TradFi - Interest Rate Derivatives on Cardano

[GENERAL] Name and surname of main applicant

Dmitry Shibaev

[GENERAL] Email address of main applicant

dmitry.shibaev@dynamicstrategies.io

Additional applicants

Sergio Rodrigues

Vlad Mikirtumov

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

8

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language.

No

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

No

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.” .

No dependencies.

[GENERAL] Will your project’s output/s be fully open source?

No

[GENERAL] If NO, please describe which outputs are not going to be open source. If YES, please write “Project will be fully open source.”

The smart contracts will be open-sourced after the initial testing phase with the financial industry participants.

[METADATA] Category of Proposal

dApp

[METADATA] SDG rating

SDG Goals

8 - Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

9 - Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

10 - Reduce inequality within and among countries

16 - Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

SDG Subgoals

10.5 - Improve the regulation and monitoring of global financial markets and institutions and strengthen the implementation of such regulations

16.6 - Develop effective, accountable and transparent institutions at all levels

3.d - Strengthen the capacity of all countries, in particular developing countries, for early warning, risk reduction and management of national and global health risks

8.10 - Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

9.3 - Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets

9.a - Facilitate sustainable and resilient infrastructure development in developing countries through enhanced financial, technological and technical support to African countries, least developed countries, landlocked developing countries and small island developing States

Key Performance Indicator (KPI)

8.10.2 - Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider

9.3.1 - Proportion of small-scale industries in total industry value added

9.3.2 - Proportion of small-scale industries with a loan or line of credit

10.5.1 - Financial Soundness Indicators

16.6.2 - Proportion of population satisfied with their last experience of public services

[IMPACT] Please describe your proposed solution.

Summary

We aim to bring Traditional Financial institutions - Banks, Financial Institutions, Funds and Retail that use financial products onto the Cardano blockchain.

Our mission is to Democratize the Interest Rate Derivative Market by making these products affordable for Small Corporates and Retail Customers through:

• Low-Cost Daily Margining
• Secure & PrivateTrading
• Automated Smart Contracts

We are in talks with two banks and aim to do a pilot with one of them at the end of the project.

Background

Recent interest rate hikes highlighted the risk of relying on cheap financing for too long and what can happen when interest rates increase rapidly. Sharp increases in interest rates can cause an unplanned increase in mortgage payments and much higher refinancing rates on every type of credit.

Consumers' current lack of access to the interest rates markets also limits their options for protecting against further rate increases, leaving them in a difficult position - exposed and without options.

We plan to bring interest rates markets onto the blockchain, so consumers and small corporates can access the same instruments as the large banks and large corporations. 

The first step in the journey is to bring the markets onto the blockchain by offering existing banks a system that lets them manage the daily payments on these products (the settlement). The second step is to bring liquidity from the main financial players.

The target state is to lower costs by up to 100x for consumers and banks.

Detail

We plan to bring trading and settlement of Interest Rate Derivatives onto the Cardano Blockchain and make this market accessible to thousands of small companies and individuals.

Interest Rate Derivatives are a multi-trillion dollar daily market, with most trading between large financial institutions, corporations, and asset managers. Corporations use them to hedge their interest rate risk on loans, bond issuance, and other liabilities. Asset managers use them to express views on the direction of interest rates.

Small corporates and private individuals are often priced out of the Interest Rate Derivative market because they don’t have the back-office staff required to perform daily margining on these trades. Not doing daily margining comes at a significant cost. On trades without daily margining, financial institutions with whom corporates trade demand extra fees to cover additional risk and the additional capital costs imposed by banking regulators on such trades. Those small Corporates who can afford the high fees and the financial institutions servicing them are in a painful situation. Both face higher credit risk, higher operational risk and higher costs. Given a choice, both sides would prefer to have all trades margined daily. A win-win that is being held back by the operational burden of managing daily margin effectively. 

