88mph uses a linear model for determining the fixed-interest rate offered to the FIRB holders. 88mph keeps track of the 30 Days Exponential Moving Average (EMA) of the floating rate offered on money market and yield protocols, such as Compound, Aave, or Yearn, over roughly a monthly window, and offers 50% of the EMA as the fixed rate.
We have plans to implement more sophisticated interest rate models in the future that take into account parameters such as the pool surplus/debt, floating-rate volatility, pool total deposit, maturity horizon, and so on.
88mph offers 2 main derisking mechanisms described below to offer its fixed-interest rates and stay solvent in different market rate conditions:
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Pooling the deposits together.
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Funding the system's debt via the floating-rate bonds.
1. How would pooling help?
Pooling deposits means putting the deposited tokens into a single pool, from which users can withdraw a deposit once its deposit period is over.
Risk balancing: If the floating rate APY rose after a deposit, the yield generated by the deposited funds could be more than the interest promised to the user. This surplus would be able to balance out the debt caused by deposits where the floating rate has dropped since the time of deposit. This way, the risk of insolvency is reduced for the users, and the stability of 88mph's interest rate is supported.
However, simply doing the above, wouldn't help if the floating rate APY drops to a very low value and stays there for a long time. The deposits made when the floating rate was still high would not by themselves generate enough interest to cover the original interest payouts, and neither would the deposits made after the rates dropped help with this situation. This would cause a pool-wide insolvency event.
This is why 88mph also offers another mechanism: floating-rate bonds.
2. How would floating-rate bonds help?
The Floating-Rate Bond (FRB) allows someone to fund the debt created by the FIRB users, referred to as Fixed-Interest Rate Bonds (FIRB). The debt is equal to the fixed-interest rate promised to FIRB holders. You will earn the variable rate offered by the underlying protocol (Compound, Aave, etc.) on the debt-funded + the FIRB initial deposit.
As the FIRB takes 50% of the floating-rate’s 30-day exponential moving average from the underlying money market protocol like Compound, Aave, if this protocol’s floating-interest rate doesn't drop by more than 50%, as a floating-rate bondholder, you will be in profit. This profit can increase if the underlying variable-rate interest increases.
To sum it up, funding floating-rate bonds allows someone to leverage-long the market rates of the underlying money market used by 88mph, such as Compound, Aave, etc, by filling up the debt of one or more FIRBs, and in exchange, they would receive the yield generated by those FIRBs until they mature.
Notes: a 3rd derisking mechanism is currently explored in collaboration with insurance protocol partners, via the creation of products similar in their essence to the traditional Credit Default Swaps. We'll communicate more on this after our v3 release.
