Voltz Protocol | ALPHA LEAK with Simon Jones

Voltz Protocol 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.” With close ties to Uniswap’s V3 model, Voltz aims to disrupt the interest rate swap market, which currently accounts for over $1 Quadrillion (four commas!) CEO & Co-founder Simon Jones joins this Alpha Leak to discuss the mechanics, roadmap, and token(?) for this exciting New DeFi primitive. ------ 📣 METAMASK | The Easiest Buy in Crypto https://bankless.cc/buy ------ 🚀 SUBSCRIBE TO NEWSLETTER: https://newsletter.banklesshq.com/ 🎙️ SUBSCRIBE TO PODCAST: http://podcast.banklesshq.com/ ------ BANKLESS SPONSOR TOOLS: ⚖️ ARBITRUM | SCALED ETHEREUM https://bankless.cc/Arbitrum ❎ ACROSS | BRIDGE TO LAYER 2 https://bankless.cc/Across 🏦 ROCKET POOL | DECENTRALIZED ETH STAKING https://bankless.cc/RocketPool 👻 AAVE V3 | LEND & BORROW CRYPTO https://bankless.cc/aave ⚡️ MAKER DAO | THE DAI STABLECOIN https://bankless.cc/MakerDAO 🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave ------ Topics Covered: 0:00 Intro 6:00 Voltz Protocol 11:15 Interest Swap Markets 16:00 From Chaos to Order 18:45 Leveraged Interest 23:57 How Voltz Works 29:40 Voltz and Uniswap 34:30 Speedrunning Markets 39:22 Voltz Roadmap 43:04 The Magnitude of Yield 46:25 Liquidity Providing 50:08 Voltz Token? 52:07 Get Involved ------ Resources: Simon on Twitter: https://twitter.com/0xSimonJones?s=20&t=LfUW7pisIXvB6IXanyaWsQ https://twitter.com/0xSimonJones?s=20&t=LfUW7pisIXvB6IXanyaWsQ Voltz Protocol: https://www.voltz.xyz/ ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://newsletter.banklesshq.com/p/bankless-disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  What that does off the back of that is it actually unlocks a whole bunch of new products and services which weren't possible until now.

• 0:09David Hoffman?

  Welcome Bankless Nation to this AlphaLeak episode where we cover Voltz Protocol. Volts is an interest rate swap AMM. It's got Uniswap V3 code in it and it helps us arbitrage interest rates across DeFi. Inside of, one side of the Voltz Protocol can go in variable interest rates and out on the other side comes out stable interest rates. And Volts is really a market maker, a coordinator between these two types of market actors in DeFi. Some people are willing to take the risk of volatile interest rates and some people are willing to pay for that risk being reduced and get stable interest rates. And Volts is an AMM that allows these two market participants to come together and meet in the middle

• 0:51David Hoffman?

  and allows one person to get stable interest rates and one person to get variable interest rates and perhaps a bunch more yield. There's also the conversation of liquidity providing since this is using Uniswap V3 code. But instead of with assets, with interest rates, there's of course the possibility of being a liquidity provider and gaining a ton of yield. And Volts really is trying to position itself as like the curve of DeFi for interest rates. Where a curve is where you go, it's the epicenter of stablecoin liquidity or like-kind asset liquidity. Volts is going to be, or trying to position itself to be the epicenter of interest rates liquidity in DeFi. And we don't really have a single central point of interest rate liquidity.

• 1:34David Hoffman?

  While the interest rate swap market in TradFi is like a quadrillion dollars, and I didn't just make that up. There is literally a queue, this is a line from Simon in the show, there's literally a queue in front of the volume and yearly interest rate swap market volume in TradFi. And if there's one thing that we know that DeFi produces, it's yield. DeFi is really good at producing yield and AVE produces some yield for some assets. Compound produces some yield from some other assets. We have the ETH stake rate, we have the USDC lending rate, we got the Urn yield rate. We have all of these yield rates. That are different from each other and Volts can be a coupler, a center point of liquidity between all of these different yield rates, allowing people to arbitrage them in a leveraged

• 2:19David Hoffman?

  fashion because that's what Uniswap V3 with concentrated liquidity does. The reason why I'm so bullish on Volts is that like it allows DeFi to set the market, the interest rate dynamics of the Ethereum economy, right? The interest rates of crypto are set by the market rather than the Fed, right? And so in the TradFi world, interest rates are set by like 12 dudes in a closed room. There's no input. It's just like, it's whatever they say. Under like a Volts paradigm, or really like, and this is why, again, I really am bullish on the future of Volts, is that Volts allows the market to determine the interest rate. And so just kind of like how Uniswap V3 is an oracle for prices organically, like there,

• 3:03David Hoffman?

  you put in DAI into one pool, Ether into one pool, and the market balance these things out and naturally prices DAI versus ETH. Volts can naturally price the interest rates of all DeFi. And so, you know, this is bullish for just a bankless, permissionless money and finance system where we don't have 12 dudes in a closed room determining the cost of money. Instead, we have a protocol determine the cost of money and that protocol could be Volts. At least that is the bull case for Volts. Of course, I ask Simon, is there a token coming? What about the token? When token? That question comes at some point during the show, so you'll have to stick around to hear about that. Just as a disclaimer, both Ryan and I have invested in the, as angel investors in Volts

• 3:45David Hoffman?

  in previous rounds, so we are upside, access to the upside there. So that's the disclaimer there. So I want to get right into the show with Simon, right after we talk about some of these fantastic sponsors that make the show possible. Rocketpool is your friendly decentralized Ethereum staking protocol. You can stake your ETH with Rocketpool and get our ETH in return, allowing you to stake your ETH and use it in DeFi at the same time. You can get 4% on your ETH by staking it with Rocketpool, but you can get even more by running a node. Rocketpool is the only staking provider that allows anyone to permissionlessly join their network of validating nodes. Rocketpool node is easier to set up than running a solo node, and you only need 16 ETH to get started. Why would you do this? You get an extra 15% staking commission on the pooled ETH, so your APY is boosted. So if you're bullish ETH staking,

• 4:29David Hoffman?

