The Wolf Of All Streets - Interest Rate Swaps Are The Biggest Market In The World - Why We Need Them In Crypto | Simon Jones, CEO Of Voltz

Episode Date: October 16, 2022

Interest rate swaps are a quadrillion-dollar market, making it the biggest market in the world. Thanks to Voltz, this market now exists in DeFi. I sat down with Simon Jones, the founder and CEO of Voltz, at the House of Muse in New York, and discussed why Simon decided to build Voltz, how he discovered Bitcoin and crypto, and how he sees the future of decentralized finance.  Voltz: https://www.voltz.xyz/ Simon Jones: https://mobile.twitter.com/0xsimonjones ►► JOIN THE FREE WOLF DEN NEWSLETTER https://www.getrevue.co/profile/TheWolfDen  GET UP TO A $8,000 BONUS IN USDT AND TRADE ALL SPOT PAIRS ON BITGET FOR ZERO FEES! ►► https://thewolfofallstreets.info/bitget   Follow Scott Melker: Twitter: https://twitter.com/scottmelker  Facebook: https://www.facebook.com/wolfofallstreets   Web: https://www.thewolfofallstreets.io  Spotify: https://spoti.fi/30N5FDe  Apple podcast: https://apple.co/3FASB2c  #Bitcoin #Crypto #Trading The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

Interest rate swaps are the most liquid, highly traded assets in the world that almost nobody knows about. We're talking about a quadrillion dollar market each year. Bringing them to the Web3 space, into crypto, into DeFi is a priority that few people have been working on, except for, of course, Simon Jones, the CEO and founder of Voltz. We talked about why it's so important that we have these interest rate swaps in DeFi and how that will make the market more efficient and bring DeFi to the world. Now we'll start and I'll just ask you that again, basically. Interest rate swaps are the largest tradable market on the planet, correct?

That's right. It's a quadrillion of notional exchanged each year in TradFi, IRS. Yeah. Okay. And that's something that completely does not exist in DeFi. Well, it didn't exist until we created it. We didn't create it because it's the biggest market in the world. We created it because it serves such a massive utility for the whole of the ecosystem. Talk about that. Well, I mean, if we kind of go back to why we even started Vaults in the first place, we started it to try and help DeFi become the financial system for the whole world. And with that as our North Star, one of the massive problems that we noticed is that DeFi is an ecosystem. It is what I would describe as structurally variable. It's actually a byproduct of the technology. I can explain the depth of that to the extent it's

helpful, but if we kind of just think about what that means, right, if the ecosystem is only ever variable and actually at times quite volatile, then DeFi is only ever going to be able to serve like a subset of people's financial needs, right? So it's not going to be able to serve a subset of people's financial needs. It's not going to be able to become the financial system for the whole of the world. What an interest rate swap does, it does many things, but at the most macro level, it enables you to transition from something that's variable to something that's stable, and therefore, enables stability to exist in the ecosystem. What that means is it means that DeFi can actually now start serving the financial needs of the whole of the world.

So it effectively takes an extremely inefficient market and makes it more efficient? It takes an extremely variable market and enables stability to exist. And why is that? What is it inherently about an interest rate swap versus any other sort of product that does that for the market? Yeah, so an interest rate swap enables you other sort of product that does that for the market? Yeah. An interest rate swap enables you to basically exchange a variable rate from fixed rate or vice versa. You can go from fixed rate to a variable. With obviously a fixed rate of return, whether that be a fixed rate of yield, whether that be fixed borrowing cost, that means that you

have inherent certainty and therefore stability. En enabling that to exist across the whole ecosystem, I come back to this point, that actually means that we can serve or start serving the financial needs of billions of people around the world. And do you think then that you can take that quadrillion market and bring it into DeFi? Or is this a parallel sort of system offering something that's proven there to help build DeFi? I think there's two parts. I think that there's, at least in terms of what we're doing at Voltz,

