One of the biggest hits of the early decentralized finance arena has been its lending sector, which has experienced a boom since top lending dApps like Maker and Compound really started hitting their strides in 2019.
It’s not hard to understand the growing popularity, either. Eschewing the need to go into brick-and-mortar buildings and file paperwork through people, dApps like Maker and other DeFi “money legos” automate the lending process and turn it into a 5-minute affair done at home on a laptop.
From a user experience perspective, where things have proven a little trickier around these new kinds of projects is interest rates. Namely, their fluctuations.
Take the case of Maker’s governance, for example. As stewards of the Dai stablecoin, MKR token holders routinely vote on the Dai Stability Rate — the interest rate charged to users who have taken out automated Dai loans through the Maker dApp.
As such, this interest rate fluctuates. The system is a novel one, to be sure, but users are more used to “fixed rate” finance, and there’s recently been growing calls for more fixed rate DeFi possibilities accordingly.
And that’s precisely where the new Rho project comes in.
Rho Is DeFi’s Newest Addition
Rho, created by Compound engineer Max Wolff and unveiled on January 23rd, is an interest rates swap protocol. The dApp is designed as an automated market maker built on Ethereum that, like Uniswap or Compound, works not as an orderbook but rather like a single perpetual pool of funds.
Why’s that so cool, then? Because it paves the way to all sorts of new DeFi innovations and experiments around fixed interest rates. With the advent of Rho, fluctuating rates are no longer the only option in the space.
Looks like @maxcwolff decided to build the fixed/float swaps and it’s called Rho.
My mind is always blown at how fast this space is moving.https://t.co/epfGi6GD08 https://t.co/btbVlDITUc
— eric.eth (@econoar) January 23, 2020
As Wolff went on to explain in an introductory tweet thread, Rho’s rates are benchmarked to Compound’s cToken rates, but they could be benchmarked elsewhere.
The dApp’s creator noted the system could be used for many things, e.g. creating a “fixed-rate Compound borrow,” hedging risk, or simply speculating on interest rates.
Benchmarking Rho’s rates to @compoundfinance minimizes counterparty risk (avoiding the oracle problem) while indexing the DeFi borrowing market. This would allow you to create a fixed-rate Compound borrow, or just speculate on rates.
— Max Wolff (@maxcwolff) January 23, 2020
As for why he avoided an orderbook-styled setup, Wolff said:
“Building this as an [automated market maker] is more difficult, but has huge benefits. In a early market, there isnt enough money, market makers or sophistication to fill an orderbook. AMMs get everyone trading in a single market on standardized terms, so there’s less friction to opening orders.”
Most interesting of all is that Rho is now for anyone and everyone. In line with the open-source spirit that permeates the Ethereum ecosystem, Wolff has open-sourced the system to, as he put it, “inspire the community to build awesome stuff.”
He’s also released a full specification of Rho, as well as an associated reference implementation.
What Comes Next?
In the “Future Work” section of the Rho whitepaper, Wolff noted that a few features he had envisioned for the interest rate swaps protocol had been “omitted from the specification for brevity and simplicity.”
As such, Wolff went on to outline a series of features that might be rolled out in the months ahead. One such prospective addition was tokenizing the “proportional ownership” of Rho’s pooled liquidity shares, similar to the design of Compound’s cTokens.
Wolff also explained that Rho might eventually “withhold a portion of interest payments as reserves, serving as a liquidity cushion for withdrawals.” He added that this kind of structuring could potentially “serve as a business model for the protocol.”
Whatever ends up happening around the project, it’s clear it’s the latest “money lego” to hit the Ethereum scene. Now builders can iterate on it and inter-link it to other dApps to continue building out new kinds of banking experiences.
DeFi is free-range banking
— Ryan Sean Adams – rsa.eth (@RyanSAdams) January 23, 2020