Voltz, an interest rate swap AMM that could unlock a whole new world for DeFi

The Voltz protocol brings interest rate swaps to DeFi, and that opens up the field to many possibilities. Derivatives in the DeFi space are still in development, taking form and adapting to a new medium. Voltz’s thesis is that a synthetic and non-custodial version of the interest rate swaps is a prerequisite for certain future products. 

“In creating Voltz, we took a research-focused approach to address the limitations of existing AMM structures and discovered a macro opportunity for the use of interest rate swaps through a new AMM design that utilizes concentrated liquidity,” said Voltz Lab’s CEO Simon Jones in a press release. According to Binance Academy, “You could think of an automated market maker as a robot that’s always willing to quote you a price between two assets. Some use a simple formula like Uniswap, while Curve, Balancer and others use more complicated ones.”

Back to Voltz, the company’s automated market maker is “highly capital efficient, removes silos between fixed and variable rates, and allows users to trade with >10x leverage.” This is a complex project. The formal definition on the homepage of their website doesn’t help, either.

“Voltz is a novel defi primitive, powering leveraged interest rate swaps. The first ever synthetic interest rate swap AMM, Voltz AMM utilizes concentrated liquidity, creating a market that’s c.3000x more capital efficient,” it claims. 

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Relevant concepts To Understand Voltz

• Interest Rate Swap: A derivative contract in which two parties agree to exchange one’s interest rate for the other’s. The arrangement usually involves one party having a variable interest rate and the other a fixed one. Each option has advantages and disadvantages depending on market conditions. If interest rates rise, a variable rate has the upper hand and vice versa. Interest rate swaps are the mechanism by which many modern financial products run. 
• Concentrated Liquidity: According to the project’s Litepaper, this is a “concept pioneered in Uniswap v3, we allow LPs to deposit liquidity within tick ranges, rather than along the whole constant product invariant.“
• Impermanent Loss: This is a very DeFi concept, a native risk. Impermanent loss is when an investor deposits assets into a liquidity pool, and the price of said asset goes considerably down. The Voltz Protocol claims that it gets rid of the phenomenon by creating single-asset liquidity pools. 

In the quoted Litepaper, there’s another formal definition for the product as a whole. “Voltz is a noncustodial automated market maker for Interest Rate Swaps (IRS). Voltz uses a Concentrated Liquidity Virtual AMM (vAMM) for price discovery only, with the management of the underlying assets performed by the Margin Engine.” In a recent interview, Voltz’ CEO Simon Jones put it like this:

“When entering into a swap in traditional finance, you have counterparty risk since it’s a swap with another party. So they created a whole legal framework, including the use of rating agencies, to support this. DeFi, however, is very different. Instead of having mechanisms for what to do when a counterparty fails, we’ve built a system that removes counterparty risk, meaning it can’t fail in the first place.”

Geez, can’t fail? Where have we heard that before? Oh right, everywhere. And it’s always been nonsense. 

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Governance And Audit Process

Voltz qualifies itself as “decentralized” and “non-custodial.” However, at this stage, it’s neither of those things. We found this jewel in the project’s GitHub, “Voltz Protocol will be governed by the DAO, so that the protocol is owned and managed by the community that uses it. Decentralizing ownership is critical to ensure the strength of the ecosystem we are all looking to build and to provide control to those that use the system. However, Voltz will initially be controlled by the Voltz Multisigs whilst the DAO is being created.”

Despite lying about being decentralized, Quantstamp successfully audited Voltz’s smart contracts. Among other things, Quantstamp said, “Overall, the code and the test suite appear to be of high quality, however, the project is very complex due to the large number of non-trivial calculations. Although we haven't found high-severity issues, we still consider the project risky in the sense that it is novel and contains intricate logic.” And they couldn’t be more right.

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What Else Should We Know About Voltz?

According to ZDNet, “Voltz Protocol will initially launch with Aave and Compound base stablecoin rates and will add more markets in the following months, including Lido's stETH token.” In that very same article, they inform us, “Because the Voltz Protocol is open-source and highly composable, developers can leverage it to build DApps for products, including on-chain fixed-rate mortgages, loans, savings accounts, risk management, DAO treasury management swaptions, IRS caps, and floors.”

There’s more to the Voltz Protocol than meets the eye. If adopted, it could be omnipresent through the following years. That’s a big “if,” though. 

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Buy/No Buy recommendation

If you understood exactly what the Voltz protocol does, consider a buy.
If you didn’t, skip and look for something simpler. There’s no shame in that.