BlockMargin - the code name for our product, solves this by bringing daily margining on the blockchain, turning a complex and large back office operation into a few clicks of a button. BlockMargin delivers the power of a large Corporation to the fingertips of any small business or individual. Monitoring the market value of their positions and corresponding margin requirements in a dashboard, users have full visibility of their positions 24/7 with the option to manually or automatically post and redeem margin from their crypto wallet.

BlockMargin automatically monitors daily market prices, contract conditions, margin requirements and settlement, removing risk and simplifying trading.

Why Margin Matters?

Interest rate derivatives are financial contracts between two parties whose value can change throughout their life. Their value can become positive or negative at any time. And to avoid defaults and the other party simply walking away when the contract is not going in their favour, there is a need to post margin to ensure that even if one of the parties walks away, the other receives compensation for this.

Margin posting also avoids litigation, as each party can walk away from the contract and leave their margin with the other counterparty. This left margin covers any adverse market move for the next day and gives the remaining party enough time to find an alternative hedge.

The margin posting also tends to be a small fraction of the total contract size, which is convenient for risk hedging and avoids putting up the full amount as collateral. This is standard practice in traditional financial markets.

The example below shows the margin posting during the first 15 days of a contract when a user buys an interest rate future at 3% on a 500k notional to protect themselves against further interest rate rises. This could be a hedge against the interest rate rising on their 500k mortgage.

Highlighting a few of the cashflows in the example:

• Day 0: rate is at 3% and the user posts an Initial Margin of $581, just over 0.1% of the notional amount.
• Day 1: rate dropped to 2.9% and the user needs to post an additional $104 as margin.
• Day 7, rate increases to 3.4% and the user can withdraw $320 margin from the contract.
• Day 15: rate has increased to 4.0%, the user closes the contract and gets paid $1,242 in addition to receiving their Initial Margin back

So, the user gets a positive cash flow at the end of the contract as the interest rate ended above 3%. If, at any time in between, the counterparty was to walk away, the user would keep the margin equivalent to the value of the contract.

As you can see, there is a lot of back and forth of margin posting throughout, and in traditional finance, this is done with bank transfers, which are expensive and need a dedicated team to perform. Whilst doing this on a blockchain is a transaction using a web wallet, and even that can be automated

Traction with Financial Institutions

The BlockMargin idea has gained traction in conversations with financial institutions. We aim to make our first trade between a Financial Institution and a Corporate at the end of the proposal.

Building Blocks

BlockMargin has 6 main components that we call the “building blocks”. The team at Dynamic Strategies will build these over the course of 9 months.

• The Front-end through which the user will interact with the smart contracts and the back-end services
• The Back-end will run the cardano node, cardano-db-sync, cardano-grapql and others services that exposes the up-to-date state of the blockchain to the user
• Smart contracts and the smart contract factory. The smart contract will codify the terms of the interest derivative transaction and will include conditions on when it can withdraw the funds locked inside. A smart contract factory will generate a new smart contract for each trade as each transaction will have slightly different characteristics (amount, start time, end time and withdrawal conditions). To the extent possible, we will use the Marlowe smart contract language, its runtime and the knowledge of the Marlowe team
• The Risk Engine will determine how much margin counterparties need to post for the transactions and revalue daily how much extra margin needs to be posted or if the counterparty can withdraw margin.
• The Pricer will determine the fair value of instruments and serve as an input to the Risk Engine
• A Wallet connector through which user will connect their Cardano web wallets and interact with the app

Midnight Platform

We are currently in touch with two banks in the Netherlands who have shown an interest in exploring this idea further. They see the potential for a large cost saving and improved operational efficiency by moving part of their trading onto their blockchain. One of the high priority points on their wishlist is to ensure the privacy of transactions, as they do not want to expose their dealings with clients completely to the public.

Therefore, after delivering this project on Cardano mainnet, we will look to port it to the Midnight sidechain that is planned to launch on Cardano sometime in 2024 https://midnight.iohk.io/ 

Our product will be the prime candidate for Midnight when it launches with an existing client base.