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• 5:14David Hoffman?

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• 5:58David Hoffman?

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• 6:34David Hoffman?

  Welcome Bankless Nation to this episode of AlphaLeak. On today's episode, I'm talking to Simon Jones, co-founder and CEO of the Voltz Protocol. And Volts recently just went to mainnet. So Simon, congratulations on that.

• 6:46Speaker 00

  No, thanks. It's super exciting.

• 6:48David Hoffman?

  Simon, for the listeners that haven't heard of Voltz Protocol or what that is, can you just explain the high level, explain like I'm five, what is the early explanation for Voltz Protocol?

• 6:57Speaker 00

  Yeah, sure. So the really high level is that we have built out a protocol that effectively brings interest rate swaps to DeFi. And I guess to talk to the significance of that first. So if you just look at traditional finance as an example, interest rate swaps, they're just a core pillar to a well-functioning financial system. And to put that in context, there is a kind of almost cartoonishly large quadrillion of notional exchanges each year in TradFi interest rate swaps. I mean, it literally starts with a queue. And it's that large because it supports such a wide spectrum of use cases, both across risk management, across speculation, but then also across the construction of a whole bunch of different

• 7:40Speaker 00

  products, both for corporates and for retail. And at the moment in DeFi, we don't have this piece of infrastructure. And what that does is, through it not existing, it limits the amount of products that we can actually build in order for DeFi to be able to become the financial system for the whole of the world. So by us bringing this to DeFi, that is what we ultimately really hope starts to happen.

• 8:05David Hoffman?

  So let's keep things really basic here. What is an interest rate swap market? What is that?

• 8:11Speaker 00

  Yeah, so there's basically a number of different actors that exist on the protocol. So we have LPs because it's an AAM, but just to ignore that for a second and talk about the traders. You are either a, what we describe as a fixed taker, where you are selling a variable rate of return in exchange for a fixed rate, or you're what we describe as a variable taker, where you are selling a fixed rate of return in exchange for a variable rate. And if I just talk about two kind of really simple use cases for that. So if you're a fixed taker, um, and you have an asset that produces a variable rate of return, like C D I, for example. And you don't want that variable rate.

• 8:50Speaker 00

  What you can do with Voltz's protocol is you can deposit C D I a- as margin, which effectively enables you to sell a variable rate into the protocol. And in return, you are then converting that into a fixed rate asset. So you are selling variable and exchanging that for a fixed rate. Uh, which if we just look at that very simple use case, like it, it interest rates what market actually opens up a very wide spectrum of use cases. But if you just look at that really simple one, what's really interesting is, is for the first time in DeFi, that has actually removed the silos between fixed and variable rates. You have a variable rate asset with a click, you convert it into a fixed rate asset. If we look at the other side and again, take a really simple use case. Uh, so in this instance, you're a variable taker, you are selling fixed in exchange for variable.

• 9:35Speaker 00

  Um, the fixed rate of return that you're selling away. Uh, if you're essentially wanting to go along the variable rate, so for example, if you believe there's another bull market up kind of around the corner and the rates on C D I are going to increase. You can actually get levered exposure to that variable rate as it increases over time.

• 9:54David Hoffman?

  So the idea here is that there are some market participants that desire a fixed rate. And they will pay some amount of cost in order to access that risk reduced rate. And so if you like lock in four percent. You have removed a lot of risk because you've removed the volatility of the fluctuations of the interest rate. Uh, and then there are, are people who are willing to be paid for taking that risk, who are willing to take the variable rates because, uh. Being paid to take the variable rates comes with a higher yield. Although you just don't know what that yield is because it's variable, but you also don't really care because you're willing to take the, the variance and the risk and collect.

• 10:35David Hoffman?

  What is like a not, not a direct payment of a fee, but there's a, a, a backdoor fee in the sense that you get to charge higher interest rates. If you are the one taking the risk of the variance and you are charging people who are de-risking what their, the yield is by getting a fixed fee. Am I on track here?

• 10:52Speaker 00

  Yeah, kind of vaguely. I mean, there's, there's, there's, there's a bunch of different actors that will exist on the protocol. But at its highest level, there are people who are more risk averse and therefore they are willing to sell away variable rate in exchange for fixed. There's people who are kind of on that use case more kind of risk loving, who are basically able to take advantage of the fact that there are these more risk averse actors in the market.

• 11:16David Hoffman?

  Keeping things again a high level, can we talk about why this market is so big in TradFi? Like a quadrillion, people don't know how to think about the word quadrillion. That's a very large number. Why, why is it so big in the traditional markets?

• 11:29Speaker 00

  Yeah, it's really big because it supports such a wide spectrum of use cases, which exists across kind of three main buckets. There's, there's risk management, there's speculation, and then there's also the construction of a whole bunch of different products, both for corporates and for retail. And actually, in traditional finance, right, like so if you were to go to your normal person on the street and say, hey, have you heard of an interest rate swap? Chances are they probably said no. But if, if you go to them and say, have you heard of a fixed rate mortgage? The chances are they'll probably say yes. And what's actually happening is in the background that in traditional finance, that bank which is constructing, or typically that bank which is constructing that mortgage for, for consumer, they're actually using super low level capital markets infrastructure,

• 12:12Speaker 00

  i.e. an interest rate swap, in order to package up that product. So when we kind of think about this in the context of DeFi, you know, if we want these types of products to exist and if we want to increase like this, this spectrum of kind of utility that DeFi can provide to people around the world such that DeFi can become the globe's financial system, right, we need this, this, this core pillar to exist such that we can start building these products and services.

• 12:41David Hoffman?

  Can you illustrate what DeFi looks before and after a like sophisticated, robust interest rate swaps market? Like what, what is the current state of DeFi? And then what is DeFi going to be once we have all of this infrastructure around interest rate swaps built out? What changes?

