Why interest rates?
Learn about the importance of interest rates
Interest rates are the price of money. They are important for lending/borrowing and also speculation. Interest rates impact the prices from stocks, bonds to mortgages.
Interest rate markets are a critical infrastructure in our financial system. It is also the largest trading market in traditional finance. Based on 2018 statistics, the USA alone had $15T in debt markets, and 88% were fixed interest rates. However, almost all of the $200bn assets locked in DeFi are receiving variable interest without fixed rates.
Interest rate swaps are extremely important for hedging yield or borrowing costs. Interest rate swaps allow you to change variable rates to fixed rates. They also allow speculators to profit from movements in interest rates. Because they require little capital up front, they are the perfect tool for speculators.
Currently, 80% of the worlds OTC derivatives market comprises of interest rates swaps, with $435.2 trillion in notional value. There is explosive growth in the DeFi, but a lack of interest rates products to hedge the volatility of DeFi yields. Strips is the leading project addressing this market problem. The vision for Strips is to build the world's largest interest rate derivatives exchange.
Interest rate swaps help borrowers manage their floating rate liabilities by allowing them to lock in fixed rates, and receive floating payments.
Interest rate swaps are an instrument to find the fair market price for fixed interest rates. Using this fixed rate, you can begin to structure fixed income products and bonds. Without a market price for fixed interest rates, there would be no reference for fixed income products to be priced from. The fixed rate from the interest rate swap is the future expectation of the floating rate.
Because interest rate swaps require little capital up front, they give traders a way to speculate on movements in interest rates in a capital efficient manner. Traders can also arbitrage between different interest rates across protocols, or capture basis arbitrage opportunities in the futures market. It is easy to trade across multiple yields in a flexible and convenient manner.