Marlowe Smart Contracts

We met with the Marlowe team at their product launch in Lisbon on 5th Jul 2023 and had a good discussion about the capabilities of Marlowe to support different financial contracts. Marlowe is also blockchain agnostic; therefore, it can be ported to run on Midnight once that goes live. Therefore, we will aim to use Marlowe for our smart contracts and troubleshoot with the Marlowe team the edge cases. More on what Marlowe is here: https://marlowe.iohk.io/ 

Financial Derivative Contracts tend to require a programming language that offers sufficient flexibility to encode their multiple terms - and therefore, a Turing complete programming language such as Haskell is a desired starting point. However, since Marlowe was designed specifically for Financial contracts, we will test its ability to mould to different products. The Marlowe team has so far been forthcoming with explanations and examples of how it can solve certain edge cases. We look forward to leveraging their expertise throughout the project.

Looking further ahead

Looking further ahead, after delivering BlockMargin and doing a pilot trade with a bank, we will expand the products suite to create a decentralized exchange for these derivatives. 

The decentralized exchange will let anyone provide liquidity into “interest rate derivative” pools against which users can trade. With this offering a market-making service in interest rate derivatives similar to what trading desks do at large banks:

• Available 24/7
• Prices determined by supply and demand
• No minimum amounts
• Settlement is done using BlockMargin
• Access available to all

Where BlockMarging is the platform that manages a derivative trade after it has been traded (what we call the settlement and daily margining), the initiation of the trades will be done through a decentralized exchange.

[IMPACT] How does your proposed solution address the challenge and what benefits will this bring to the Cardano ecosystem?

The proposal directly addresses the challenge’s focus areas of “Creation or improvement of different products that provide value to the Cardano community and wider ecosystem.” by being a completely new product on Cardano and other blockchains and can potentially bring the financial services industry onto Cardano. 

This proposal targets the traditional finance sector and aims to bring some of their operations onto the blockchain and create a Decentralized Finance alternative (DeFi)

It will increase the Total Value locked, total number and active daily users. And it will bring the largest market in the world onto a blockchain. 

This product is suitable for execution right now and the Cardano ecosystem has the right technical requirements.

• The Marlowe smart contract language was released in 2023. Marlowe is a domain-specific language for the financial sector that we will use in our build;
• A stablecoin (Djed) has been released and;
• A number of DeFi projects are running;
• Cardano lacks adoption by the Financial sector due to the lack of apps for them on Cardano. We propose building one of their essential apps and engaging with a financial institution to trial it.

The Interest Rate Derivative market is the largest market in the world by a big margin, with $250+ Billion daily volume between Small Corporates, Retail and Financial institutions. The overall market that includes large corporates is even bigger at over $5 trillion of volume per day.

Bringing the settlement of these derivatives onto a blockchain has the potential to open up adoption of the large financial sector on a blockchain and, over time, drive a tide of adoption to that blockchain.

The second effect is that settling these trades on the blockchain, reduces their operational cost drastically, making it possible for financial institutions to offer these products to smaller clients they overlooked in the past. This can lead to market growth as new participants enter the market

[IMPACT] How do you intend to measure the success of your project?

It will increase the number of innovative products available for the Cardano community and traditional businesses. It will enrich the ecosystem with new use cases and increase the number of integrations with the traditional financial and corporate sectors.

The proposal directly addresses the challenge's success criteria of "increasing number of products and integrations that offer new solutions for people to interact with and benefit from using Cardano." This is a completely new solution that is unique to Cardano and other blockchains.

The Cardano ecosystem has the right tools to permit this type of innovation. With the advent of Midnight later in 2024, the BlockMargin app will be a natural candidate for one of the first products to migrate to Midnight and offer the financial service industry privacy-preserving smart contracts for their financial transactions.

We will consider the project to be a success if we build a platform that permits:

• An app running on the Cardano Mainnet that does the daily exchange of collateral based on Synthetic SOFR Futures and;

• A pilot between a financial institution and a corporate client.

This will validate the use case of using blockchain for selling and managing collateral on interest rate derivatives and open up the possibility of building a DEX for trading these instruments in a decentralized manner.

