Floating VS Fixed Rates in DeFi: Qonstant Explained

In 2021, the US government issued more than $18 trillion in treasuries. Of this, less than 5% were issued as floating rate notes, with the rest being at fixed rates. The conclusion is clear: Historically, demand for fixed interest rates is proven to be far higher than for floating rates.

Yet in the DeFi world we see that model flipped upside down, with floating rate protocols like Compound and Aave dominating the market today. This is more due to floating rate protocols being easier to implement from a technical perspective than because of any fundamental preference by users. Users who enter the interest rates market value predictability and stability — whether it’s their cost of funding for borrowers or yields for lenders. We can expect as the space matures, the next generation of DeFi protocols that can offer stable, predictable rates coupled with ease-of-use will far outstrip the floating rate protocols of today in volumes, popularity, and overall market share.

Floating VS Fixed Rates

Why do fixed rates products give you a more predictable cost of borrowing when levering up your crypto portfolio?

The vast majority of existing lending and borrowing protocols offer floating rates. This means you lend or borrow at a rate that can change at any moment. It is inconvenient and risky, especially if you lever up your portfolio by borrowing at a floating rate — it is impossible to accurately forecast your cost of borrowing.

Protocols like Qonstant offers fixed rates on all loans until maturity — you can borrow with peace of mind. The DApp automatically calculates your interest expense for the duration of your loan, so your cost of borrowing is much more predictable compared to Aave, Compound, etc.

What is also important: even though interest rates are fixed, you are not locked into your position until maturity. You can exit your positions at any time before maturity (a process known as “unwinding” in TradFi), so you only pay interest for the time you actually use the funds.

So, we bring this capital-efficient practice from TradFi to DeFi by building Qonstant.

What is Qonstant?

Qonstant is a collateralized lending/borrowing protocol for fixed rates and fixed maturities.

The Qonstant protocol implements this in a marketplace-style model akin to an orderbook for interest rates. Whereas the traded figure in a standard orderbook exchange would be the price of the token or coin, in this case the traded figure would be the APY. Users will be able to submit Quotes, or gasless limit orders (via cryptographic signatures), detailing whether they are a borrower or lender, how much they want to borrow or lend, at what APY, and for how long. Conversely, users can also browse the marketplace for existing Quotes and pick the one that suits their needs.

With an orderbook-like implementation, the goal is to encourage the mindset of thinking of interest rates as a tradeable product in and of itself. A trader who thinks rates will go up can borrow today and reverse the position by lending in the future, or vice versa. Moreover, as interest rate trades get executed across a variety of maturity dates, the trade data can be used to construct an on-chain yield curve — in traditional finance, the yield curve is the most fundamental building block on top of which more complex and interesting products can be built. Imagine having a yield curve oracle for ARB, or ETH, or any other token or coin — this is data that doesn’t exist today. But it is key to bridge us to the next step in maturing the crypto fixed income space.

Qonstant introduces predictable funding costs for borrowers and predictable yields for lenders. The aim is to rethink how the crypto lending/borrowing markets should work by taking a different approach to the current incumbents like Aave and Compound. With a robust liquid protocol with predictable funding across a variety of maturities, Qonstant hopes to establish itself as a central pillar of a new generation of crypto fixed income protocols that can challenge the dominance of traditional fixed income markets.The vast majority of existing lending and borrowing protocols offer floating rates. This means you lend or borrow at a rate that can change at any moment.

Conclusion

Fixed interest rate markets represent the next step in the growth of the DeFi fixed income world by reducing volatility for borrowers and lenders and by introducing a yield curve primitive. A whole host of new fixed income products can then be built on top of these building blocks. Qonstant’s ultimate goal is to foster the growth and maturity of the DeFi fixed income markets as a whole. We hope you’ll join us in fulfilling that mission together.

Check out Qonstant if you want learn more: https://qonstant.fi/