates and for retail. And actually, in traditional finance, right, like, so if you had to go to your normal person on the street and say, hey, have you heard of an interest rate swap,

chances are they probably said no. But if you go to them and say, have you heard of a fixed rate mortgage, the chances are they'll probably say yes. And what's actually happening is in the background that in traditional finance, that bank which is constructing, or typically that bank, which is constructing that mortgage for consumer,

they're actually using super low level capital markets infrastructure, i.e. an interest rate swap, in order to package up that product. So when we kind of think about this in the context of defy, you know, if we want these types of products to exist and if we want to increase like this spectrum of kind of utility that defy can provide to people around the world such that defy can become the globe's financial system, right? We need this, this core pillar to exist such that we can start building these products and services. Can you illustrate what defy looks before and after a, like, sophisticated, robust interest rate swaps market? Like, what is the current state of defy? And then what is defy going to be once we have all of this infrastructure around interest

rate swaps built out? What changes? Yeah. So there's actually, if we, if we look at defy today, there's almost a structural problem where defy is structurally variable. And this exists all the way across the stack. So if you go right to the bottom of the stack to your kind of proof of state mechanics, which obviously kind of vast majority of change converging, you know, on a block by block basis due to supply and demand dynamics, the rates of emissions, which miners are able to generate change. Right.

So you have right at the lowest level, you have variable rates of return coming out of the ecosystem. on top of that you've got protocols. So if you think of, say, Avian compound, just as examples, again, supply demand dynamics mean that the rates of return change on a block by block basis. And then on top of that, if you're a trading firm or you're trying to build products or kind of that you distribute to retail or whatever, even if you deploy some sort of market neutral strategy, you are doing that on top of an ecosystem that's structurally variable. And what interest rate swaps unlock at the most macro level is it enables us to build a system where we have structural stability for those that want it.

And that it kind of opens up this whole spectrum of different use cases and products and services that can be built, which kind of span across different retail use cases, so that could be stuff, which is on one end of the kind of complexity spectrum, stuff that's relatively simple, like fixed, volts, all the way through to actually at the other end of the spectrum, you can start building, for example, fixed rate mortgages on chain. And there are teams that have reached out to us since we've gone live, kind of exploring that as an idea. And then on the corporate side, you actually have stuff where you can do stuff around risk management and you can also do stuff around speculation. So if we talk to risk management as an example, you may have a CFI lending business, for example, which is kind of promising, say, fixed rates of return on one side.

but then a kind of lending out variable rates on the other. And actually what they have at a balance sheet level, when you aggregate that up, is they have a rate liability, and they have no way of hedging that risk on chain. And all of a sudden, with VALTS, you can do that, which enables them to be more stable as an entity

and therefore start to expand the products and services that they can offer. And then on the speculation side, what's actually really interesting is you can build, because it's a derivative and you can trade rates, just like you can speculate with, kind of like crypto assets, you can actually build a whole bunch of really interesting trading strategies that take advantage of kind of different rate markets and the way in which those rates are produced and the fact that they kind of at times, for example, may diverge and you believe

they're going to converge. And because you can do that and trade that exposure on volts with leverage, all of a sudden it's 100 basis points, which 1% kind of like change. Actually, if you're doing that with 100x leverage, it becomes really attractive. So there's a, there's a more. much wider spectrum of use cases which then get opened up off the back of it. In crypto has this branding of being this like chaotic, volatile, unstable wild west. And perhaps it's because we don't have some infrastructure like this, which really creates like solid foundations for people to make like longer term plans. And so if some like big institution with a bunch of capital comes in, they need solutions to

lock in their interest rates so that they can think in the long term. right? And like, you know, my model for this is that the crypto industry starts extremely degenerate, extremely speculative, extremely unstable, extremely volatile, but as it grows and grows and grows, both in just like amount of capital, a number of users, but then also like sophistication of financial primitives, all of a sudden we come up with tools to turn what is a chaotic, unstable place into a orderly, orderly markets with solid foundations. And like the cool thing that I'm seeing here with this is that you have two parties, one that is the volatile party and one that is the non-volatile, the stable party, and like the stability can come on the backs of degenerates, right?