• 12:59Speaker 00

  Yeah, so there's actually, if we if we look at DeFi today, there's there's almost a structural problem where DeFi is structurally variable. And this exists all the way across the stack. So if you go right to the bottom of the stack, uh, to uh, your kind of proof of state mechanics, which obviously where kind of vast majority chains converging, uh, you know, on a block by block basis, uh, due to supply and demand dynamics, the rates of emissions which miners are able to generate change, right? So you have right at the lowest level, you have variable rates of return coming out of the ecosystem. On top of that, you've got protocols. Uh, so if you think of, say, Avi and Compound just as examples, again, supply, demand dynamics mean that the rates of return change on a block by block basis.

• 13:43Speaker 00

  And then on top of that, if you're a trading firm or you're trying to build products or or kind of that you distribute to retail or whatever, um, uh, even if you deploy some sort of market neutral strategy, you are doing that on top of an ecosystem that's structurally variable. And what interest rate swaps unlock at the most macro level is it enables us to build a system where we have structural stability for those that want it. And that it it kind of opens up this whole spectrum of different use cases and products and services that can be built, um, which can span across different retail use cases. Uh, so that could be stuff which is on one end of the kind of complexity spectrum, stuff that's relatively simple, like fixed rate volts,

• 14:28Speaker 00

  all the way through to actually the other end of the spectrum, you can start building, for example, fixed rate mortgages on chain. And there are teams that have reached out to us since we've gone live, kind of exploring that as an idea. Um, and then on the corporate side, you actually have stuff where you can uh, do stuff around risk management and you can also do stuff around speculation. So if we talk to risk management as an example, you may have a C-Fi lending business, for example, uh, which is uh, kind of promising, say, fixed rates of return on one side, but then a kind of lending out variable rates on the other. And actually what they have at a balance sheet level, when you aggregate that up, is they have a rate liability and they have no way of hedging that risk on chain. And all of a sudden with volts, you can do that, which enables them to

• 15:12Speaker 00

  to to be more stable as an entity and therefore start to expand the products and services that they can offer. And then on the speculation side, what's actually really interesting is you can build, uh, because it's a derivative and you can trade rates, just like you can speculate with uh, kind of like crypto assets. Um, you, you can actually build a whole bunch of really interesting trading strategies that take advantage of um, kind of different rate markets and the way in which those rates are produced. And the fact that they kind of at times, for example, may diverge and you believe they're going to converge. And because you can do that and trade that exposure on vaults with leverage, all of a sudden it's a hundred basis points, which one percent kind of like change. Actually, if you're doing that with a hundred X leverage, it becomes really

• 15:55Speaker 00

  attractive. Um, so there's, there's a much wider spectrum of use cases which then get opened up off the back of it.

• 16:01David Hoffman?

  And crypto has this branding of being this like chaotic, volatile, unstable, Wild West. And perhaps it's because we don't have some infrastructure like this, which really creates like solid foundations for people to make like longer term plans. Uh, and so if some like big institution with a bunch of capital comes in, they need solutions to lock in their interest rates so that they can think in the long term, right? And like, you know, the, my model for this is that the crypto industry starts extremely degenerate, extremely speculative, extremely unstable, extremely volatile. Uh, but as it grows and grows and grows, both in just like amount of capital, a number of users, but then also like sophistication of financial primitives.

• 16:45David Hoffman?

  All of a sudden we come up with tools to turn what is a chaotic, unstable place into a orderly, uh, orderly markets with solid foundations. And like the cool thing, the cool thing that I'm seeing here with this is that you have two parties, one that is the volatile party and one that is the, uh, the non-volatile, the stable party. And like the stability can come on the backs of degenerates, right? Like people that are trading with like a thousand X leverage on interest rate, uh, variance. Uh, and if they are right, they get a bunch of money and the, the people that are looking for the orderly institutions can ride off of the liquidity of like the degens who are taking a bunch of leverage with, with interest rates. Uh, would

• 17:27David Hoffman?

  you, would you, how do you like that take? Is that a, a good take or what would you change?

• 17:32Speaker 00

  No, I think there's definitely parts of that which I like completely agree with. I mean, it's completely fine for elements of, like, I have absolutely no issue. I think it's amazing that there's parts of DeFi that are kind of volatile. It's like lots of speculation. It's a completely legitimate thing to do with your money. But there's also, if we really want DeFi to become the financial system for the whole of the world, there's also a whole bunch of other people who don't want that. And actually, the existence of an interest rate swap market enables DeFi to exist for both sides of the market and actually frankly enables those different types of kind of actors with different risk appetites to almost be able to kind of play off the fact that there are different people with different risk appetites

• 18:14Speaker 00

  and you can effectively exchange that difference in risk appetite with one another.

• 18:19David Hoffman?

  Yeah, right. This Volt seems like it can be a coordination tool between the risky and the risk averse, right? It allows the risk averse to find their other half to balance each other out to create a stable foundation.

• 18:34Speaker 00

  In many ways, yes. And then what that does off the back of that is it actually unlocks a whole bunch of new products and services which weren't possible until now.

• 18:41David Hoffman?

  So a good question about how Volt actually works under the hood. Like, we already have like stable interest rate options. Like, AVE has stable interest rates in its protocol. When you borrow like USDC or DAI or anything really, I think you can get a variable interest rate and pay a lower fee than what is offered for a stable interest rate. So like, either you can lock in like a 3% USDC borrow fee or you can get a variable interest rate, which will be something like 2.5% or 2%. But then there's the chance that that variable interest rate goes up to like 5% or perhaps even down to 1%. Like, but we already have this option in AVE and in Notional as well. And so like other DeFi applications already provide this service. So what's different about Volt?

• 19:26Speaker 00

  Yeah, I think the key thing is that Volts is generalizable and composable such that you can build a whole bunch of different products and services off the back of it. And alongside that, the other thing which is extremely different is that it's so capital efficient. So actually, when I kind of go back to when Archer and I, that's my co-founder, when he and I were going through a process of just figuring out how on earth you build this this type of market in DeFi, where the constraints are frankly just fundamentally different to say traditional finance, if you're trying to look at that as an example.