[IMPACT] Please describe your plans to share the outputs and results of your project?

We will share progress on our Twitter page https://twitter.com/dynamic_io and on the catalyst website through the monthly Milestone reports.

The app will have a front-end with all its functionalities open to the public. It will run on the testnet during the first 5 months, and community members will be able to connect with their Cardano web-wallets and test its functionalities.

At the end of the project, the app will be released on the Cardano mainnet for everyone to use.

Additionally, we will monitor the following KPIs and report back to the community through the monthly progress reports.

Build KPIs

• Number of weekly commits
• Total lines of code

User engagement KPI

• Number of total wallets created on the test net
• Number of transactions
• Number of contract interactions
• Number of average daily visitors to web app

Stability KPIs

• Average CPU and RAM utilization on server
• Peak CPU and RAM utilization on server
• Total % server downtime

[CAPABILITY/ FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability?

The team has already delivered 2 out of their 3 previously funded catalyst projects, with the third one progressing at pace.

The project's technical details were discussed on the Cardano forum back in 2021 https://forum.cardano.org/t/oracle-for-energy-prices/53588/3 

The key team members, Dmitry and Sergio, have decades of experience with trading and settling these types of Interest Rate derivative contracts and have worked together at a large financial institution in the Netherlands

Dmitry spent over a decade in Risk Management and Trading, managing multi-million dollar positions for the bank and the bank’s clients. Sergio is a banking professional with hands-on expertise in Regulation and bank-to-corporate interactions. They both have deep connections in the industry necessary to convince large financial institutions to do a pilot.

The team is in direct talks with 2 banks in the Netherlands and will raise the level of discussion to proposal level for the prototype if funding is approved and include 3 other banks.

We are in contact with the Marlowe team, who have been very responsive to the community and provided detailed explanations of the edge cases we need to cover in our build.

[CAPABILITY/ FEASIBILITY] What are the main goals for the project and how will you validate if your approach is feasible?

The main project goals are:

• Create a platform to Settle Interest Rate Derivative trades on the Carano blockchain - focusing on Synthetic Futures and FRAs - Planning for this project started in 2021 when we exchanged messages on the Cardano Forum with the now developer on the Marlowe team. The project lead has a trading background at large investment banks where he risk-managed and traded these products for over a decade and has seen the opportunities that blockchain presents. 

• Onboard a large financial institution to do a Pilot with one of its clients - We have engaged with several banks which have shown interest in exploring our solution.

• Release the platform to mainnet for wide use - the team behind this project has built full-scale apps running on Cardano with a Web2 + Web3 full stack and smart contracts. The team is experienced in creating innovative solutions on Cardano.

Delivering this project is a prerequisite for us to move into the next stage of building a Decentralized Exchange (DEX) for trading Interest Rate Derivatives in a decentralized manner where banks and hedge funds can provide liquidity.

Expand the solution to Privacy-preserving smart contracts when the Midnight launches in 2024 or 2025.

We will aim to use Marlowe smart contract language in our project. We will need to evaluate if it has enough flexibility to customize the financial products and payment profiles of the products traded by banks. Plutus and Aiken will be our go-to languages for the smart contracts which the team has experience developing - but a DSL language like Marlowe could be a viable alternative.

[CAPABILITY/ FEASIBILITY] Please provide a detailed breakdown of your project’s milestones and each of the main tasks or activities to reach the milestone plus the expected timeline for the delivery.

The deliverable will run over 8 months.

Milestone 1: Set up dev environment and tooling

Activities:

The first month will be to set-up the Cardano infrastructure and the necessary chain indexes for the back-end and the front-end to read the state of the blockchain

Additional Web2 services will also be set-up for the back end

At the end of the month, it is expected that the team has the necessary tooling and APIs to build the rest of the deliverables.