Like people that are trading with like a thousand X leverage on interest rate variance, and if they are right, they get a bunch of money, and the people that are looking for the orderly institutions can ride off of the liquidity of like the DGens who are taking a bunch of leverage with interest rates. How do you like that take? Is that a good take or what would you change? No, I think there's definitely part of that, which I like completely agree with. I mean, it's completely fine for elements of like, I have absolutely no issue. I think it's amazing that there's parts of the defy that are kind of volatile. It's like lots of speculation. It's a completely legitimate thing to do with your money. But there's also, if we really want defy to become the

financial system for the whole of the world, there's also a whole bunch of other people who, don't want that. And actually the existence of an interest rate swap market enables defy to exist for both sides of the market and actually, frankly, enables those different types of kind of actors with different risk appetites to almost be able to kind of play off the fact that there are different people with different risk appetites. And you can effectively exchange that difference in risk appetite with one another. Yeah, right. This is, Volz seems like it can be a coordination tool between the risky and the risk averse. It allows the risk averse to find their other half to balance each other out to create a stable foundation.

In many ways, yes. And then what that does off the back of that is it actually unlocks a whole bunch of new products and services which weren't possible until now. So a good question about how Voltz actually works under the hood. We already have like stable interest rate options. Like AVE has stable interest rates in its protocol when you borrow like USDC or die or anything, really. I think you can get a variable interest rate and pay a lower fee than what is offered for a stable interest rate. So, like, either you can lock in, like, a 3% USEC borrow fee, or you can get a variable interest rate, which will be something like 2.5% or 2%, but then there's the chance that that variable interest rate goes up to, like, 5%, or perhaps even down to 1%. But we already have this option in AVE and Notional as well.

And so, like, other defy applications already provide this service. So what's different about volts? Yeah, I think the key thing is that volts is generalizable and composable such that you can build a whole bunch of different products and services off the back of it. And alongside that, the other thing which is extremely different is that it's so capital efficient. So actually when I kind of go back to when Archer and I, I asked my co-founder, when he and I, we're going through a process of just figuring out how on earth you build this type of market

in DFI, where the constraints are frankly just fundamentally different. to say traditional finance if you're trying to look at that as an example. The kind of two things that we're really optimizing for was number one, capital efficiency, which is kind of led to a bunch of architectural decisions that we made in the protocol. And I guess the headline there is it. It is around 3,000 times more capital efficient than alternative structures. But then the other that we're really solving for is to try and make the protocol as composable as possible, which meant that we figured out a mechanic where everything exists on chain, such that people can

start using volts as a very low-level building block to build all these products and services that we feel that it is going to unlock through the next few years. Right. So AVE and his variable or fixed interest rates is like a money market, but it only goes so far in providing like the actual tooling for all years. yield-bearing assets to be able to access both fixed and variable interest rate markets. But then also, like, another big difference is that with leverage, right? And so you can only, you can only arbitrage the differences between variable and fixed interest rate markets on AVE to, like,

it only goes so far because of, like, the capital intensivity, and Avey is just not really meant for that. Volt is specifically meant for arbitraging the differences between variable and fixed interest rates, and you are able to do it with leverage. How does the leverage happen? How do we get leverage interest rate market swaps? Like where does that key unlock come from? Yeah, so the way that we've built the protocol is we deliberately split out the AMM from what we describe as the margin engine.

And the AMM, what that now does is we describe it as a virtual AMM because it essentially only acts as a pricing Oracle where we essentially mint and burn fixed and variable tokens as trading activity takes place, and that obviously drives the price. that then acts as a pricing oracle into the margin engine. And the margin engine, we often describe it as the beating heart to the protocol because it's responsible for defining the leverage that you can take as a trader. It deals with settlements. It deals with liquidation events.

It collects fees for LPs. It basically does everything except the pricing Oracle, which the virtual AMM does. And then in terms of specifically how it creates leverage. So if I just walk through kind of a really simple use case, if you've got a pool, which has got a one-year term, and say you're a variable taker, so you're selling a fixed rate, and imagine the price of the fixed is 10%.