• 19:59Speaker 00

  The two things that we're really optimizing for was number one, capital efficiency, which has kind of led to a bunch of architectural decisions that we made in the protocol. And I guess the headline there is it is around 3,000 times more capital efficient than alternative structures. But then the other that we're really solving for is to try and make the protocol as composable as possible, which meant that we figured out a mechanic where everything exists on-chain, such that people can start using Volts as a very low-level building block to build all these products and services that we feel that it is going to unlock through the next few years.

• 20:40David Hoffman?

  Right, so AVE and its variable or fixed interest rates is like a money market, but it only has so it only goes so far in providing like the actual tooling for all yield-bearing assets to be able to access both fixed and variable interest rate markets. But then also like another big difference is that with leverage, right? And so you can only arbitrage the differences between variable and fixed interest rate markets on AVE. It only goes so far because of the capital intensivity and AVE is just not really meant for that. Volt is specifically meant for arbitraging the differences between variable and fixed interest rates and you are able to do it with leverage. How does the leverage happen?

• 21:23David Hoffman?

  How do we get like leveraged interest rate market swaps? Like where does that key unlock come from?

• 21:28Speaker 00

  Yeah, so the the way that we've built the protocol is is we deliberately split out the AMM uh from what we describe as the margin engine. And the AMM, wha- what that now does is it, we describe it as a virtual AMM because it essentially only acts as a pricing oracle. Uh where we essentially mint and burn fixed and variable tokens as trading activity takes place and that obviously drives the price. And that then acts as a pricing oracle into the margin engine. And the margin engine, we often describe it as the beating heart of the protocol, um because it's responsible for defining the leverage that you can take as a trader. It deals with settlements, it deals with liquidation events, it collects fees for LPs. Basically does everything except at the pricing oracle, which the virtual AMM does.

• 22:13Speaker 00

  And then in terms of like specifically how it creates leverage. So if I just walk through a kind of a really simple use case, if you've got a pool which has got a one year term. And say you're a variable taker, so you're selling a fixed rate and imagine the price of the fixed is 10%. Right, if I'm doing a hundred of Notional, a really simple uh kind of model. Uh would assume that I need to deposit 10 of margin, right, so I've got 110% for a year, 10 of margin. Um and so at in that instance, you are already trading with 10x leverage. Uh but what's actually very naive about that model is it would assume that the variable rate would drop to zero. And stay at zero through the entire course of the term.

• 22:56Speaker 00

  Which actually, when you start to run a whole bunch of modeling around that, is it just extremely unlikely to happen. So what we have instead is we have a margin engine which computes predictions into the future. Of what your likely upper and lower bounds are going to be for a rate. And then that defines, uh kind of within a safety measure, it defines the amount of leverage that you can take as a trader. Which actually, in some instances, particularly as rates actually start to come down, so if you go from 10 to 1%. You know, you you could theoretically be fully covered and and only be depositing one instead of 10 for a year term. Uh as rates start to come down, it means that actually you're able to take more leverage.

• 23:37Speaker 00

  Uh as a user, so so the the actual kind of underlying number associated to the rate is not what matters. Because it's offset by the fact that you're able to take more leverage.

• 23:47David Hoffman?

  And this is where, yeah, we're definitely taking a peek under the complexities of the Volt's protocol and what really powers the Voltz's protocol to make it different than all the other fixed versus variable interest rates markets. Can we actually just zoom out and like start from the very beginning about the technical details behind Volt's? You talked about how it's a virtual AMM and like I kind of can wrap my head around that. But like, can we just like go and do just a walkthrough of like all the details of the Voltz's protocol under the hood? I know you already just did it, but like let's start from the beginning and like go through it like step by step.

• 24:18Speaker 00

  To explain the architecture, it's actually easier to just explain the different actors first. So we've got, we've got three different actors. You've got liquidity providers, you've got fixed takers, and you've got variable takers. If you are providing liquidity, we actually borrowed concepts from Uniswap V3 where we have tick kind of spacing within the AMM. So as a liquidity provider, you choose your tick range that you want to deposit liquidity within, and that's essentially the way which you go about doing it. But that requires you via the margin engine to-

• 24:50David Hoffman?

  And that's like in Uniswap V3, that's like concentrated liquidity, right? That's the concept of concentrated liquidity in V3. When you say like providing between two tick ranges, this is the same thing, but with interest rates rather than asset pricing, right?

• 25:02Speaker 00

  Exactly. And actually, if anything, what's really interesting is, well, not only does that unlock capital efficiency, but actually within a rates market where your rates tend to be mean reversing, if anything, it's actually a better kind of use case for the concentrated liquidity mechanic, which I guess to talk to that just very briefly, so if you've got DAI and ETH, for example, where that, you know, that's quite volatile, as a liquidity provider, you are having to change your tick ranges relatively regularly. In a rates market where rates have this mean or exhibit this mean reversing behavior, actually you can choose your tick range and even if the rates kind of go out for a period of time, you can kind of like confidently kind of predict that it's going to come back, at which point you might not even need to change your tick range, you can just leave

• 25:47Speaker 00

  your liquidity there for a period of time.

• 25:49David Hoffman?

  Right, yeah, and just to double down on that, providing liquidity between Ether and DAI, you know, some people choose to do this behavior, but I don't choose to do this behavior because I think Ether is going to like $10,000 and beyond.

• 26:03Speaker 00

  Yeah.

• 26:04David Hoffman?

  And so like I don't want to be providing liquidity there when I, when I want and bet on Ether going up and up and up and up. That same bet doesn't happen with interest rates, right? Like, it's just ridiculous to make a bet that you think the interest rates are going to go from 5% to 10% to 20% to 100% to 1500%. That's not how interest rates work. They never really get that far away from some certain mean. And so liquidity providing inside of a concentrated liquidity model that Uniswap V3 unlocked is like more efficient from like a fee-taking perspective because when it mean reverts, what that means is that it's going back to, back inside of a range that you can depend on more than like Ether. Ether's not going back into a range, like Ether's going to the moon. So it is meant to escape the ranges.

