Manage Exposure with Derivio’s Interest Rate Design

Abstract:

Derivio introduces a novel DeFi primitive which enables users to separate their yield generating index (i.e., DLP-Blue-Chip / DLP-Volatile, or any interest bearing assets) into yield and principal components. By using a game theory approach, the market will peg the corresponding prices of yield and principal components. This enables improved capital efficiency and fine-grained risk management, allowing sophisticated portfolio construction and DeFi strategies such as leveraged market making and liquidation-free lending.

Motivation:

As we introduced our perpetual DEX model in the article: [Deep Dive into Derivio’s Market-neutral Liquidity], providing liquidity in Derivio’s perp dex is effectively holding market-neutral index while generating yield from market making & fee sharing. As the yield can be highly profitable, it also comes with uncertainty. This inspires us to create this primitive for users to have ultimate control over their index portfolio.

Mechanism Design:

Let’s start with a simple formula: DLP = rDLP + bDLP

rDLP is the index yield token which represents the yield generated from market making & fee sharing. bDLP is the index principal token which represents the ownership of the corresponding amount of underlying asset — the underlying index basket in our case.

To give a clear and intuitive illustration:

1. Stake rDLP, it is locked for 7 days, to share 7 days’ revenue from market making & fee sharing
2. Stake bDLP, locked for 7 days, get 1% of the staked rDLP
3. If you stake 1 rDLP, 7 days later you get less than 1 rDLP + 7 days' revenue
4. As long as there is someone staking rDLP, bDLP stakers can get rDLP
5. A malicious market manipulator may want to manipulate the market by buying a lot of rDLP or bDLP, stop the other token from pricing correctly
6. If rDLP gets monopolised and not being staked, then staking rDLP can share a lot of revenue, which pushes more people to stake them
7. If bDLP gets monopolised, it's okay because rDLP can share revenue and it represents the yield