Right? If I'm doing 100 of Notional, a really simple kind of model would assume that I need to deposit 10 of margin, right? So I've got 110% for a year, 10 of margin. And so in that instance, you are already trading with 10x leverage. But what's actually very naive about that model

is it would assume that the variable rate would just drop to zero and stay at zero through the entire course of the term, which actually when you start to run a whole bunch of modelling around that, is it's just extremely unlikely to happen. So what we have instead is we have a margin engine which computes predictions into the future of what your likely upper and lower bounds are going to be

for a rate, and then that defines, kind of within a safety measure, it defines the amount of leverage that you can take as a trader, which actually in some instances, particularly as rates actually start to come down, so if you go from 10 to 1%, you know, you could theoretically be fully covered and only be depositing 1 instead of 10 for a year term. As rates start to come down, it means that actually you're able to take more leverage as a user.

So the actual kind of underlying number associated to the rate is not what matters because it's offset by the fact that you're able to take more leverage. And this is where, yeah, we're definitely. taking a peek under the complexities of the Volts Protocol and what really powers the Voltz Protocol to make it different than all the other fixed versus variable interest rates markets. Can we actually just zoom out and start from the very beginning about the technical details behind Voltz? You talked about how it was a virtual AMM and like I kind of can wrap my head around that. But like can we just like go and do just a walk through of like all the details

of the Voltz protocol under the hood? I know you already just did it but like let's start from the beginning and like go through it like step by step. To explain the architecture, it's actually easier to just explain the different actors first. So we've got three different actors. You've got liquidity providers, you've got fixed takers, and you've got variable takers. If you are providing liquidity, we actually borrowed concepts from Uniswap v3, where we have tick kind of spacing within the AMM. So as a liquidity provider, you choose your tick range that you want to deposit liquidity within. And that's essentially the way which you go about doing it.

but that requires you via the margin engine. And that's like in Uniswap v3, that's like concentrated liquidity, right? That's the concept of concentrated liquidity in V3. When you say providing between two tick ranges, this is the same thing, but with interest rates rather than asset pricing, right? Exactly. And actually, if anything, what's really interesting is, well, not only does that unlock capital efficiency, but actually within a rates market where your rates tend to be mean reversing,

if anything, is actually a better kind of use case for the concentrated liquidity. mechanic, which I guess to talk to that just very briefly, so if you've got dye and ETH, for example, where that's quite volatile, as a liquidity provider, you are having to change your tick range is relatively regularly. In a rates market where rates have this mean or exhibit this mean reversing behavior, actually you can choose your tick range. And even if the rates kind of go out for a period of time, you can kind of like confidently kind of predict that it's going to come back, at which point you might not even need to change your tick range, you can just leave your liquidity there for a period of time. Right. Yeah, and just to double down on that,

providing liquidity between ether and die, you know, some people choose to do this behavior, but I don't choose to do this behavior because I think ether is going to like $10,000 and beyond. Yeah. And so like, I don't want to be providing liquidity there when I want and bet on ether going up and up and up and up. That same bet doesn't happen with interest rates, right? Like, It's just ridiculous to, like, make a bet that you think the interest rates are going to go from 5% to 10% to 20% to 100% to 1500%. That's not how interest rates work. They never really get that far away from some certain mean. And so liquidity providing inside of a concentrated liquidity model that Uniphthyp V3 unlocked is, like, more efficient from like a fee-taking perspective.

Because when it mean reverts, what that means is that it's going back to back inside of a range that you can depend on more than, like, ether's not going back into a range. range, like ether's going to the moon. So it is meant to escape the ranges. But interest rates are meant to stay inside of certain, like, ranges. And so I just wanted to like double down on that explanation there. Yeah. No, that's absolutely. I think the only thing which I'd add to that is obviously in bull and bear markets, in a real bull market, you'll see that the underlying rates on, say, avian compound do typically go up. So you kind of end up at this more, a different equilibrium, but they still tend to exhibit mean reversing behavior around some sort of equilibrium. Right, right. Like we're not seeing 10 or 100 Xs in interest rates, and not for very long at the very least.