• 26:48David Hoffman?

  But interest rates are meant to stay inside of certain like ranges. And so I just wanted to like double down on that explanation there.

• 26:55Speaker 00

  Yeah, no, that's absolutely. I think the only thing which I'd add to that is obviously in bull and bear markets, in a real bull market, you see that the underlying rates on, say, Avi and Compound do typically go up. So you kind of end up at this more, a different equilibrium, but they still tend to exhibit mean reversing behavior around some sort of equilibrium.

• 27:13David Hoffman?

  Right, right. Like, we're not, we're not seeing 10 or 100 Xs in interest rates. And not for very long, at the very least.

• 27:20Speaker 00

  Not for

• 27:20David Hoffman?

  Okay, so we just, we just explained concentrated liquidity providing with interest rates. Where does this, where does the protocol process go from here?

• 27:29Speaker 00

  Yes, you've got, you've got the three actors. You've got liquidity providers, which obviously provide liquidity through that mechanic. And then you've got your fixed and variable takers.

• 27:38Speaker 00

  It's really important to think about that architecture of your virtual AMM and your margin engine, because every single actor, including liquidity providers, you are depositing margin to cover a position and then that is minting fixed and variable tokens, which is your, your actual notional that you're trading, and that's going into the AMM. And your notional that you're trading is essentially your margin times your leverage. And by separating these two out, not only does it enable us to essentially have the ability to introduce leverage into the rates market, but it also enables us to have this mechanic where the virtual AMM is just purely functioning as a pricing oracle.

• 28:20David Hoffman?

  From the user perspective, from the external perspective, Volt is Uniswap V3 for interest rates, but it doesn't mimic Uniswap V3 in every single way in the sense that you want not depositing assets. It's using the Uniswap V3 code as an oracle more than it is an actual exchange. Is this correct?

• 28:38Speaker 00

  Yeah, so originally, when we actually kind of came up with the idea, we thought that we could route trade via Uniswap V3. And then actually, when you start going in and kind of really trying to build that, actually, there's so much of that code that basically needs completely refactored for a different market, that in the end, we actually needed that code to be native to our codebase. And it is essentially only the very low-level kind of building blocks, such as the use of tick ranges, that actually ended up going into our code. I don't know if you remember this, we actually had to go through, obviously, Uniswap V3 code is subject to what's described as a business source license, so you can't

• 29:21Speaker 00

  just fork it and kind of put it into your codebase. So instead, we had to go through a process with the Uniswap DAO where we asked the Uniswap DAO to provide us with essentially a license. It's actually described as an additional use grant, but it's a license which allows us to have Uniswap V3 code in Volt's protocol codebase.

• 29:40David Hoffman?

  Yeah, this is a fun piece of DeFi trivia. Uniswap V3, rather than being fully open source, it's licensed for a number of years, I think something like three to five years or something. And that's just mainly to protect the efforts of the Uniswap team and the investors. Eventually, that timeframe of licensing will definitely just end and it will become open source. I can't remember the years on that. It's like three to five or something. But Volt's protocol wanted to use Uniswap V3 code inside of its application, and so it needed to convince the Uniswap organization, the Uniswap DAO, to allow Volt to use the code, because the code is licensed. And I think Volt gave Uniswap 1.5% of all tokens in order to pay for this license. Is that the correct number?

• 30:23Speaker 00

  1%, 1%. Yeah, but yeah, one percent.

• 30:27David Hoffman?

  One percent, one percent. Which is just a cool story of just like inter DAO relationships. So like one, one org wants to pay another org to use their software. And so they, they just paid them one percent for the, for the costs of producing Uniswap V3. And now it's integrated inside of Volts, which is actually an interesting business model that I don't think many, many people think about Uniswap or, or even open source software that's not fully open sourced yet. But just like kind of a cool side quest of a story between Volts and Uniswap V3.

• 30:56Speaker 00

  Yeah. And what was really cool about that is the first ever like DAO to DAO deal that has taken place in this space. We actually expect, and we've already seen a bunch of proposals that kind of mimic that. So we expect that to continue. But what it, what it also does is actually ties the success of the two DAOs together in many ways. So we've got people coming in from the Uniswap DAO that are now contributing in, in different ways to the Volts kind of protocol and, and, and to the DAO that we're building out. And then alongside that, kind of going back to Uniswap, well, like they're in one percent of Volts' future token. So as Volts grows, that actually has an economic advantage to Uniswap as well. So it's not, what's actually really nice there is it's not just the composability of the software.

• 31:38Speaker 00

  You start getting some sort of composability across the two communities as well, which is pretty nice.

• 31:43David Hoffman?

  Yeah, the phrase composable communities is something that Ryan and I have, have been like leaning into ever since DeFi summer. And like, so like, while it is like a one percent capital cost from the Volts organization, from like all the one percent of the capital goes to Uniswap. It's also kind of investment in Uniswap and Uniswap's community. So it's not just like a fixed, it's not just like a cost, it's not just like a, a negative on the balance sheet. You also get, well, the Uniswap V3 code, but also Uniswap talent just by proxy because of how composable these ecosystems are.

• 32:13Speaker 00

  Yeah, exactly, exactly. And what, what it means is that Uniswap, you know, very much the grandfathers of AMM design and, and, you know, perhaps in version four or whatever, like assuming they kind of are working on that type of thing. You know, there's opportunities for the ideas that are generated within that ecosystem to really kind of like come through into, into the Volts community as well. Because you have these people that now start to exist across the two ecosystems. Which, which then just enables, you know, more innovation and, and kind of ideation to take place, which perhaps as an ecosystem gets us to an even better place as well.

• 32:45David Hoffman?

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• 34:57David Hoffman?