long term, we want to displace all of the trading volume that goes through centralized exchanges. I want all of that to go through Voltz. So long term, we want that quadrillion to go through Voltz protocol. But then at the same time, there's not just displacing what already exists there's actually like growing like what like like defy as a sector itself right and one of the things which like just to lean into that right like there's a number that always surprises me which is that 25 of the world's population don't even have a bank account right and that's 1.6 billion people. And what DeFi enables is, for the first time ever, it enables everybody to have the same access to financial services. So when we think about the growth of that part of what we want to do long term, actually

the opportunity there is massive. And that has the opportunity to change the lives of billions of people. So the first principle for you is really people are unbanked, underbanked, we need to service them and that's how you sort of backed into interest rates swaps as being a key way to make that happen. Because a lot of people would just say, get everyone a wallet, send them some Bitcoin or some USDT and they're banked. Sometimes it just gets forgotten, I think.

Compare DeFi to TradFi. Why do we need DeFi in the first place? Actually, if you just look at traditional finance, I think what's clear from traditional finance is that it does not work for the majority of people. You as an individual, whether you're in an emerging economy, whether you're in a Western economy, you're fundamentally not in control. In the West, for example, there are structures in traditional finance that are deliberately opaque such that there is an informational advantage that puts you in a position where you are not in control.

Another example of that is actually central banks. Look at what's happened this week. I don't even want to get into the decision whether rate rise is right or wrong, but like, what say did you have in that decision? You had no say in it. So you as an individual, you're in traditional finance. You're not in control, right?

And what DeFi enables is it enables you to be in control. It puts the user at the center and builds for the user. It gives the user ownership, right, over like the structures that are being created. And therefore, like it enables you for the first time ever to actually have full control over your financial lives. And the direct comparison that I'd make actually is think about freedom of speech, right?

Like freedom of speech is something which we all in the West fight tooth and nail for. It's like a cornerstone of just modern society. And I find it crazy that we fight tooth and nail for freedom of speech, but we're just willing to accept we do not have financial freedom. And what DeFi enables is it enables financial freedom to exist for everybody across the world and us at like Vaults and why we came into creating this protocol, we had that as our North Star. Let's find a way of helping DeFi become the financial system for the whole of the world.

And that's where we landed on this massive problem, which is that the ecosystem is structurally variable and if it remains variable and volatile, we won't be able to serve the financial needs of billions of people. Well, Jerome Powell definitely did not call me and ask for my opinion on his interest rate decision or if he was going to be dovish or hawkish in his tone and all the other absurdities that you just hinted to. Where are we then in the evolution of DeFi now from what you've seen as this variable, unusable sort of platform that's really tailored for just the few who understand the technology

or are willing to take the risk to it being a complete either replacement or a complement, but with the same sort of benefits as the legacy systems? Yeah, I think there's, I mean, DeFi's been around for like a couple of years, really. It's nothing. Yeah, so it's, I mean, it's incredibly nascent as an ecosystem. So there's so many more problems that we need to solve in order for DeFi to actually be able to be used

by billions of people. But like, we're still early. And I think what's so amazing about what's taken place over the past couple of years is it's been an environment where you can experiment a lot. Where we can experiment, we can come up with these new mechanism designs, we can come up with these new governance structures, all of which is kind of focused ultimately on coming out to this point, putting the user at the center and building for the user. There's a lot more to go clearly,, but by having stability in the ecosystem,

that actually means that we are able to start building products and services that serve the financial needs of billions of people. What about the idiosyncratic risk, though, of that stability that are well beyond the financial controls that you're talking about? For example, blockchain goes offline and you know, and you literally can't transact or the technological problems or that, you know, that can't scale. Right now, we don't have a blockchain that can, you know, confirm enough transactions for a billion people to be using it, for example. So how much are you at the sort of whim of the technology itself?

But I think the technology will continue to evolve, right? Like, and I think it's arguably fine that that's the case at to evolve, right? And I think it's arguably fine that that's the case at the moment, right? Because we're not at the point where 7 billion people aren't using DeFi as a financial system as of today. But we are at the point where coming back to now that we have stability, now that you actually have the ability to use it for a much broader spectrum of financial needs, where what I want to start seeing happening is more and more people coming in around the world and using it as the ecosystem, at which point, like we have to solve these other, there's lots of problems need to be solved. And that's one of them, right?