Not for long. Okay. So we just explained concentrated liquidity providing with interest rates. Where does this? Where does the protocol process go from here? Yes, you've got the three axes. You've got liquidity providers, obviously provide liquidity through that mechanic, and then you've got your fixed and variable takers. It's really important to think about that architecture of your virtual AMM and your margin engine,

because every single actor, including liquidity providers, you are depositing margin to cover a position and then that is minting fixed and variable tokens, which is your actual notional that you're trading, that that's going into the AMM. And your notional that your trading is essentially your margin times your leverage. And by separating these two out, not only does it enable us to essentially have the ability to introduce leverage into the rates market, but it also enables us to have this mechanic where the virtual is just purely functioning as a pricing oracle. From the user perspective, from the external perspective, Bolt is Uniswap V3 for interest rates,

but it actually doesn't mimic Uniswap V3 in every single way in the sense that you aren't not depositing assets. It's using the Uniswap V3 code as an Oracle more than it is an actual exchange. Is this correct? Yeah. So we originally when we actually kind of came up, up the idea we thought that we could route trades via uniswap v3 and then actually when you start going in and and kind of really trying to build that actually there's so so much of that code that basically needs completely refacted for a different market that in the end we actually needed that code to be native to our code base and it is essentially only the very low level kind of kind of

building blocks such as the use of tick ranges that actually ended up going into our code I don't know if you remember this. We actually had to go through. Obviously, Uniswap V3 code is subject to what's described as a business source license. So you can't just fork it and kind of put it into your code base. So instead we had to go through a process with the Unisop DAO where we asked the Uniswop DAO to provide us with essentially a license. It's actually described as an additional use grant. But it's a license which allows us to have Uniswap V3 code in VAT's protocol code base.

Yeah, this is a fun piece of D5 trivia. Uniswap V3, rather than being fully open source, it's licensed for a number of years, I think something like three to five years or something. And that's just mainly to protect the efforts of the Uniswop team and the investors. Eventually, that time frame of licensing will definitely end and it will become open source. I can't remember the years on that. It's like three to five or something. But Voltz Protocol wanted to use Uniswap V3 code inside of its application.

and so it needed to convince the Uniswop organization, the Uniswap Dow, to allow Volts to use the code, because the code is licensed. And I think Volz gave Uniswap 1.5% of all tokens in order to pay for this license. Is that the correct number? 1%. 1%.

Yeah. But yeah, 1%. 1%. Which is just a cool story of just like inter-Dao relationships. So like one org wants to pay another org to use their software. And so they just paid them 1% for the, for the costs of producing uniswap v3, and now it's integrated inside a vault,

which is actually an interesting business model that I don't think many, many people think about uniswap or even open source software that's not fully open sourced yet. But just like kind of a cool side quest of a story between volts and uniswap v3. Yeah, and what was really cool about that is the first ever, like, down-to-down deal that has taken place in this space.

We actually expect, and we've already seen a bunch of proposals that kind of mimic that. So we expect that to continue. But what it also does is actually ties the success of the two DOWs together in many ways. So we've got people coming in from the Uniswap Dow that are now contributing in different ways to the VALS, kind of protocol and to the Dow that we're building out. And then alongside that kind of going back to Uniswap, well, like they own 1% of VALTS's future token. So as Volts grows, that actually has an economic advantage to Uniswap as well. So it's not what's actually really nice there is it's not just the composability of the software.

where you start getting some sort of composability across the two communities as well, which is pretty nice. Yeah, the phrase composable communities is something that Ryan and I have been, like, leaning into ever since DFI summer. And like, so, like, while it is, like, a 1% capital costs from the Voltz organization,

from, like, the 1% of the capital goes to Uniswap. It's also kind of investment in Uniswap and Uniswap's community. So it's not just like a fixed, it's not just like a cost. It's not just like a negative on the balance sheet. You also get, well, the uniswap v3 code, but also uniswap talent just by proxy because of how composable these ecosystems are. Yeah, exactly, exactly. And what it means is that uniswap,

you know, very much the grandfathers of AMM design and, you know, perhaps in version four or whatever, like assuming they're kind of working on that type of thing, you know, there's opportunities for the ideas that are generated within that ecosystem to really kind of like come through into the vaults community as well because you have these people that now start to exist across the two ecosystems, which then just enables, you know, more innovation and kind of ideation to take place, which perhaps as an ecosystem gets us to an even better place as well. The Brave browser is the user-first browser for the Web3 internet with over 50 million monthly active users. Control your digital footprint with built-in privacy and ad blocking.