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• 35:28Speaker 00

  Yeah, sure. So, well, the way that it works is you have these three participants. Liquidity providers provide liquidity within tick ranges that creates the market from which a fixed or variable takers can start trading. And the way that that works at kind of a more practical level, so imagine you've got a fixed taker who comes in, they're wanting to sell a variable rate in exchange for a fixed. What they can do in the way that that works relative to liquidity providers is if the kind of price is within the liquidity provider's tick range, fixed taker comes in, they initially use the liquidity provider's liquidity to execute a trade, at which point the LP is effectively the variable taker, because they're on the other side.

• 36:11Speaker 00

  But then if a variable taker comes in and has the same amount of notional, the prices at the same point, and they do the trade, actually what happens, although they use the LP's liquidity initially, those two trades then actually net each other off, and the liquidity provider's kind of liquidity then kind of is released and goes back into the AMM to continue to collect fees. And that's a process that we describe as margin recycling. And then those two positions basically are sat as essentially, it's actually a pool-to-pool basis rather than pair-to-pair, but they're sat in two pools, which are supporting either side's position until the end of the term.

• 36:50David Hoffman?

  This kind of feels like a perpetual swap market as well, where like there's a central contract, and then like, and it just orients the two sides of the market. But I guess that's all kind of how all markets work.

• 37:03Speaker 00

  Yes.

• 37:03David Hoffman?

  With a, with a margin, margin recycling.

• 37:07David Hoffman?

  Yeah, sorry. Go ahead, go ahead.

• 37:08Speaker 00

  Well, I was gonna say, one of the key things is that all the pools on Volts have terms. So the pools which are live at the moment, they have 60-day terms and that means that the end of the term, everybody settles.

• 37:20Speaker 00

  But the margin recycling, when we're thinking about, coming back to some of the stuff that you were saying before about how like Volts is different and how we kind of create this market. Actually, having fixed and variable rates, which are tradable within the same AMM, such you can transition from one side to the other and back again. And what that does from a liquidity provider's perspective, where you're able to have this margin recycling mechanic. All of that contributes to having a kind of an AMM design that is ultimately more capital efficient and removes the silos between fixed and variable rates. It's all mathematically connected.

• 37:53David Hoffman?

  Why fixed at 60-day terms? Why, is there a future where Volts is like infinite terms or like what's the story here?

• 38:01Speaker 00

  Yeah, so we, well, so rate markets are still relatively new in DeFi, so kind of opening up pool terms that had kind of a year term and someone's trying to speculate on what's going to happen to the variable rate and seed eye over the course of an entire year. It is, you know, the cycles that exist are just a bit too unpredictable for someone to kind of reasonably take a view on what's going to happen over that long period of time. So what we did instead actually is we built ourselves a whole bunch of statistical arbitrage kind of models internally. We've actually, within the Volts Labs team, we have our own quant team. And we started looking at what type of kind of APIs can you generate depending on how long the pool terms are and that type of thing.

• 38:46Speaker 00

  And that's where we landed on actually a 60-day term to begin with. Is a sensible length of time, which enables you to have a few cycles in rates where they kind of like converge. Say between A-Di and C-Di, it will converge for a period of time and then it will kind of come back to get, sorry, diverge and then converge. Which means that you can start building these models that trade that kind of movement with leverage in a time period that is sufficiently long enough for that to take place, but also sufficiently short enough for people to be confident speculating over that period of time.

• 39:22David Hoffman?

  So is this 60-day window, what's the vision for the development of different timeframes? And we're now getting into the conversation of the Voltz's roadmap, so we can talk about that next. But first, like, what's the roadmap for, like, opening up further, further, longer time scales?

• 39:41Speaker 00

  Yeah, so we, I mean, we can, it's very, the protocol's generalizable, actually, to the point that not only can we introduce a market on top of any asset with a variable rate of return. So we, so long as we have a rate oracle pulling in the variable rate, we can basically create an asset on top of any asset, sorry, a pool on top of any asset. So to begin with, we've done that on Aave and Compound, and we've just done that for 60-day terms. But we will launch pools on top of kind of other assets. And one of the ones which has been public talk about is Lido, kind of in the future as well. And then in terms of the actual term, it's super straightforward. We, we, we kind of felt 60 days was the most sensible thing to start off with, but we could very easily introduce 90, 180 days, even a year long term. If that's what the market desired.

• 40:27Speaker 00

  But the thing is, if you start stitching these 60-day terms onto each other, you, you can sort of replicate something similar anyway.

• 40:33David Hoffman?

  Yeah, so Volt's can open up any length of market that it, it wants to. It just needs to make sure that there's enough liquidity there. And so it sounds like the interest in specific timeframes will, is going to be what determines those timeframes, like, opening up. And so since Volt's is literally in, it's like, it just got pushed to mainnet very, very recently, starting with 60 days. And then as Volt's gets adopted, the interest rates markets on DeFi grow, so will the options for timeframes inside of Volt's. Is this all tracking?

• 41:04Speaker 00

  Exactly, and because if you were to have, say, a 60-day term on an Adi pool and a 90-day term on an Adi pool live at the same time, actually, what you're doing is you're fragmenting liquidity across those two pools. So it's a lot more, it's a lot more sensible, actually, to have kind of shorter duration, single pools to begin with. And then as the liquidity starts to increase, we can start opening up kind of more terms, kind of on the same asset.

• 41:27David Hoffman?

  We know that stablecoin yield is huge in DeFi, of course, but also we are coming up to the merge. So like this is a beautiful moment for Volts to be on mainnet as we, as Ether goes from proof of work to proof of stake. So I definitely want to talk about the future of Volts with like the ETH stake rate and its relationship as like a financialization of ETH, financialization layer on ETH. But first I just wanted to get more of like the Voltz roadmap. What are you guys working on like right now? What are you guys working on the next few weeks, next few months? And then like longer term horizons for the next few years?

