Now, investors have the opportunity to protect themselves against changes in interest rates within a decentralized finance (DeFi) setting by trading Secured Overnight Financing Rate (SOFR) swaps.
The Voltz decentralized finance protocol on Avalanche now enables users to trade interest rate swaps tied to the Secured Overnight Financing Rate (SOFR). SOFR is a widely recognized dollar rate used globally as a benchmark in the economy.
As per a May 24 announcement from Voltz, the newly introduced feature enables investors to protect themselves from interest rate fluctuations, while also allowing speculators to make predictions on whether the rate will increase or decrease. This provides users with more options for managing their investments.
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SOFR is the interest rate that institutions pay when they borrow money overnight using United States Treasury bonds as collateral. It was developed as a replacement for the older LIBOR. Since loans backed by Treasury bonds are considered very safe, SOFR is frequently used as a reference point to determine other interest rates. The Federal Reserve’s Federal Funds Rate has a significant impact on the fluctuations of SOFR.
In traditional finance, companies have long been using interest rate swaps linked to SOFR to safeguard themselves from fluctuations in interest rates. For instance, if a company intends to borrow funds, it can utilize these financial instruments to shield itself from potential increases in the Federal Reserve’s rates.
With the introduction of the Voltz feature on the Avalanche network, this traditional finance product becomes accessible to a broader range of investors. This expansion in usability may attract a wider group of individuals interested in utilizing the benefits offered by the platform.
According to Simon Jones, the CEO and co-founder of Voltz Labs, the new feature aims to create a fairer environment by bridging the gap between retail investors and large institutions. This initiative is designed to provide equal opportunities for all participants in the market.
“Everyone is affected by the decisions made by the Federal Reserve. However, only a few institutions have had the privilege of accessing interest rate swap markets to protect themselves from such exposure. With the launch of the Voltz protocol, Jones believes that traditional financial markets are now accessible through DeFi, providing a more inclusive and accessible platform for all participants”.
Traditional financial products have been gradually entering the world of DeFi (Decentralized Finance). For instance, INX, a securities broker-dealer, introduced shares of Greenbriar Capital on the Ethereum blockchain. They also developed a wallet that adheres to compliance regulations, catering to institutional users. Similarly, Neobank released a Soulbound token protocol on April 27, aiming to simplify the Know Your Customer process in DeFi. Neobank envisions this protocol fostering greater integration between banks and the expanding Web3 ecosystem.
Important: This article is intended solely for informational purposes. It should not be considered or relied upon as legal, tax, investment, financial, or any other form of advice.