Like, and we need to get to a place where DeFi can, from a technical perspective as well, like cater to 7 billion people. What were you doing before this? This is my third startup. So the first two were like more traditional Web2 businesses. to 7 billion people. What were you doing before this? This is my third startup. So the first two were like more traditional web two businesses, and then obviously this is the third. And all of them have been focused on trying

to democratize access to financial services. So why then the first one? There was obviously an aha moment for you when you said, I need to democratize financial services, right? And so you're on your third iteration perhaps of that. But what was that first spark? Yeah. So essentially, it's a funny story.

I need to take you all the way back to 2009, right? So that's not so far for me. I'm 45. So yeah, we go back to when I was in my 30s. Yeah. But no, so in 2009, this pretty young man is was actually it's pre-university so i was living in australia i was actually playing rugby out there and um i got into university study architecture i had absolutely no intention of ever going into financial services and then i was out there with

very little money trying to get a job and i couldn't get a job anywhere and i remember this moment there's Basically, all my friends went to Melbourne for the weekend. I was living in Sydney and I sat there with my massive bag of $1 pasta, eating it with no sauce, just really just classic person with very little money at that kind of age. And I just remember thinking, like, I need to do something about this. And that's when I started kind of researching, kind of in more detail, what was going on in the world. It's the middle of the global financial crisis, right? And there's, it wasn't, clearly, it wasn't just me that was affected. There's millions of people that were affected. Lots of people being made unemployed,

lots of people losing their jobs, kind of governments bailing out banks, all this type of stuff. And I remember just thinking to myself, I need to do something about this. And that's when I switched, whilst I was in Australia, I switched from architecture to economics. And then coming out the other side, I actually went on to set up three different startups. That's a pretty incredible story. And so how frustrating is it you now to see us in another potential global recession only 13 years after they solved that one? Yeah. Well, I mean, economies are going to have cycles. And unfortunately, we're transitioning, we're kind of going through the next cycle. But I think when we're thinking about DeFi, or I think about everybody around the world, what we actually also do have now, which we didn't have in the last cycle, is we have

technology and infrastructure, which actually has the potential to change the lives of billions of people. Yeah, there's a lot of people who love to say, you know, in 2008, there was no Bitcoin. So you can't blame them as much. But now they should have their eyes open and see this as another option. Did you find Bitcoin first or was it straight to DeFi? It was 2012 I got introduced to Bitcoin. So you've been around a while.

But then for me, it was always about the technology, which is why I went to do these other two startups. And then coming into last year, I was just, sorry, coming into 2020, I was like, technology is clearly ready for mass market adoption. And that's why I left my last startup and kind of went to Setup Vaults. So you think the technology is actually ready? I think it is, yeah.

Like, I think it is. I think we can start to use it in ways which, kind of enable people to use it in ways where it's actually serving a kind of meaningful purpose in their day-to-day lives. So we haven't even talked about specifically like granularly what Vaults does. So how does it actually use interest rate swaps? Yeah, so we created like an automated market maker for interest rate swaps. So there's a bunch of kind of like things under the hood going on from an architectural perspective.

One of the things that we really wanted to solve for was both capital efficiency, which is incredibly important when trading rates, but then also making sure the protocol is as composable as possible. To explain that point, interest rate swaps in traditional finance, like you said, it's a quadrillion a year. It's insanely big. But if you go to anybody on the street here and say, have you heard of an interest rate swap?