• 42:00Speaker 00

  Yeah. So in terms of right now, we're obviously in this alpha state where we've just gone very recently gone on to mainnet. And what what alpha means at a more practical level is there's a cap on the amount of liquidity that could be provided as an LP per pool, which not only enables us to kind of like test it in a more kind of like kind of safe environment to begin with. It then means as trading volumes start to pick up, we will start opening up those caps too. But then alongside that, we're actually working on a bunch of different rate oracles, which pulls in the underlying variable rate on chain. So the kind of first one, which we kind of obviously public in talking about is that we're going to launch Lido Markets,

• 42:40Speaker 00

  which will enable people to speculate on the rate of return that they expect to occur on state ETH. And we'll launch that alongside a bunch of other ETH-based pools, so AETH, CETH, for example, which actually also enables people to start arbitraging between those different rates and the way in which the rates are behaving in different kind of protocol designs.

• 43:04David Hoffman?

  And there's so much coming online in DeFi right now, like not, there's AVE and Compound, of course. There's also Rari's Fuse pools, which can create interest rates. But then there's also Euler Finance, which is a brand new AMM, which can also tap into Volts. So it sounds like any, any market, money market like, like AVE or Compound or Euler or Fuse can just hook into Volts and it can take their variable interest rates and Volts can turn it into stable interest rates. So this Volt seems like a tool. For every AMM or every money market that comes into DeFi. But then also, like, we have Lido's staked ETH and Rocketpool's R ETH.

• 43:45David Hoffman?

  And we have these two variable interest rates, but also coming online is the new Coinbase announced one. Alluvial, I think, is also a new, like, liquid staking as a service organization. Obel Network is here to, like, make a bunch of competitive staking as a service networks. And so perhaps a bunch of liquid staking derivatives. There's also, like, things like Stakewise and, like, all of these things that produce yield in DeFi. And I make this joke, like, Bankless listeners who tap in to Bankless all the time will hear me and say this joke all the time. Like, crypto is here and has made really three good things. Like, there's three good things that come out of the crypto world. One is non-sovereign store of value money, and that's Bitcoin and Ether.

• 44:29David Hoffman?

  The second one is yield, like, that's the second big thing that crypto makes. And then the third one is content, which is like the joke, but also I think is true. And but like Volt, if you agree with me that, like, the first use case of crypto is money and the second use case of crypto is yield. Well, Volt is turning that whole entire second use case and making it stable and allowing other people to to take the risk and the upside on the volatile side. And so as we get into the ETH post-merge state where Ether yield rates go from like 4.2 up to 7 and beyond. But then also goes up further as a function of the heat of the Ethereum economy.

• 45:10David Hoffman?

  The hotter the Ethereum economy is, the more higher the ETH stake rate goes. Although I'm sure, like, Volt is just, like, licking its lips at just, like, the possibilities here. So, like, how do you guys think about how Volt interfaces with the ETH stake rate over the long term?

• 45:25Speaker 00

  Yeah, well, I mean, you kind of touched on it there. Because the protocol is generalizable such that we can create kind of pools on top of any asset with a variable rate of return. All that's required is a rate oracle to be built for all of these different protocols. At which point you can start speculating kind of on the direction which kind of the rates of return on, say, state ETH is going to go over a period of time. But then you also can start arguing between different protocols. So what becomes really interesting is as you start getting kind of more competitors to Lido. Actually, you know, if they are starting to produce different rates of return, you can start arbing that with leverage by the fact that Volts exists, which is obviously something which you could not do before.

• 46:09Speaker 00

  Which starts to obviously kind of post-merge, it starts to become kind of really interesting as the dynamic evolves and as there's more competitors which start to exist. Actually, people starting to speculate on that, we see as like a really interesting and big use case for the protocol.

• 46:24David Hoffman?

  I want to touch on the very last participant in the Volts ecosystem before we talk about some candy topics. I am going to ask if there's a token, the liquidity providing. Why would somebody provide liquidity? What do they get out of it? And can you also explain the cool quirk about Volts and liquidity providing, which is there is no impermanent loss because we're not trading across assets. But instead, there's this other thing. Can you overall just like pitch why somebody might be interested to be a liquidity provider? And like the whole like trade-offs that come with being a liquidity provider in Volts?

• 46:59Speaker 00

  Yeah, I mean, well, the headline is that there's opportunity to generate pretty significant APIs, which is both driven off the fact that you are depositing within tick ranges. Therefore, your capital is more capital efficient. It's also driven off the fact that actually you are generating fees off your notional, but you're only having to deposit margin in order to create that notional within the AMM. And then the last thing is actually this kind of really interesting dynamic where, I'd say unlike a Uniswap V3 pool where you have two assets, like say DAI and ETH, with a rates market, your kind of fixed takers and your variable takers are getting paid in the same kind of underlying asset. So if you've got a pool which is created on top of C DAI,

• 47:43Speaker 00

  your fixed interest rates are in DAI and your variable interest rates are also in DAI, which means as a liquidity provider to actually create either side of the market, you only have to deposit one asset, which is DAI. And then all of a sudden, you do not have the concept of impermanent loss. It is replaced with other risks. So we have what we describe as funding rate risk, where just for argument's sake, imagine a fixed taker came in and traded with your liquidity. But a liquidity, sorry, a variable taker never came in and then did the opposite side of that trade. What would actually happen is your liquidity would be locked into that position, supporting the fixed taker until the end of the term.

• 48:25Speaker 00

  And you're more exposed to that risk if you are depositing within a tight tick range. At a place where it kind of like your your tick is outside of the band where you have this mean reversing behavior. So that that's the that's the small quirk, which is, I guess, is different to impermanent loss. But if you're depositing it within a tick range where you've got balanced trading activity taking place on either side. All that's happening is you support a trade until it or corresponding trade nets it out. You go through this margin recycling process and you're collecting fees.

• 48:55David Hoffman?

  Okay, so if instead of impermanent loss, you're exposed to the risk where if there is a lopsided market, as in there are more people on the fixed side of things and not enough people to support that, as people on the variable side of things. That is the that is the new impermanent loss for Volts. I kind of didn't totally follow the mechanic on how it works, but that imbalance costs you yield, costs you fees. And like you are the one taking the weight of that imbalance as a liquidity provider in Volts.