• Set-up a Linux server
• Set-up Cardano-Node, Cardano DBSync and Cardano Graphql
• Set-up a self-hosted Marlowe deployment with Docker
• Run supporting services via Docker: NodeJs, SSL, MongoDB
• Sign up with 3rd party providers for backup: blockfrost, maestro
• Set-up dev environment for Web2, Haskell and Aiken

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks

Milestone 2: Building blocks to trade a Synthetic Future on SOFR rate

Activities:

The building blocks for settling Synthetic futures on the 3-month SOFR rates will be built. Most of this work will focus on the backend, sourcing and recording price information onto the Cardano blockchain

3-month SOFR futures contracts are traded on the CME https://www.cmegroup.com/markets/interest-rates/stirs/three-month-sofr.html

We will build a daemon that reads their settlement prices once a day, after the market closes, and records them onto the blockchain. A proof of concept of this has already been built and a trial ran where these prices were recorded as metadata back in 2021 using https://nut.link/ and https://github.com/functionally/mantis-oracle 

We will investigate the possibility of using Marlowe oracles, which already comes with a SOFR rate as explained in this article: https://github.com/input-output-hk/marlowe-cardano/blob/main/marlowe-apps/Oracle.md#custom-external-feeds

This will result in settlement prices on the 3-month futures contract being posted on-chain to test and run a pilot with a financial institution.

Our Regulatory Expert will investigate the need for licencing of the futures prices and the associated cost. This will be put forward for discussions with the banking partner during the pilot phase. If the cost of the futures feeds are prohibitive, then a beta of the SOFR spot price will be used as a proxy - which is published by the FED free of charge https://www.newyorkfed.org/markets/reference-rates/sofr 

The other deliverable is the Risk Engine and the Pricer. The risk engine will determine how much margin counterparties need to post for the transactions and revalue daily how much extra margin needs to be posted or if the counterparty can withdraw margin.

Interest Rate Derivatives are margined trades, where each counterparty needs to put up a margin at the start of the trade, which is typically just a tiny fraction of the notional amount. For example, on a 3-month Forward Rate Agreement with 10mn notional, the initial margin might be less than 5%

This margin will vary during the life of the trade, and a risk engine is needed to decide how much initial margin needs to be deposited into the smart contract by each of the counterparties and how much this margin will change over time.

The Pricer calculates the instrument's price for a given set of inputs and is a necessary component of the Risk Engine.

These will be deployed as backend services with an API

A smart contract factor will generate new smart contracts (its CBORHex and address) for each new transaction.

Smart contracts will codify the terms of Synthetic Futures. In addition, they will determine the tenor, term, notional, rate, and other elements of the term sheet.

Execution of the smart contracts is guaranteed; once a trade is registered, there is no ambiguity on the dates and margin conditions. Margin is revalued daily, and if the counterparty does not post additional margin, then the contract is resolved, and the remaining margin is returned to each counterparty.

A front-end will be developed around this functionality to show the user the value of the positions, the value of the collateral they need to post, or can withdraw depending on how the market has evolved over the last days and options to post or redeem collateral into their wallet.

Users will be able to connect to the app with their web wallets using the wallet connector developed and open-sourced by Dynamic Strategies https://github.com/dynamicstrategies/cardano-wallet-connector

Expected time to completion: 2 months

Resources: 

• One Senior developer 40h per week for 8 weeks
• One Regulatory Expert 20h per week for 8 weeks
• One Quant Modeler 20h per week for 8 weeks

Milestone 3: Execute test trades on the testnet and fix bugs

Activities:

A test trade will be done on the testnet to validate functionality and identify bugs. It will be run over five days to check the initial trade and daily collateral management functionalities. At the end, the trade will be closed out and cashflows exchanged

Any bugs will be logged and addressed.

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks
• One Regulatory Expert 20h per week for 4 weeks
• One Quant Modeler 20h per week for 4 weeks

Milestone 4: Extend the functionality to Forward Rate Agreements (FRAs)

Activities:

The app functionality will be extended to allow settling in Forward Rate Agreements (FRAs). These differ from the Synthetic Futures in that they have more flexibility to define the terms of the trades and can be as short as 1 day and as long as 1-year maturity - whereas the Futures follow a more standardized 3-month maturity.