Yeah, there's a chance that, well, we're in New York, so there's a chance that you might meet someone that does. We need to go a little further downtown. But there's a high likelihood that they doubt a clue. But if you say, do you know what a fixed rate mortgage is, I can guarantee that they'll know what that is. And what's actually happening in the background is the bank or whatever that you're taking that mortgage from, they are in the background using super low level capital markets infrastructure,

i.e. interest rate swaps, to package that product up for you. So when we're creating Vaults, we wanted the protocol to exist fully on-chain such that it was composable to the point that lots of people could start building products on top of it. And that's now what's really interesting is we're now starting to see that take place. There's loads of teams that have come through that have noticed that we've created this new market in DeFi for the first time, and they're starting to build new products on top of it. So you consider yourself somewhat a base layer for the ability for others

to innovate and build on top of it? I think Faults is a very, very low-level primitive for DeFi. Yeah, for sure. So when do we get fixed-rate mortgages in DeFi then? I'm excited to see that happen. Honestly, I think it will happen. Within the next few years, I think that there's going to be... We already have real world assets on chain. USDC is a real world asset that's just replicated on chain. So if we can start having ways of doing that for more assets that exist in the so-called

real world, why can't we start doing that for mortgages? And at that point, we can have fixed rate mortgages on-chain. Yeah, I think it comes up repeatedly, repeatedly, repeatedly in these conversations just because I think of where the timing of where we are in the evolution of this technology, but feels like we could tokenize everything. Yeah. Well, I think we could definitely find a way of replicating assets that exists in the so-called real economy, which I really don't like that phrase. But anyway, in the so-called real economy, we can definitely find a way of replicating those and kind of putting them on chain.

At which point, then you can have fixed rate mortgages off the back of it. But don't we sort of backing into that conversation, interest rate swaps are a quadrillion plus market because of fixed rate mortgages. And that's sort of the plumbing for what's happening behind. You're coming at it actually in the opposite direction, right? You're presenting the interest rate swap first, but do we need the fixed rate mortgages and all those things for volts to then be necessary? Volts needs to exist now in order for DeFi to have stability.

And with that existing in the ecosystem, people can then start building products on top of that, which includes the likes of fixed rate mortgages. But if you didn't have that, then you would only ever have the ability to create a variable mortgage with DeFi. Actually, given the volatility of the ecosystem at times, arguably, that would not serve the utility that someone wants in order to buy that. Getting liquidated is probably not that much fun when it's your house. When it's your house.

Yeah, that makes perfect sense. Are there other things that you're seeing built right now that are really exciting to you? There's a really massive spectrum, which actually in itself is exciting. There's people doing relatively simple things in the grand scheme of things like fixed rate volts, not volts as in us, but volts. All the way through to actually more complicated stuff like swaptions, and actually some degenny stuff like using fixed rates as a form of stablecoin collateralization, which is interesting.

Regulators aren't going to love that. I think we need to just steer away from the term stablecoin and start calling anything that's not like USD backed and over collateralized something else so that they don't pay as much attention to us. Is it an asset that replicates a single dollar. Yeah. The term stablecoin now has become like a four-letter word, unfortunately, for the regulators. So do you see DeFi eventually eating everything? Or do you think that it becomes a parallel rail for all of those people you talked about

who don't have access? I think there's going to be a spectrum. Do I think Goldman Sachs is just going to disappear? I think it's unlikely. But will Goldman Sachs come on chain and perhaps realize that the only way for them to evolve is to pay in DeFi? Well, if you think about your financial stack, I think about DeFi as back-end disruption. Actually, what we've had arguably over the past 20 years with fintech is front-end disruption of that whole stack. I think DeFi has the potential to both become a financial system that anybody can come into, and maybe they're coming into that through fintech, maybe they're coming into that

directly, and it also has the potential to wedge itself into traditional finance. And coming up to this point from the start, London Clearinghouse, obviously, as a Brit, I enjoy talking about this. London Clearinghouse, entity based in London, it's responsible for 90% of the world's interest rate swap clearing. And in five years time, we don't want that to exist as an entity. Because in order for that to function as an entity, they have to employ thousands of people. In order to employ those thousands of people, they have to pay them salaries. Where does the salaries come from? It comes from charging fees in order for people to trade.