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and we kept on finding these side quests. Can we do it like one more time where we just like speed run through the three market participants, the variable interest rate sellers, the variable interest rates buyers, and then the liquidity providers? Yeah, sure. to say, well, the way that it works is you have these three participants. Liquidity providers provide liquidity within tick ranges. That creates the market from which fixed or variable takers can start trading. And the way that that works at a kind of a more practical level, so imagine you've got

a fixed taker who comes in. They're wanting to sell a variable rate in exchange for a fixed. What they can do in the way that that works relative to the liquidity providers is if the kind of prices within the liquidity provider's tick range, fix taker comes in, they initially use the liquidity provider's liquidity to execute a trade, at which point the LP is effectively the variable taker because they're on the other side. But then if a variable taker comes in and has the same amount of notion of prices at the same point, and they do the trade, actually what happens, although they use the LP's liquidity initially, those two trades then actually net each other off, and the liquidity providers

kind of liquidity then is released and goes back into the AMM to continue to collect fees and that's a process that we describe as margin recycling and then those two positions basically are sat as essentially is actually a pool to pool basis

rather than peer to pair but they're sat in two pools which are supporting either side's position until the end of the term. This kind of feels like a perpetual swap market as well where like there's a central contract and then like it just or it orientes the two sides of the market but I guess that's all kind of how all markets work with a margin recycling right sorry go ahead go ahead well I was going to say the key one of the key things is that all the pools on vaults have terms

so the pools which are live at the moment they have 60 day terms and and that means at the end of the term everybody settles but the margin recycling when we're thinking about coming back to some of the stuff that you're saying before about how like faults is different and how we kind of create this market, actually having fixed and variable rates, which are tradable within the same AMM, such you can transition from one side to the other and back again, and what that does from a liquidity provider's perspective where you're able to have this margin recycling mechanic, all of that contributes to having a kind of an AMM design that is ultimately more capital efficient and removes the silos between fixed and variable rates. It's all mathematically connected.

Why fixed at 60 day terms? Is there a future of revolts is like infinite terms or like what's the story here? Yeah, so we well, so rate markets are still relatively new in DFI. So kind of opening up pool terms that had kind of kind of a year term and someone's trying to speculate on what's going to happen to the variable rate and seed eye over the course of an entire year. It is, you know, the cycles that exist are just a bit too. unpredictable for someone to kind of reasonably take a view on what's going to happen over that longer period of time. So what we did instead actually is we built ourselves a whole bunch of

statistical arbitrage kind of models internally. We've actually within the vaults labs team, we have our own quant team. And we started looking at what type of kind of APIs can you generate depending on how long the pool terms are and that type of thing. And that's where we landed on actually a 60 day term to begin with is a sensible length of time. which enables you to have a few cycles in rates where they kind of like converge, say between A-di and C-di, it will converge for a period of time and then it will kind of come back to get, so diverge and then converge, which means that you can start building these models that trade that kind of movement with leverage in a time period that is sufficiently long enough for that

to take place, but also is sufficiently short enough for people to be confident speculating over that period of time. So is this 60-day window, what's the vision for the development of different timeframes? We're now getting into the conversation of the Voltz roadmap, so we can talk about that next. But first, like, what's the roadmap for, like, opening up further, further, longer timescales? Yeah. So, I mean, we can know it's very, the protocols generalizable, actually, to the point that not only can we introduce market on top of any asset with a variable rate to return. So we, so long as we have a rate oracle pulling in the variable rate, we can basically create an asset on top of any asset, sorry, a pool on top of any asset.

