New crypto-derivative could help set unpredictable IAD interest rates

Delta Exchange, a crypto-derivative platform, announced the launch of an interest rate swap contract for DAI, MakerDAO’s stablecoin, with a fixed price in dollars.

The contract will allow its buyers to swap interest on the DAI Savings Rate (DSR, a smart DAI contract for generating interest), which is seen by the exchange as a way for Maker borrowers (MKR) to set interest payments on their stability fee, which are channeled into the Savings Rate as profit for DAI holders.

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Interest rate swaps are a type of derivative contract established between two counterparties with opposite objectives, similar to options and futures. One party seeks to fix its interest rate payments at a fixed value to cover the risk of a volatile interest rate. This provides them with a predictable payment schedule, which can be especially helpful to borrowers. The counterparty is required to pay a fixed interest rate at certain intervals, on a daily basis in the case of Delta’s contract. They will make money if the actual interest rate is higher than they agreed to pay, and will subsequently lose money if the floating interest falls below the fixed rate of the contract.

Therefore, entering the contract means that one party is down on the floating rate, while the other is up. This opens the ground to speculation, as traders will make bets on the future value of interest rate payments. Delta’s contract supports leverage of up to 160x.

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Maker’s governance parameters

Both the stability rates, the interest paid by the borrowers, and the DAI Savings Rate are specifically set by Maker’s governance in periodic votes.

Since the introduction of DAI Multi Collateral, each asset has different stability rates, although the savings rate is one for all DAI tokens. Interestingly, the savings rate has been set at 0% since March 24. Ether’s stability rate (ETH) is also 0% at the time of publication, although other assets may have interest rates of 2-4%.

Rates are very low due to Bitcoin Rejoin constant breaking of its $1 quota. It often trades above $1 after the events of Black Thursday. A low rate should attract borrowers to create new IADs at their cost and sell them to the market.

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With interest rates at zero, the sellers of the swap contract may agree to pay some interest rate to their buyers, with the expectation that it will soon rise.

The borrowers of the Maker platform, using the contract, could compensate for some of their losses in the stability fee in the future and cover themselves against unpredictable changes.

But unlike other interest rate swaps where dynamic percentages are market-driven, traders in Delta will effectively be speculating on the decisions of the Maker community.