Interest Exchange

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How It Works ​

Interest Exchange lets borrowers lock in a fixed interest rate on any supported lending protocol. A backer takes the other side, absorbing variable rate risk in exchange for yield on the spread.

Pools and Series ​

A pool defines the parameters for a particular market: the loan token, lending protocol, cap rate, tick size, expiry, and minimum notional. Every pool has a fixed expiry timestamp that determines the tenor of all positions within it.

Within each pool, series represent distinct fixed rate tiers. A series is created automatically when an order is filled at a rate that doesn't have one yet. Each series has a fixed rate and a reserve rate (the difference between the cap rate and the fixed rate). Rates must be multiples of the pool's tick size and cannot exceed the cap rate.

Matching: Orderbook and RFQ ​

Positions are created when a borrower is matched with a backer through one of two mechanisms:

  1. Backer Order - A backer signs an off-chain order specifying a pool, fixed rate, and principal range. A borrower (or relayer) submits this order on-chain to open a position. Orders can allow partial fills, letting multiple borrowers fill against a single backer offer.

  2. RFQ Auction - A borrower broadcasts a request-for-quote. Backers respond with signed quotes containing a rate and principal. The borrower selects the best quote and submits it on-chain. Quotes are short-lived to prevent stale fills.

Both mechanisms flow through the OrderBook contract, which verifies signatures from both parties before opening the position.

Opening a Position ​

When a position opens, three things happen:

  1. Backer deposits reserve - The backer's reserve covers the worst-case scenario where the variable rate stays at the cap rate for the remaining tenor. Backers can deposit either the loan token directly or yield-bearing vault shares (if the pool has a yield token configured).

  2. Borrower posts bond - The borrower deposits a bond sized to cover fixed interest over the bond window, plus a small buffer. This bond ensures the borrower keeps settling their position on time.

  3. Tokens are minted - The borrower's PositionManager receives FRT (Fixed Rate Tokens) representing their fixed rate obligation over the remaining tenor. The backer receives VRT (Variable Rate Tokens) representing their proportional claim on the series reserve pool.

Ongoing Settlement (Rebalance) ​

Anyone can call rebalance on a PositionManager to settle accrued interest. The process:

  1. The PositionManager reads the borrower's current debt from the underlying lending protocol.
  2. It calculates the actual interest accrued since the last settlement.
  3. It calculates the fixed interest the borrower owes for the same period based on the locked-in rate.
  4. Actual interest is capped at the pool's cap rate to bound backer exposure.
  5. The spread is the difference between the capped actual interest and the fixed interest:
    • If positive (variable exceeded fixed), the pool pays the borrower from the series reserve.
    • If negative (fixed exceeded variable), the borrower pays into the series reserve.
  6. FRT decays proportionally with each rebalance, reflecting the passage of time.

If the borrower receives funds from the pool, those funds are automatically repaid to the underlying lending protocol to reduce the borrower's debt.

Bond Window and Liquidation ​

The bond window is the maximum time allowed between rebalances. It scales with the pool's tenor (10% of time-to-expiry at position open), clamped between 1 day and 2 weeks.

If a borrower fails to rebalance within 90% of the bond window, the position becomes liquidatable. Any keeper can trigger liquidation to:

  1. Settle any remaining fixed interest owed to backers from the bond.
  2. Collect a keeper fee that escalates the longer the position goes unsettled (up to 10% of the bond).
  3. Return any remaining bond to the borrower.

If the underlying lending position becomes unhealthy (health factor below threshold), the PositionManager self-liquidates during the next rebalance.

Closing a Position ​

Positions close in one of three ways:

  • At expiry - All FRT has fully decayed. The borrower settles one final time and the full bond is returned.
  • Early exit - The borrower closes before expiry. An exit fee is charged proportional to the remaining time.
  • Liquidation - A keeper or self-liquidation closes the position as described above.

Backer Redemption ​

Backers redeem their VRT for their share of the series reserve pool at any time. The payout is proportional to their VRT holdings relative to total supply, based on the pool's actual asset balance (excluding bond escrow). If the variable rate stayed below the fixed rate, backers profit from the accumulated spread. If it exceeded the fixed rate, their reserve is drawn down.

FRT Secondary Market ​

Borrowers can trade their FRT positions on a secondary market. The seller and buyer both sign a trade order, and the OrderBook transfers FRT between PositionManagers along with a proportional share of the bond. This lets borrowers exit their fixed rate commitment by selling it to another party.

Interest Exchange Protocol