So to begin with, we've done that on Avian compound and we've just done that for 60 day terms, but we will launch pools on top of kind of other assets and one of the ones which have been public talking about is Lido, kind of in the future as well. And then in terms of the actual term, it's super straightforward. We kind of felt 60 day was the most. sensible thing to start off with, but we could very easily introduce 90, 180 days, even a year-long term, if that's what the market desired. But the thing is, if you start stitching these 60-day terms onto each other, you can sort of replicate something similar anyway. Yeah, so volts can open up any length of market that it wants to. It just needs to make sure that there's enough liquidity there.

And so it sounds like the interest in specific timeframes is going to be what determines those timeframes like opening up. So since Volz is literally in, it's like it just got pushed to Mainnet very, very recently, starting with 60 days. And then as Volz gets adopted, the interest rates, markets on Defi grow. So will the options for timeframes inside of Volz? Is this all tracking? Exactly. And because if you were to have, say, a 60-day term on an Adai pool and a 90-day term on an ad-poole live at the same time, actually what you're doing is you're fragmenting liquidity across those two pools. So it's a lot more sensible actually to have kind of shorter duration single pools to begin with. And then as the liquidity starts to increase, we can start opening up kind of

more terms kind of on the same asset. We know that stable coin yield is huge in defy, of course, but also we are coming up to the merge. So like this is a beautiful moment for volts to be on main net as we as ether goes from proof of work to proof of stake. So I definitely want to talk about the future of Voltz with like the East stake rate in its relationship as like a financialization of ETH financialization layer on ETH. But first I just want to get more of like the Voltz roadmap. What are you guys working on like right now? What are you guys working on the next few weeks, next few months and then like longer term horizons for the next few years? Yeah. So in terms of right now, we're obviously in this alpha state where we've just gone very

recently gone on to Maynet. And what alpha means at a more practical level is there's a cap on the liquidity that could be provided as an LP per pool, which not only enables us to kind of like test it in a more kind of like safe environment to begin with, it then means as trading volume starts to pick up, we will start opening up those caps too. But then alongside that, we're actually working on a bunch of different rate oracles, which pulls in the underlying variable rate on chain. So the kind of first one, which we're being kind of obviously public in talking about is that we're going to launch Lido markets, which will enable people to speculate on the rate of return that they expect to occur on state ETH, and we'll launch that alongside a bunch of other

ETH-based pools, so A-Eth, C-Eth, for example, which actually also enables people to start arbitraging between those different rates and the way in which the rates are behaving in different kind of protocol designs. And there's so much coming online in D-Fi right now. like not, there's AVE and Compound, of course. There's also Rari's fuse pools, which can create interest rates. But then there's also Euler Finance, which is a brand new AMM, which can also tap into volts.

So it sounds like any, any market, money market, like Avey or Compound or Euler or Fuse, can just hook into volts and it can take their variable interest rates and volts can turn it into stable interest rates. So this Volt seems like a tool for every AIME. AMM or every money market that comes into defy. But then also, like, we have Lido's staked Eth and RocketPools are ETH, and we have these two variable interest rates, but also coming online is the new Coinbase announced one, Alluvial, I think, is also a new, like, liquid-staking-as-a-service

organization. Oble Network is here to, like, make a bunch of competitive staking-as-a-service networks. And so perhaps a bunch of liquid-staking derivatives. There's also things like steakwise and like all of these things that produce yield and defy. And I make this joke, like bankless listeners who tap in to bankless all the time will hear me and say this joke all the time. Like crypto is here and has made really three good things. Like there's three good things that come out of the crypto world.

