Although Memo is still in its earliest stage, in the near future, Memo will be able to provide the functionality for on-chain credit defaults swaps and interest rate swaps while serving as a decentralized clearinghouse and credit rater. Like traditional credit default swaps, market participants will be able to buy and sell bespoke contracts over the counter. But, Memo’s novel innovation is the addition of credit default swaps trading on a central limit order book like Serum. Furthermore, after bootstrapping these markets, Memo will utilize these derivatives to provide users with fixed income structured products.
What it does
In traditional finance, financial derivatives make up the vast majority of the notional size of markets across the world. In fact, the combined notional value of credit default swaps and interest rate swaps is estimated to be over 530 trillion US dollars. Memo will make it possible for market participants to hedge risk while navigating virtually any DeFi protocol or even speculate on the possibility of a default event occurring.
How we built it
The first solution is the Memo Default Swap, an abstraction of the typical credit default swap in which a market participant looking to protect the yield or interest rates from a defi protocol for a specified period of time. Another market participant looking to sell protection will receive premiums from the aforementioned buyer, however, if the yield drops below a predetermined threshold, the seller of the credit default swap protection will have to pay up to the par value of the contract. The interest rate swap will tokenize fixed and floating rates to allow effortless swapping from a centralized pool. The credit default swap backed fixed rates can also be utilized as liquidity for the fixed rate pool. The market will determine prices and conversions for all of these derivatives. Lastly, fixed income structure products can be constructed by bundling fixed yields from a variety of sources.
Accomplishments that we're proud of
The memo default swap will be available through bespoke over the counter and peer to peer contracts in addition to being present on central limit order books. In order to get these complex contracts onto a standard CLOB like serum, which only accounts for price as the single variable, Memo computes the mValue of each contract using a formula that takes the premium spread in basis points of the contract and the rate of the defi protocol that is to be guaranteed or protected. mValue formula These two variables, along with the newly computed mValue will be parameterized into polar coordinates, and the order of the orderbook is determined by the path length from the origin, essentially representing the underlying yield of the defi protocol in real time, to the point of a spiral emanating from the origin that is closest to each point representing a contract.
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