Understanding Strips: The First Attempt to Bring Interest Rate Markets into DeFi
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Understanding Strips: The First Attempt to Bring Interest Rate Markets into DeFi
By establishing an efficient interest rate derivatives exchange, Strips can provide genuine price discovery for fixed interest rates.
Navigating Web3 tides with focused insightsBy: Ethereum Boy
Interest rates are the meta-rule of finance. In traditional finance, interest rate trading volumes reach $6.5 trillion per day—26 times larger than the stock trading market.
DeFi's TVL has reached $20 billion, but in reality, interest rates (APY) are the fundamental driver behind TVL. You deposit money on AAVE for the interest rate, participate in liquidity mining for high APY (interest), and provide market-making on Curve or Uniswap to earn fee income. Yet, interest rate trading has remained a missing piece in DeFi.
Strips has built the first decentralized interest rate swap platform, deployed on Arbitrum. It integrates oracles that extract real-time floating rates from DeFi protocols and perpetual contract funding rates from CEXs. On Strips, users can trade interest rates with up to 10x leverage. Strips will offer all forms of interest rate derivatives, structured products, and fixed-income instruments.
Strips launched its mainnet on February 12 and initiated liquidity mining and trading mining rewards. (See details)
A Brief Introduction to Strips
What is an interest rate swap? As the name suggests, it’s an exchange between fixed and floating interest rates.
In interest rate swaps, going long means paying a fixed rate and receiving a floating rate. Conversely, going short means paying a floating rate and receiving a fixed rate.
Going Long: Pay fixed rate, receive floating rate
In Strips' interest rate swaps, only two factors affect your profit and loss: profit/loss = funding PnL + trading PnL.
To understand funding PnL and trading PnL, let’s use leveraged yield farming on Strips as an example:
What is funding PnL? Going long on interest rates (paying fixed, receiving floating) is essentially leveraged yield farming. For instance, suppose the current fixed rate is 1.91% and the floating rate is 11.38%. If you go long with 10x leverage, you earn (11.38% – 1.91%) × 10 = 94.7% every 30 days, or about 3.1% daily. As the floating rate changes hourly, this yield farming spread fluctuates accordingly. If the floating rate rises, your daily return could exceed 3.1%. Funding PnL refers to the hourly spread income credited to your account during leveraged yield farming.
What is trading PnL? Trading PnL depends on the difference between the fixed rates at opening and closing positions. Suppose you’ve been doing leveraged yield farming and accumulated some funding PnL before deciding to close your position. At that moment, if the market fixed rate is 3%, since you went long (paid fixed), your trading PnL would be (3% – 1.91%) / 1.91% = 57%. With 10x leverage, simply betting correctly on the rate direction yields a 570% return (excluding slippage). This portion constitutes trading PnL.
Your total profit equals funding PnL + trading PnL.
In simple terms, leveraged yield farming primarily focuses on funding PnL (hourly floating minus fixed), where longer duration increases the weight of funding PnL.
Betting on rate direction mainly targets trading PnL (driven by the current market price of fixed rates), where shorter durations amplify the impact of trading PnL. The key factor affecting speculative returns is the counterparty activity in the rate-long/short markets.
Funding PnL favors long-term plays, while trading PnL suits short-term speculation. From this, we can derive hedging strategies (mining hedging, futures rate hedging), arbitrage between different protocol spreads, and more advanced strategies.
How to Use Strips?
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Leveraged Yield Farming:
As discussed earlier, existing leveraged yield farming tools in the market are essentially borrowing-based farming. On Alpaca, for example, you can open up to 3x leverage, but borrowing ETH incurs a high floating rate of 14%.
Revisiting leveraged yield farming—it’s fundamentally about capturing interest spreads. On Strips, going long on interest rates (paying fixed, receiving floating) *is* leveraged yield farming.
The difference is that Strips allows up to 10x leverage and requires only a fixed market rate (though note that closing the position triggers trading PnL).
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Speculators ("Degens"):
Pure speculation on rate movements, with up to 10x leverage.
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Mining Hedging:
When yield farming, you can short (pay floating, receive fixed) on Strips to convert potentially declining high APYs into fixed rates, locking in your mining profits early.
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Perpetual Contract Rate Hedging:
Beyond DeFi protocols, Strips also offers interest rate swaps for BTC perpetual funding rates from Binance and FTX. For CEX traders, Strips enables locking in perpetual contract rates at fixed levels—a highly valuable feature.
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Arbitrage (spreads exist between different funding rates):
In the chart:
Orange: Annualized funding rate of OMG Perp on FTX
Green: Annualized funding rate of OMG Perp on Binance
Dark Blue: Difference between the two funding rates.
FTX’s rate is significantly higher than Binance’s, creating a 10.7% spread. Currently, there’s no easy way to short this rate. However, on Strips, traders can go long on Binance’s rate and short FTX’s rate, then close both positions once the rates converge, profiting from the arbitrage.
How AMM Captures "Token Value"
The mainnet test version includes AMMs for Binance > BTC-PERP, FTX > BTC-PERP, Aave Lending, and an insurance pool.
Strips’ AMM design is particularly noteworthy:
The AMM used for interest rate trading on Strips does not use USDC directly. Instead, it’s formed by users staking their USDC-STRP LP tokens from Arbitrum’s Sushiswap (similar to a vAMM). This dual-purpose design means LP tokens serve both as liquidity on Sushi and as TVL backing Strips’ interest rate trading.
For example, upon mainnet launch, Strips will open three AMMs—Binance > BTC-PERP, FTX > BTC-PERP, Aave USDC lending—and an insurance pool. If each market has $20M, $20M, $15M, and $15M in TVL respectively, then the USDC-STRP liquidity on Sushi must be at least $70M.
This design, combined with trading mining and staking rewards after mainnet launch, enhances its elegance:
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After liquidity mining begins, the USDC-STRP pool on Sushiswap gains strong depth, enabling deep liquidity for STRP purchases.
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Quickly attracts sufficient TVL to Strips’ AMMs, providing ample liquidity for interest rate trading.
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Captures token value: If the total TVL across four markets is $70M, it implies $70M worth of USDC-STRP LP is staked, meaning $35M worth of STRP is locked in the system.
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A classic snowball effect loop. Beyond trading mining rewards, trading fees and slippage directly contribute to AMM revenue. (For example, with $20M TVL, closing a $200K position may incur ~1% slippage, generating $2,000 in AMM income.) High AMM APY attracts users to buy STRP, form LPs, and stake them in the AMM → STRP price rises → LP value increases → AMM TVL grows → slippage decreases → AMM income drops → staking rewards decline → AMM reaches dynamic equilibrium.
(Of course, in the long run, this spiral relies on genuine demand for interest rate trading. As long as there is trading activity, fees and slippage will generate income. As long as USDC flows in, the AMM generates APY, incentivizing users to buy STRP and stake in the AMM.)
Final Thoughts
Strips features an innovative AMM that captures token value, built on Arbitrum with low transaction fees. By establishing an efficient interest rate derivatives exchange, Strips enables transparent price discovery for fixed rates. Based on this, Strips can develop structured fixed-rate products such as bonds and debt markets.
If decentralized finance is to become the future of finance, who will build a transparent market for interest rates in DeFi? What innovations will emerge when the "meta-law" of finance—the interest rate赛道—is integrated into the DeFi Lego ecosystem?
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