Betting on DeFi Interest Rates – Maple Finance

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Maple SmartBonds can be used to speculate on or hedge the interest rate on Compound for supplying Sai.

Speculate: To profit if the Compound supply rate is going up, Issue Maple SmartBonds, set a fixed rate which you will pay your investors and your profit grows if the Compound interest rate increases.

Hedge: for the Compound supply rate going down, buy Maple SmartBonds and lock in a fixed interest rate for the next 3 or 6 months.

Are you bulish on DeFi interest rates and you think that Compound rates will reverse the downward trend they’ve had recently? How can you make a bet on this?

By Issuing SmartBonds with Maple Protocol.

  1. You hold cDai on Compound which earns interest
  2. You lock your cDai as collateral for Maple SmartBonds and sell these to Investors. Your SmartBonds pay Investors a fixed interest rate over a period of your choosing (SmartBond Term).
  3. At the end of the SmartBond Term, the SmartBonds mature and you can call the Redeem function. This redeems the cDai plus interest from Compound for Sai and then uses this Sai to repay the Investors (the amount they paid for the SmartBonds plus the interest they earned) and the remaining Sai is paid to you.

You are betting that the interest rate your Compound collateral earns at (A) increases. The interest rate you pay at (B) is fixed, so the amount you keep at (C) will increase.

A 1% increase in the Compound interest rate (A) is shown below.

LHS: With Compound Supply at 5%, Return on Equity of 9%. RHS: A 1% increase in Compound Supply Rate to 6% at beginning of SmartBond Term increases Return on Equity to 14%.

In the charts above you can see that a 1% increase on Compound at the beginning of the SmartBond Term translates to a 5% increase in your Return on Equity. This is because the 1% movement is on the whole 100 Sai-worth of cDai collateral on Compound, but your net investment position is only 20 Sai worth of Equity (you borrowed the other 80 Sai by issuing SmartBonds), so you are leveraged 5:1 (Collateral:Equity).

The approximate math is:

Leverage = 5x (ie 100 Collateral /20 Equity).

A 1% increase in Interest on Compound gives you an extra 1 Sai.

Your Return on Equity increases by +5% (ie 5*1%)

If you think that Compound Supply rates will continue the downward trend displayed recently. Then you can Invest in SmartBonds which pay a fixed interest rate over a 30, 90 or 180 day period and lock in an interest rate. In the example above an Investor could purchase the Issuer’s Grade 1 SmartBond and lock in a return of 4%. If the Compound rate were to drop below 4%, the Investor still receives their 4% reducing the Issuer’s Return on Equity.

See our recent Invest in SmartBonds with Maple article for detailed instructions.

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