Grant to Develop a Futures Market DEX for cTokens (Convexity)

Hello, everyone! My name is Leo and I’m an ex-FX swap and interest rate derivatives trader.

I am applying for a $50k grant to build a decentralised exchange for cToken futures. The grant will go towards set up costs and attorney fees.

A cToken future is new kind of interest rate derivative that is a cash settled non-deliverable forward that also creates a fixed versus floating exposure to the Compound Supply Rate of any given market.

The first set of problems that this product will solve is enabling fixed rate deposits and stable rate borrowing using the existing Compound liquidity pools. The stable rate borrowing in this context is different from AAVE’s stable rate borrowing, because there is no risk of the rate being reset. However, if the utilisation ratio on average realises at a region that implies a wider spread between the supply rate and borrow rate, the borrower would be under-hedged.

The second problem that this product will solve is by creating a hedge instrument for crypto interest rates. As the market develops, my hypothesis is that overall level of crypto interest rates will become move correlated across protocols and CeFi lenders. With that assumption, an interest rate derivative that references the Compound Supply rate will move around with the general level of crypto interest rates, and therefore serve as a hedge instrument.

Our team have built a proof of concept demonstrating one of the use cases (fixed rate deposits). It is only deployed on a local blockchain so I’m happy to host a demo and discuss what we’ve built so far. We are currently a team of 4 people (all met online) and have signed up for the HackMoney hackathon and plan on building a minimum viable product over the next 3 weeks. Concurrently I would like to push forward with making this idea a reality.

Thank you


I love the idea of adding derivative markets as I am an avid trader and derivatives/futures markets add to what is available to trade.

Are you going to be on the call tomorrow morning? I think we need to see a demo showing exactly how this can help the Compoind Protocol.

If I am understanding correctly, your product would allow for someone to essentially lock-in an interest rate until the expiration of the futures contract?

What are some negative effects of your idea?

Hello CryptoCraig! Thanks for your reply.

It seems like every day I find out about a new team that is working on something similar. I guess that just shows that there is a collective awareness in the community that there is a need for such a solution. There are probably about a dozen or more teams out there doing something to do with interest rates - whether tokenising them or creating interest rate swap markets in CLOB or AMM.

I think the biggest benefit to Compound is that it enables fixed rate deposits and stable rate borrowing. This is a feature unavailable in Compound right now. I’m sure a lot of people are happy with floating rates, but there probably are some who would rather have the option for fixed rates.

I don’t really know how these money markets are going to develop over time. However, I think it is in the interest of COMP holders and the Compound community to support an interest rate derivative market that references the Compound markets because it creates another class of use cases. For example, if there was an active derivative market in Compound, it is possible that you could have crypto bond issuances referencing Compound supply rates (e.g. a 2 yr bond that pays Compound rate + 1% or something like that) In that case, both the bond issuer and investor could use derivatives to augment their exposures. But then again, this is DeFi, maybe people don’t want such exposure to a benchmark. Maybe a benchmark like LIBOR only has utility in a world where figuring out an appropriate interest rate for a loan was too cumbersome. I have no idea.

Negative effects - I don’t know. There is definitely a risk of manipulation of the markets if the derivative markets grows sufficiently large. According to DeFi Protocols for Loanable Funds by Gudgeon et al, a handful of addresses dominate the liquidity supplied to the market. They would have an outsized impact on the Compound rate fixings so they may be tempted to put on a huge sized derivative position and withdraw liquidity to benefit from the derivatives.

The idea is interesting but would recommend lines of limited edition NFTS for certain contribution, activity or early adoption members.

Exclusivity and/or limited release NFTS is key to early interest and adoption.

Hi Leo. I’m curious about the specifications of this fixed rate product you have created. Since there are many times tradFi products can be created differently (and potentially better) in DeFi, I have a possible solution to suggest. Correct me if I am wrong in my understanding of cTokens, but when you look at the protocol math, the utilization ratio referenced is always the previous block. If you took the utilization ratio from t-7days (or however many blocks that would be) you could create cToken that has known utilization ratio (thus an implied borrow/lending rate) for the next 7 days. It would be dynamic, but since its able to be calculated for the next 7 days it would be “stable”.

The creation of this token would require that being able to referencing a more distant utilization ratio instead of the previous block is trivial. This would be its own market (e.g. cUSDC-7Day) and would reference its own utilization ratio, not the next block protocol. Collateral and liquidation could function exactly the same as the current markets without issue.

Building out a yield curve within the DeFi space will be an important milestone in the evolution of these markets and having a novel framework for interest rates could positively differentiate our protocol. You can think of this set up as either looking back at earlier rates or that the current utilization is determining future rates. This “stable” rate would only be stable for borrowers, not for lenders. Interest paid to lenders is implied from the interest rate for borrowers and the total borrowed amount. If the future rate is going known to be high, borrowers may pay off their debt leading to a high interest rate for the borrowers remaining but the interest paid to the lenders would be lower if all lenders remained in the market. Lenders would quickly leave for greener pastures and a new equilibrium would be reached. Price Discovery

Was doing a little research on projects that are working on similar functionality as what the futures market would do. BarnBridge (BOND) has already implemented similar fixed-interest rate products with Compound assets, USDC and DAI.

Not only can users get set-term, fixed interest rates, they can also, with more risk, get a better variable interest rate with incentives. I’m not sure there is or will be a need for multiple / separate paths for entering this kind of market. The current TVL across all of Barn Bridge’s assets is less than $300M.

Hello - @eggbagels

Sorry for the delay in response. I don’t quite understand what you mean by taking the utilisation ratio of the the block t-7. Does that mean that the cToken exchange rate for USDC t+7 is calculated by assuming the same Utilisation ratio that was snap shot from t-7?

I’m not sure how that would work. Borrowing and lending, in my mind, is inherently forward looking activity. I’m having a hard time wrapping my mind around referencing historical Utilisation for the future in that way.

Hello @CryptoCraig -

Yes I had come across Barnbridge too. What they have built is pretty cool and it is definitely a different approach to what I had in mind. I think we are currently in a stage of experimentation with regards to interest rate derivatives and structured products in DeFi and we will probably see a lot of different attempts at solving this problem. The use cases and user experience will probably determine which protocols gets used more.

I think we have an elegant solution to the problem of fixed rate deposits and loans building on top of existing floating rate protocols. We’ll see how that translates to usage but I guess only time will tell.


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