One is non-sovereign store value money and that's Bitcoin and Ether. The second one is yield. Like that's the second big thing that crypto makes. And then the third one is content, which is like, joke, but also I think it's true. But, like, Volz, if you agree with me that, like, the first use case of crypto's money and the second use case of crypto's yield, well, Voltz is turning that whole entire second use case and making it stable and allowing other people to take the risk and the upside on

the volatile side. And so as we get into the ETH post-merged date, where ether yield rates go from, like, 4.2, up to seven and beyond. but then also goes up further as a function of the heat of the Ethereum economy, the hotter the Ethereum economy is the more higher the ETH stake rate goes. I'm sure Volz is just like licking its lips at just like the possibilities here. So like how do you guys think about how Volz interfaces with the ETH stake rate over the long term? Yeah, well, I mean, you kind of touched on it there because the protocol is generalizable

such that we can create kind of pools on top of any asset with a variable rate of return, all that's required is a rate oracle to be built for all of these different protocols at which point you can start speculating kind of on the direction which kind of the rates of return on state teeth is going to go over a period of time but then you also can start arming between different protocols so what becomes really interesting is as you start getting kind of more competitors to Lido actually you know if they are starting to produce different rates of return you can start albing that with leverage by the fact that Voltz exists, which is obviously something which you could not do before,

which would start to obviously kind of post-merge, it starts to become really interesting as the dynamic evolves and as there's more competitors which start to exist. Actually, people starting to speculate on that, we see as like a really interesting and big use case for the protocol. I want to touch on the very last participant in the Voltz ecosystem before, we talk about some candy topics. I am going to ask if there's a token.

The liquidity providing. Why would somebody provide liquidity? What do they get out of it? And can you also explain the cool quirk about volts and liquidity providing, which is there is no impermanent loss because we're not trading across assets, but instead of there's this other thing. Can you overall just pitch why somebody might be interested to be a liquidity provider and the whole tradeoffs that come with being a liquidity provider in volts?

Yeah, I mean, well, the headline is that there's opportunity to generate pretty significant APIs, which is both driven off the fact that you are depositing within tick ranges, so therefore your capital is more capital efficient. It's also driven off the fact that actually you are generating fees off your notional, but you're only having to deposit margin in order to create that notional within the AMM. And then the last thing is actually this kind of really interesting dynamic where, say, unlike a Uniswap V3 pool, where you have the, two assets like say die and eath. With the rates market, your kind of fixed takers and your

variable takers are getting paid in the same kind of underlying asset. So if you've got a pool which is created on top of C die, your fixed interest rates are in die and your variable interest rates are also in die, which means as a liquidity provider to actually create either side of the market, you only have to deposit one asset, which is die. And then all of a sudden, you do not have the concept of impermanent loss. It is replaced with other risks. So we have what we describe as funding rate risk, where just for argument's sake, imagine a fixed taker came in

and traded with your liquidity, but a variable taker never came in and then did the opposite side of that trade. What would actually happen is your liquidity would be locked into that position, supporting the fixed taker until the end of the term. and you're more exposed to that risk if you are depositing within a tight tick range at a place where your tick is outside of the band where you have this mean reversing behavior.

So that's the small quirk which I guess is different to permanent loss. But if you're depositing it within a tick range where you've got balanced trading activity taking place on either side, all that's happening is you support a trade until a corresponding trade nets it out, you go through this margin recycling process and you're collecting fees. Okay, so if instead of impermanent loss, you're exposed to the risk where if there is a lopsided market, as in there are more people on the fixed side of things and not enough people to support those, people on the variable side of things, that is the new impermanent loss for volts. I kind of didn't totally follow the mechanic on how it works, but that imbalance costs you

yield, cost you fees, and you are the one taking the weight of that imbalance as a liquidity provider in vault. Yeah, that's right. There's a chance that that costs you. So if you get an, if you end up having a position that's not netted out, and if it happens to be, for example, a fixed take a position and the underlying rate market moves against you, because on one side it's going to move for you and on the other it's going to move against you. So if you don't get netted out and the rates move against you, then there's a risk that you are supporting that person's position, that trader's position.

But the best way to kind of avoid that is obviously to put your liquidity within a tick range, where there is balanced trading activity, at which point you just have this continuously recycling mechanic. So, Simon, is there a Voltz token? Well, so we did the uniswap down-to-down deal, and they received 1% of Volz's future tokens. So I think it's completely fine to acknowledge that there will be tokens in the future. But right now, there is no Volta token.

