Perpetual Interest Rate Swaps
The perpetual interest rate swap is an innovative new product invented by Strips.
Perpetual Interest Rate Swaps (IRS) allow traders and hedgers to trade interest rates with ease and very little capital. The Perpetual Interest Rate Swap is similar to trading futures, built around the three pillars of robustness, capital efficiency and flexibility.
Our key innovations of the perpetual interest rate swaps are:
  1. 1.
    There is no expiry of the contracts
  2. 2.
    Naturally mimics the payoff of a traditional IRS
  3. 3.
    Each contract has a single market
Unlike traditional interest rate swaps in finance which have fixed terms, Strips perpetual interest rate swap trade in perpetuity. This means that users can open a trade without worrying about rolling over their position at the end of each month or each year.

How is a perpetual contract settled?

The profit/loss of a perpetual contract is settled in USDC directly into your wallet when you close your position.

Mechanics of Perpetual Interest Rate Swaps

Floating rate

The floating rate is based on the reference pool/vault yield. For example, the floating rate for the Aave USDC lending market would be the Aave USDC lending yield. Floating rates are calculated per block.

Fixed rate

The fixed rate is based on the market supply/demand. It indicates the market's expectation of future average floating rates.
Leverage
Strips perpetual contracts do not require traders to post 100% of collateral. Strips Exchange offers traders up to 10x leverage on our markets.

Initial and Liquidation Margin

The initial margin is the amount of USDC you need to open a position. The liquidation margin (5%) is the margin level that you need to maintain above in order to prevent liquidation.

Funding Pnl

Every position pays or receives funding pnl based on the floating rate and whether the position is long or short.

Trading Pnl

The position trading pnl is the mark-to-market pnl of your perpetual position, and depends on the current market fixed rate.

How is the profit/loss calculated?

Perpetual IRS Profit/Loss is calculated as follows
profit/loss=funding pnl+trading pnlprofit/loss=funding\space pnl + trading\space pnl
Funding Pnl is calculated as follows (for longs, opposite for shorts)
funding pnllong=Notionali=1tfloating rateifixed rate30funding \space pnl_{long} =Notional*\sum_{i=1}^{t}\frac{floating\space rate_{i}-fixed\space rate}{30}
Note: Daily pnl is used for simplicity. The funding pnl is calculated per block in actual implementation.
Trading Pnl is calculated as follows (for longs, opposite for shorts)
trading pnllong=Notional(exit fixed rateentry fixed rate)/exit fixed ratetrading \space pnl_{long}=Notional*\left(exit\space fixed\space rate-entry\space fixed\space rate\right)/exit\space fixed\space rate

Why is fixed rate different from the floating rate?

The market fixed rate is determined by the market supply and demand of buyers and sellers. The market fixed rate reflects the market’s long term expectation of future floating rates.
  1. 1.
    The more traders come into the market to trade, the more likely for market fixed rate to show strong positive correlation with floating rate. Allowing more traders with various trading purposes is critical to build an efficient interest rate market and eventually achieve decentralisation of interest rates.
  2. 2.
    Oftentimes perpetuals can trade higher than spot, because the perpetuals price is determined by the market buyers and sellers for those perpetuals, which is also called contango.
  3. 3.
    In the short term, it depends on whether the market believes in the same as you, which is determined by market buyers and sellers.
  4. 4.
    In the long term, the market fixed rate and floating rate should converge closer.
Futures and index price may be different

Example: Lock in your yield

  1. 1.
    Alice deposits 10,000 USDC in Aave, currently yielding a floating rate of 3.05%
  2. 2.
    On Strips Exchange, the fixed rate for Aave USDC lending is currently 3.26%
  3. 3.
    Alice shorts 833 USDC notional amount of perpetual interest rate swaps on Strips
  4. 4.
    Alice's short position on Strips requires her to pay the Aave floating rate and, in return receives 3.26% fixed rate
  5. 5.
    Combined with Alice's yield from Aave, and her pnl on Strips, Alice will receive 3.26% yield in perpetuity if she doesn't close out her position
fixed rate=(Aave)floating rate+(Strips)[fixed ratefloating rate]fixed\space rate=(Aave)floating\space rate +(Strips)[fixed\space rate - floating\space rate ]
Alice's Aave yield is now fully hedged.
Aave USDC deposit floating rate 3.05%
Strips Aave USDC fixed rate 3.26%
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On this page
How is a perpetual contract settled?
Mechanics of Perpetual Interest Rate Swaps
How is the profit/loss calculated?
Why is fixed rate different from the floating rate?
Example: Lock in your yield