update 16 October 2021

A Guide to Swivel Finance – The Protocol For Interest-Rate Derivatives

The derivatives market is one of the least popular cousins of the decentralized finance family. However, all of that is about to change. New DeFi protocols aiming to make lending derivatives easy and accessible are on the rise. And, they may be enough to give the ugly cousin a makeover.

One of these promising protocols is Swivel Finance. Operating on the development of DeFiHedge finance, this decentralized protocol enables secure fixed-rate lending and interest-rate derivatives. Furthermore, it does so without using AMM pools.

The protocol is barely one year old. It has yet to publish all its features or complete its development team. Still, it has the backing of illustrious crypto industry names and the know-how to, one day, become a powerhouse of the derivatives market.

What is Swivel Finance?

Swivel Finance is a decentralized platform that allows users to lend derivatives at a fixed rate and earn interest on them. The protocol operates on top of Ethereum and uses the blockchain’s top-security features to help users lock in fixed-rate interest rates risk-free.

Similar to other DeFi protocols, on Swivel, participants can reach lending agreements with fixed interest rates. This way, users do not jeopardize their entire portfolio when they fail to meet the conditions of the agreement.

Swivel uses Compound as a supplier of ERC-20 tokens. Participants can easily access the lending market on the platform. There, they can look for lending proposals or suggest one themselves. Every user can set their terms and reach an agreement when others take them on their offer. At that point, both their funds are locked until the clearance date they mutually set.

A Brief History of Swivel Finance

It is interesting to note that Swivel Finance is not a DeFi project that evolved from scratch. That is to say, and the protocol developed from previous attempts at creating a decentralized lending platform. The latest in this chain of trials is DeFi Hedge.

As of the time of this writing, the DeFi Hedge website was still up. And,  as you can see, it’s an almost exact copy of the new Swivel Finance website, including layout, graphs, and grammar errors.

Behind these projects are the same people, mainly Julian Traversa and William Hsieh. They added four more members to their team in the past months, but they are still hiring.

Julian Traversa is an experienced entrepreneur with active involvement in developing Web 3.0 applications. William Hsieh is a software engineer with nearly 7 years of experience in the field.

The two DeFi enthusiasts met at ETH Denver 2020 and later founded Swivel Finance in February 2020. However, they didn’t release the Swivel whitepaper until seven months later. Since then, the project has been in full, albeit slow, development.

In December 2020, Swivel announced the closing of a 1.15M seed round led by Multicoin Capital. The protocol raised a total of $1.2M in funding over 1 round. More importantly, the investors include industry leaders like Electric Capital, CMS Holdings, Divergence Ventures, and Defiance Capital.

At the end of March 2021, Traversa announced the testnet launching of Swivel Exchange, which should help the platform develop a stronger community in its bid for complete decentralization.

How Swivel Finance Works

Swivel Finance is certainly not the first lending protocol to appear in the DeFi landscape. Still, it differentiates from other similar projects by giving more power to participants.

For instance, most lending platforms use automated market maker (AMM) pools to aggregate capital. On the other hand, Swivel operates like a crypto exchange by allowing users to play the maker and taker roles. Here’s how that works in a nutshell:

1.      Submitting Orders

A user places an order on the Swivel platform at a rate of his choice. Additionally, he can place a market order that can potentially lead to a lending agreement with another user almost instantly.

2.      Earning interest

Users can earn fixed interest on their principal lending agreement. Alternatively, they can gain leveraged interest on the market rate on protocols like Compound and Aave.

3.      Releasing Funds

Upon the completion of an agreement, the funds are released. For instance, the fixed-side lender receives their guaranteed yield, and the floating side gains the rest of the interest.

The downside of using this mechanism is that the on-chain accessibility is limited. However, it earns favorable points by allowing users to participate with a minimal amount of liquidity. More so, it diminishes the risk of order slippage and guarantees the market pricing is consistently accurate.

To ensure permanent liquidity available, Swivel defines markets as available for a minimum of three months and up to a year. As a result, users have plenty of time to engage in various operations before the market closes.

Here are some of the Swivel features that make the protocol work!

Fixed-Side Rate-Swap Contracts

This feature works similarly to a traditional exchange. Participants can submit offers above the market rate and establish limit sell orders. On the other hand, an offer below the market rate results in a market sale and locking the best available fixed rate.

Floating-Side Swap-Rate Contracts

In this type of contract, participants can use collaterals to cover fixed rates and place orders below the market rate. The operation results in a market buy for the lowest fixed-side offers.

Swivel Finance Off-Chain Orderbook

Swivel employs a user-friendly feature in the off-chain order book to help new users find their way around the platform. This interface works similarly to traditional exchange applications. For example, messages and notifications display clearly for everyone. More so, participants can use an EIP-712 signature to read and understand lending agreements quickly.

Swivel On-Chain Orderbook

Among the future features of Swivel is the on-chain order book, which will operate on the Ethereumblockchain. One projection is that funds will go through an asset pool before being minted into cTokens, stored, and retained on the chain.

The Swivel Ledger

Both the on-chain and the off-chain order books keep separate records of the ledger. So, under the Swivel Ledger umbrella, all the agreements will be easy to see whether they are active or not.

On the Swivel Ledger, participants will be able to see their order on account of a unique hash and its appropriate timestamp.

Future Token Distribution

Swivel Finance has the release of a native token on its cards. While the plans for a future release are, so far, inconclusive, the eventual token allocation might look something like this:

  • 1% of the tokens would go to Compound stakeholders
  • 1% of the tokens would go to Aave stakeholders
  • 5% of the tokens would go to the Swivel founding team
  • 8% of the tokens would go to the Swivel community members who vote on initiatives
  • 10% of the tokens would go towards the original DefiHedge
  • 10% of the tokens would reach developer funds
  • 25% of the tokens would go to early investors

The rest of 40% of the tokens would go to liquidity providers. This way, participants will have an incentive to access the Swivel market and engage in liquidity providing and lending operations.

The Bottom Line  – A Guide to Swivel Finance

In terms of decentralized finance, Swivel is a new protocol. Most of its competitors started operating before the famous DeFi boom of 2020. Still, the project has made a few critical advances and solved many of the issues that marred the trial-and-tested DeFiHedge protocol.

Swivel enables easy, decentralized lending while reducing slippage and lowering liquidity requirements. It may not seem like a lot, but it’s a good start.

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As the market for derivatives rises, the need for a trustless, well-functioning lending platform is imperative. The swivel can be that protocol only if it accelerates its development and boosts its popularity. So far, it’s lagging behind Aave, Compound, Maker, and other similar platforms.

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