Okay. So there's just like there are ideas for future tokens. Do you know how that token would be released into the public? So there's a lot of the design around that and the decisions around that, which honestly have just not been not being a core focus as we've been building the product and getting it live. obviously we want the whole kind of protocol to be transitioned to a Dow's such as it becomes a public good which is owned and managed by the community. I think that's incredibly important for the whole ecosystem.

But exactly how that gets distributed is obviously not decided at this stage. What are the parameters that if you had a token, the token would likely govern over? Like what are the governing parameters of the Voltz Protocol? Yeah, so there's the initiation of new pools. there's kind of launching of new markets. So say if you wanted to launch a pool on Ave instead of compound, but then there's also the actual risk parameterization and the setting of things like LP fees,

which are all things which can be voted on via governance. I'm assuming since like we've been talking about uniswap v3, there's so much, there's probably also like the concept of a fee switch, whether that's like formally built into the protocol from day one or introduced later, but there would be perhaps like a fee switch mechanism that is similar to Uniswap's fee switch mechanism as well. Exactly. So the way that the protocol can generate fees for the treasury is, well, so LPs generate fees

and the protocol can collect, can collect a proportion of LP fees if it chooses to. That is currently set to zero, but obviously it is a governance decision for the future as to whether to switch that on or not. Okay, awesome. Simon, this has been really, really interesting. I've learned a ton. Are you guys hiring? What kind of jobs are you guys looking for? Or for people that just want to join the community, what kind of people are you looking for? Or just like overall, what talent are you looking to find in the Voltz ecosystem? Yeah, so we've been growing pretty aggressively over the beginning of this year.

Like if I go back to January, it's literally just Archer and I, Artis being my co-founder. We're now a team of 12, going to be 14 relatively soon. We're obviously always on the lookout for kind of really high quality, kind of developer talent. We're also looking for a head of growth. But then actually within the community itself, because we're kind of such a low-level building block,

which unlocks so many new products that could be built in this space, and we're constantly getting teams coming through who have, now that we have this new market, which is an interest rate swap market, constantly getting teams coming through, thinking of new products can be built on top of that, which spans from stuff across like swapions through to more simple products like fixed rate vaults,

even using kind of faults as a form of stable coin collateralization, which is pretty interesting use case. We've got two teams which are doing that at the moment. So if there are teams which, I guess ultimately it is, listening to this and thinking, oh, wow, there's this new market that's being created and actually unlocks all of these kind of new opportunities for me as a builder. Come into the Discord. We often set up kind of like one-on-one channels with that team and the Voltz Labs team, and we really try and help teams through that ideation process to the point which they can actually go live.

Amazing. Well, Simon, we will get the link to the Discord, the Twitter and all the other relevant information into the show notes for listeners that want to dive deeper into the Voltz Rabbit Hole. Simon, any last comments or anything you want to share that I forgot to ask about before we sign off here? I don't think so. I think that the main thing which I'd say is that when we're going through a process of kind of figuring out what we felt was the next zero to one innovation required to move the whole sector forwards, you know, interest rates swaps, they're just a corpillar to any well-functioning financial system. So by us building this, we want it to help defy ultimately become the financial system for the whole of the world. And in order for that to have, happen, we need, now that this low-level piece of infrastructure needs to exist, does exist, that kind of provides these opportunities for people to start building these new products and services, which serve a much wider spectrum of financial needs.

And that's, frankly, that's the one thing which, more than anything, that's the thing which kind of excites us about the fact that we now launch. Amazing, yes. And once again, congratulations on getting to Mainnet. Well, I'm sure it also feels like the end of a very long journey, is also just the start of even longer one. So which is the best to you and Voltz. And thank you for coming on and sharing all of this alpha in this alpha leak episode with the Bankless Nation, Simon. It's been awesome to be here and I kind of really enjoyed talking to you. Bankless Nation, of course, disclaimers, ETH is risky, crypto is risky, DeFi is risky, trading interest rates is also going to be risky. You can

lose what you put in, but we are headed west. We're on the frontier. It's not for everyone, but we are glad you are with us on the bankless journey. Thanks a lot.