How Celsius, 3AC misjudged risk and is DeFi’s future in interest rate swaps?
CryptoSlate spoke with Simon Jones, CEO of Voltz, an interest rate swap DeFi protocol aimed at creating “capital-efficient” things within DeFi. Jones has a deep understanding of market risk assessments and talks about the mistakes made by both Three Arrows Capital and Celsius in the last few months. A potentially negligent approach to risk was highlighted by Nansen in a recent report linking the issue of Celsius and Three Arrows Capital to Terraruna’s combined Ethereum.
In the interview below, Jones explained why DeFi needs interest rate swaps to inject stability into volatile markets, how Decentralized Finance and 3AC misjudged risk, and subsequent market capacities. Gives an opinion on what can be learned.
Voltz is described as providing access to “DeFi’s comprehensive and capital-efficient IRS market.” What does this mean for the average investor?
At most macro levels, interest rate swaps allow you to create products with built-in stability. So far, DeFi has been a great environment for people looking for high-risk volatile products. However, suppose you want DeFi to be a global financial system. In that case, we need to be able to meet the economic needs of the world. Therefore, it is very important to ensure the stability of some products.
Interest rate swaps make this possible by allowing you to move from floating rates to fixed rates (or vice versa). This unleashes a wide range of new products and trading opportunities that can be built that make the transition from “risk on” to “risk off” very easy.
The key to capital efficiency and the overall nature of the pool is that the Voltz protocol market is a suitable derivative. You can trade leverage and you do not need to own the underlying asset to trade. These are important attributes when trading basis points and using them as a mechanism for building new and interesting products.
Speaking of risk, how did Three Arrows Capital misunderstand this systemic risk?
Systemic risk was especially misunderstood by the lenders who provided capital to 3AC. This loan was often made to some form of collateral. However, as in 2008, the collateral is overvalued, suggesting that the position is secured despite the fact that there is a shortage of collateral.
In parallel with this, collateral liquidation occurred at about the same time. This meant that all capital was flooded into the market and prices fell even more sharply, creating a spiral of falling asset prices and further contributing to the nature of lenders’ lack of collateral. This downward death spiral was a systemic risk that was not properly considered by lenders, leaving many bankrupts.
What are the similarities and differences between this plunge and the 2008 market crisis?
The 2008 crisis had many similar characteristics. In particular, the system’s reliance on assets that are overvalued or at high risk of significant price adjustments. This has led to systemic risk, which causes a complete meltdown when the value of an asset declines.
However, unlike 2008, there are some differences. Most notable is the existence of DeFi, a system built to prevent failures, rather than having a legal infrastructure in place to direct what to do in the event of a system failure. This means that most of the “crypto financial sector” continues to function normally, mitigating some of the impact from poorly managed CeFi players.
Worth to repeat – CeFi is not DeFi. Many DeFi founders like me have entered this space to build a more equitable, transparent and vulnerable financial system. Seeing the many iterations of 2008 happening on CeFi players further reinforces my view that unauthorized and non-vulnerable financial protocols are the future.
How about Celsius? What did they make a mistake, and what can other companies learn from them?
Celsius appears to have entered a highly utilized position in retail deposits in an attempt to offer incremental yields in the form of a “competitive advantage” compared to other CeFi players. This may have worked in a bull market, but as has happened recently, there is always a great risk of remaining bankrupt if the value of an asset drops significantly and investors try to withdraw money. did.
Not only this poor risk management, but also the stink of the shaded and opaque world of TradeFi. This is exactly what we are trying to change.
Compare this with DeFi. This is a world where transparency and system integrity are at the core of system functionality, and system rules are deliberately known to everyone, and how some of these CeFi players acted. In stark contrast. ..
What do you think of FTX’s SBF, which offers loans in exchange for shares in companies like Voyager? Do you think his actions will be in the industry’s greatest interests?
FTX acted as effectively as the Fed did during the 2008 crisis to bail out bankrupt lenders. However, unlike 2008, it’s great to see the industry save itself rather than spending taxpayer money to save poor businesses.
Is there any evidence of further transmission due to the collapse of Terra / Anchor?
Many people have lost money in the collapse of Terra / Anchor, and it will sadly leave some permanent scars. However, DeFi’s fundamentals haven’t changed. So there are many reasons to be bullish in the future. Now is also the best time to build. So I’m looking forward to what we can create as a sector. We are also even more excited about what we do for society by providing everyone in the world with equal access to a global, vulnerable and transparent financial system.
A recent report by Nansen highlights the transmission from Terra Luna and how it affected companies such as Celsius and 3AC. Does the report fit your dissertation?
Nansen’s report is consistent with the fact that many CeFi players did not properly consider systemic risk. Whether it’s the collapse of Terra or, more generally, the risk of a significant fall in asset prices across the sector, they all say “fluid value” that everyone can achieve when they try. Had unequal assets on the balance sheet and at the same time moved from those assets. Alternatively, they did not properly consider systemic risk. This meant that many of them were at risk of bankruptcy in the event of a crash.
The contrast with DeFi is very impressive. The protocol is built with the worst-case scenarios in mind so that it doesn’t fail. The fact that this happened to CeFi players only reinforces the fact that decentralized unauthorized protocols are the future of finance.