• 49:26Speaker 00

  Yeah, that's right. There's a there's a chance that that costs you. So if you get and if you end up having a position that's not netted out. And if it happens to be, for example, a fixed taker position. And the underlying rate market moves against you because on one side it's going to move for you and on the other it's going to move against you. So so if you don't get netted out and the rates move against you, then there's a risk that you are supporting that person's position, that trader's position. But the best way to kind of avoid that is obviously to put your liquidity within a tick range. Where there is balanced trading activity, at which point you just have this continuously recycling recycling mechanic.

• 50:08David Hoffman?

  So Simon, is there a Voltz token?

• 50:13Speaker 00

  Well, so we did the Uniswap DAO to DAO deal and they received 1% of Volt's future tokens. So I think it's completely fine to acknowledge that there will be tokens in the future. Uh, but right now there is, there is no Voltz's token.

• 50:27David Hoffman?

  Okay, so there's just like, uh, there are ideas for future tokens. Uh, do you know how that token would be released into the public?

• 50:35Speaker 00

  Uh, so there's, there's a lot of the design around that and the decisions around that, which, which honestly have just not been, not been a core focus as we've been building the product and getting it live. Um, obviously we want the whole, uh, kind of protocol to be transitioned to a DAO such that it becomes a public good, which is owned and managed by the community. I think that's incredibly important for the whole ecosystem. Uh, but exactly how that gets distributed is obviously not decided at this stage.

• 50:59David Hoffman?

  What are the parameters that if you had a token, uh, the token would likely govern over? Like what, what are the governing parameters of the Voltz's protocol?

• 51:08Speaker 00

  Yeah, so there's, there's the initiation of new pools. Um, uh, there's kind of launching of new markets. So say if you wanted to launch a pool on AVE instead of Compound. Um, but then there's also the actual risk parametrization. Um, and the setting of things like LP fees, uh, which are all things which, uh, can be voted on via governance.

• 51:31David Hoffman?

  I'm assuming since like we, we've been talking about Uniswap V3, there's so much, there's probably also like the concept of a fee switch. Whether that's like formally built into the protocol from day one or introduced later. Uh, but there will be like perhaps like a fee switch mechanism, uh, that is similar to Uniswap's fee switch mechanism as well.

• 51:49Speaker 00

  Exactly. So the, the way that the protocol can generate fees for the treasury is, is it, well, so LPs generate fees and the protocol can collect, can collect a proportion of LP fees if it chooses to. Uh, that is currently set to zero, but obviously it is a governance decision for the future as to whether to switch that on or not.

• 52:07David Hoffman?

  Okay, awesome. Simon, this has been, uh, really, really interesting. I've learned a ton. Who, are, are you guys hiring? Uh, what kind of jobs are you guys looking for? Or like for people that just want to like join the community, what kind of people are you looking for? Or just like overall, what talent are you looking to find in the Volt's ecosystem?

• 52:22Speaker 00

  Yeah, so we, we've been growing pretty aggressively over the beginning of this year. Like if I go back to January, it was literally just Archer and I, uh, Archer being my co-founder. Um, uh, we're now a team of 12, going to be 14 relatively soon. Um, we're obviously always on the lookout for kind of really high quality, uh, kind of developer talent. Uh, we're also looking for a head of growth. But then actually within the community itself, because we're kind of such a low level building block, which unlocks so many new products that can be built in this space. And we're constantly getting teams coming through who have, now that we have this new market, which is an interest rate swap market, constantly getting teams coming through, thinking of new products can be built on top of that, which spans from stuff across like swaptions

• 53:07Speaker 00

  through to more simple products like fixed rate vaults, even using kind of vaults as a form of stable coin collateralization, which is a pretty interesting use case. We've got two teams which are doing that at the moment. So if there are teams which I guess ultimately are listening to this and thinking, oh, wow, there's this new market that's been created and actually unlocks all of these kind of new opportunities for me as a builder, come into the Discord. We often set up kind of like one-on-one channels with that team and the Vault Labs team, and we really try and help teams through that ideation process to the point which they can actually go live.

• 53:41David Hoffman?

  Amazing. Well, Simon, we will get the link to the Discord, the Twitter and all the other relevant information into the show notes for listeners that want to dive deeper into the Vault's rabbit hole. Simon, any last comments or anything you want to share that I forgot to ask about before we sign off here?

• 53:55Speaker 00

  I don't think so. I think that the main thing which I'd say is that when we're going through a process of kind of figuring out what we felt was the next zero to one innovation required to move the whole sector forwards, you know, interest rate swaps, they're just a core pillar to any well-functioning financial system. So by us building this, we want it to help DeFi ultimately become the financial system for the whole of the world. And in order for that to happen, we need, now that this low-level piece of infrastructure needs to exist, does exist, that kind of provides these opportunities for people to start building these new products and services, which serve a much wider spectrum of financial needs. And that's frankly, that's the one thing which, more than anything, that's the thing which kind of excites us about the fact that we now launch.

• 54:41David Hoffman?

  Amazing, yes, and once again, congratulations on getting to mainnet. This is, well, I'm sure it also feels like the end of a very long journey, it is also just the start of an even longer one. So, wish the best to you and Volt, and thank you for coming on and sharing all of this alpha in this AlphaLeak episode with the Bankless Nation, Simon.

• 54:59Speaker 00

  No, it's been awesome to be here, and I kind of really enjoyed talking to you.

• 55:02David Hoffman?

  Bankless Nation, of course. Disclaimers, ETH is risky, crypto is risky, DeFi is risky, trading interest rates is also going to be risky. You can lose what you put in, but we are headed west, we're on the frontier. It's not for everyone, but we are glad you are with us on the Bankless journey. Thanks a lot. Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcasts, and community as a Bankless premium subscriber to get the most out of your Bankless experience.

• 55:39David Hoffman?

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