Strips Finance - A Tool for Hedging Interest Rate
On February 12, Strips Finance, a perpetual derivatives project, went live on the Arbitrum mainnet, along with many tutorials on how to use it, officially opening the interest rate swap market and allowing users who have been waiting for it to finally experience the official version of the product. This article provides a brief overview of the Strips product and its token $STRP.
What is Strips Finance?
Strips.Finance is an AMM model perpetual derivatives marketplace with other yield project's APY as the underlying asset. It is built on Arbitrum, planned to be deployed on BSC and was expected to go live on the mainnet by the end of November 2021. However, its mainnet beta version went live on Feb 12, 2022. Its main product, the Perpetual Interest Rate Swap platform, allows users to long and short APYs by depositing collateral as margin to trade fixed or floating rates.
Perpetual Interest Rate Swap
A perpetual interest rate swap allows users to trade any type of DeFi yield. Users deposit collateral on the platform in order to trade various interest rate markets. Users select the reference interest rate they would like to trade (i.e. Nerve.fi 3Pool vault, Bitmex funding rate) and simply buy or sell the interest rate against passive liquidity provided by an AMM. Pricing is automatically adjusted by the AMM, which can be customized for each pool based on parameters.
Strips uses a perpetual model of interest rate swaps, where positions have no expiration date and, as with perpetual contracts, when a user closes a position, the realized revenue is transferred directly to his wallet. Therefore, perpetual interest rate swaps have the same features as perpetual contracts: Index Price, Mark Price, Funding Fee and Leverage Margin.
- Underlying Floating Rate APY - Index Price: In a perpetual interest rate swap, the underlying floating interest rate APY (Floating Interest Rate) is the index price. The underlying Floating Interest Rate APY is feeded by the Oracles, so Strips do not have a real contract interaction with any external protocols.
- Fixed Rate APY - Contract Mark Price: In perpetual interest rate swaps, Strips offers a fixed rate APY similar to the mark price in a traditional perpetual contract. The fixed rate represents the value of the contract and is also used to calculate profit and loss and trigger liquidation. Strips Finance uses Trading Profit and Loss to represent the total profit and loss of a user's open and closed positions: the profit and loss is the difference between the market price of the fixed rate at the time the position is opened (Y1) and the market price of the fixed rate at the time the position is closed (Yt), multiplied by the size of the position.
- Funding Fee: When there is a spread between a floating rate and a fixed rate, the smart contract will automatically transfer the funding fee between the long and short sides. The Funding Rate (Oi) is the current yield of the underlying asset and is provided by the oracle. Unlike centralized exchanges where funding fees are settled hourly or every 8 hours, Strips Finance's funding fees are settled per block. When Oi greater than zero, users who are long the floating rate will pay a funding fee to users who are short the floating rate. Specifically, longers will pay (Oi - Y1) times the total position per block to shorters.
- Margin: Initially, users initially will be able to trade with up to 10x leverage. When the margin ratio of a position falls below 3.5%, the position will be liquidated by the automatic clearing engine (so the maximum leverage is approximately 28 times).
In addition to the AMM interest rate market, Strips Finance includes an auto-liquidation engine and an insurance pool. For details of the mechanism and fees, see: Liquidation, Insurance Fund
Strip Finance allows users to introduce new interest rate IRS markets, each of which will have an AMM pool. Strips does not specify which pricing method is used for AMMs, only notes that an "innovative calculation" is used to reflect fair prices. However, Strip's AMM will use the $STRP-$USDC LP tokens in Sushiswap as collateral in order to increase the value of $STRP, ensure liquidity in the AMM, and enhance price stability, according to the whitepaper.
Except for the governance utility, the $STRP can also accomplish the following utilities:
- Distribution to early users. $STRP tokens will be distributed to early users of the protocol through trading incentives, insurance farming incentives, and AMM LP incentives.
- To create new interest rate markets, you must deposit an initial amount of STRP-USDC LP tokens as collateral to bootstrap liquidity. New markets may not be protected by the insurance pool until governance vote.
- As collateral. Strips planned to use STRP, and USDC as collateral on the exchange, with the ability to add other assets as collateral subject to 75% approval from the community.
- $STRP tokens can be staked to receive vSTRP tokens. vSTRP acts as the liquidity of last resort in the event that the Strips Insurance pool is insufficient to pay.
The maximum supply of STRP is 100million and its allocation is shown as below.
Two funding rounds in June and September 2021, raising a cumulative $11 million, with participation from Multicoin, Kronos, DeFiance Capital and others.
Strips Finance launched a token pre-sale on October 13, 2021 on the MISO and Polkastarter platforms. 0.75% of the total supply of $STRP was sold on MISO as a Dutch auction with a final unit price of $4.98. The remaining 0.25% was sold on Polkastarter as a whitelist user split with a unit price of $2.
The project's MISO raising distribution is shown below. There are in total 16 addresses successfully getting final allocation of STRP with an average investing size of $250k.
Source: Anonymous Twitter, Oct 2021.
- TI Listing: Strips Finance(STRP)
- Tutorials of Bridge, Staking and Trade by Strips Official: https://strips-finance.medium.com/strips-user-manual-step-by-step-instructions-to-bridge-stake-and-trade-258fe890a2f9
- How to trade Interest Rate? https://strips-finance.medium.com/how-to-trading-on-strips-irx-8255eb3ee4b4