So effectively, what you have is you have this rent coming out of the system in order to pay all of these people to manage that exchange. And what you can do with a smart contract is you can get rid of the need for all of those people. So it's actually like a positive for all of the traders and therefore everybody that uses that as a low level building block. So even if we want DeFi to grow and and obviously, we really care about making that happen, we

also want to wedge ourselves into traditional finance and displace these centralized exchanges. Yeah, I mean, I think the core ethos of crypto for most people is eliminating third party rent collectors from our transactions. But five years, I'm pretty optimistic and aggressive, but five years seems pretty fast. Yeah, I think it's possible. I think it's possible. I mean, we already say, you just play out how's that going to happen? At the moment, we're super focused on being like the interest rates of exchange for the

metaverse, so to speak, just be very DeFi focused. And there's been loads of trading activity. We've only been live for three and a half months, we've been growing 50 or 40 to 50 each week right so there's pretty good growth there and there's now lots of people coming in that building on top of the protocol when those teams go live that will drive more trading activity is great but what we want to do next right and there's no timeline on this but what the next step is then to start to replicate traditional financial rates on-chain, such that you can have these TradFi rate markets, but they're existing in a decentralized environment. And off the back of creating that, we'll slowly over time start to bring

the TradFi players, who at the moment are paying all these fees and odds to use a centralized exchange, bring them onto a decentralized exchange where the fundamentals of the exchange that they're interacting with are orders of magnitude better than what they get through a centralized exchange. You talk about 50% month-over-month growth. Are those interest rate swap traders from the real world that are coming in? Maybe it's someone in between. Are these degenerate BitMEx perpetual swap bitcoin traders who are seeing another asset that they can basically you know uh gamble on there's there's a spectrum right and i think actually it's it's an interesting question because like what do you use

an interest rate swap for um and i think for the most part there's three main use cases there's speculation there's uh hedging of risk, right? And then there's using it for product construction, which is both for retail, like mortgages, and it's actually for corporates, like structured products. So that product construction at the moment, we've got like a bunch of teams building stuff, right? That's going to go live in the coming, or some of them are going to start going live in the coming months, which will be exciting. Then in the other two, there have been people who have been using vaults to hedge risk. That could be something as simple as a C5 lending desk where they're promising fixed rates to their consumers and

they're lending it out at a variable rate. On their balance sheet, they've got this rate liability and they can now hedge that on chainchain. Then alongside that, you've got speculators. Some of those speculators are, I think, degents. Then alongside that, I think a lot of those speculators are actually sophisticated trading firms who trade rates in traditional finance. They can now start doing it on-chain too. How do you get all of them trading on Vault? We need DeFi to become the financial system for the whole of the world. We need the spectrum of use cases that DeFi can support to be widened. That's where I come back to this product construction point.

We need lots of products to be built on top of Vault. When there are lots of products, that creates the opportunity for trading activity to exist for all of the sophisticated trading firms to start coming in. MIKE GREEN I mean, we're literally talking about replacing the biggest and most powerful systems on the planet, not going to let go easily. JARED DILLIAN Well, are they letting go? I don't know if I'd... The centralized exchange, fine, they could get displaced. I mean, that happens time and time and time again when new technology comes along, right? Yeah, I'm just talking more about the banks, the credit card

companies, the centralized platforms you're talking about. But they can still come in and operate on DeFi. They can still use DeFi as part of their financial stack. So it's more that kind of base layer of infrastructure which has the opportunity to be displaced. So here's our deal. We're going to come back in five years. We're going to do this again and we're going to see if we replace it. I completely support what you're doing.

I believe that it will eat everything personally yeah but sometimes it's hard not to just play devil's advocate and ask those questions because let's see i mean i i honestly i think the fundamentals are strong i think these things can at times happen a lot quicker than people think right if you have like exponential growth is something which you kind of struggle with yeah like humans right um uh so like honestly five-year horizon that's what we're shooting for all right well let's uh do it again in five hopefully before man thank you so much really really inspiring excited to see what you guys build thanks been awesome That's dope.