A Vanilla Interest Rate Swap is a foundational derivative contract where two parties exchange fixed interest rate payments for floating interest rate payments over a specified period, based on a notional principal amount. In crypto, this concept can be adapted for digital asset yield management or fixed-rate borrowing against variable-rate lending.
Mechanism
The mechanism involves periodic exchanges of cash flows without exchanging the principal. One party pays a predetermined fixed rate, while the other pays a floating rate tied to a benchmark, such as a DeFi lending protocol’s variable rate. This effectively converts a floating rate exposure into a fixed one, or vice-versa.
Methodology
Utilizing vanilla interest rate swap principles in crypto involves establishing smart contracts or legal agreements that specify digital asset equivalents for notional principal and define clear floating rate benchmarks from decentralized finance protocols. This methodology provides institutional investors with a standardized tool for hedging interest rate risk or optimizing yield strategies within the digital asset lending market.
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