FRAs are an interbank market and the prices are established by the market rather than by a centralized exchange as in the case of Futures. Therefore, the licensing of FRA price data is less strict than for futures and there are a handful of service providers who calculate the so-called “midmarket curves” that represent the FRA rates at different maturities (examples: https://osttra.com/services/optimise/basis-risk-optimisation/ & https://www.tullettprebon.com/ebroking/ebroking-tp-match.aspx ). Our regulatory expert, in consultation with the bank partner, will identify the appropriate source of prices for FRAs

The Risk Engine, Price and Smart contract factory will be adjusted to accommodate FRAs and an interpolation method will be added to the pricer to derive custom starting dates for FRAs

The user will be able to choose in the front-end to deal in Synthetic Futures, or FRAs

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks
• One Regulatory Expert 20h per week for 4 weeks
• One Quant Modeler 20h per week for 4 weeks

Milestone 5: Release “alpha” product to Prod

Activities:

An “alpha” version will be pushed to production, and a limited user base will be invited to test the product in production with small amounts.

Any identified bugs will be logged and addressed. Audit companies will be approached for quotes to audit the platform infrastructure and smart contracts.

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks
• One Regulatory Expert 20h per week for 4 weeks
• One Quant Modeler 20h per week for 4 weeks

Milestone 6: Establish a working group with a bank and a corporate

Activities:

The banks with which Dynamic Strategies maintains a dialogue and that are being kept updated on the project’s progress will be requested to start preparing for a Pilot.

A working group will be established. The team's regulatory expert will be in close contact with the regulatory liaison from the financial institution and the corporate client. If deemed necessary, the regulator will also be briefed.

The trade terms will be agreed between us, the financial institution and the corporate client - preference will be given to shorter trades and small amounts.

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks
• One Regulatory Expert 20h per week for 4 weeks
• One Quant Modeler 20h per week for 4 weeks

Milestone 7: Execute a Pilot trade between a bank and a corporate

Activities:

A FRA trade is executed between the financial institution and one of its corporate clients. The trade is settled on the Cardano blockchain. There is an exchange of initial margin at the start.

The trade will be monitored daily and additional collateral will be posted or redeemed at the end of each day. Feedback will be collected and logged for future releases.

At trade maturity, both parties will redeem the final cashflows from the smart contract.

Expected time to completion: 1 month

Resources: 

• One Senior developer 40h per week for 4 weeks
• One Regulatory Expert 20h per week for 4 weeks
• One Quant Modeler 20h per week for 4 weeks

[CAPABILITY/ FEASIBILITY] Please describe the deliverables, outputs and intended outcomes of each milestone.

Milestone 1: Set up dev environment and tooling

Deliverables: A working Cardano stack and Dev environment for Haskell and Marlowe

Outputs: 

• Set-up a Linux server;
• Set-up Cardano-Node, Cardano DBSync and Cardano Graphql;
• Set-up a self-hosted Marlowe deployment with Docker;
• Run supporting services via docker: NodeJs, SSL, MongoDB;
• Sign up with 3rd party providers for backup: blockfrost, maestro;
• Set-up dev environment for Web2, Haskell and Aiken.

Intended Outcomes: The team has a sever and a dev environment to build the rest of the project

Milestone 2: Building blocks to trade a Synthetic Future on SOFR rate

Deliverables: Web2 full stack and smart contract that represent 3 months SOFR Synthetic Futures.

We will trial the Marlowe smart contract language for specifying this product and if successful, will use Marlowe for the rest of the project

Smart contract code will be open-sourced

Outputs: 

• A daemon to fetch market prices once a day at the close;
• Publish market data on-chain as a daily metadata transaction;
• Deploy a Risk engine to forecast 2-day forward range of rates;
• Deploy a Pricer to give back up-to-date value of future cash flows;
• Wallet connector implemented to main web wallets (Nami, Eternl, Flint, Lace …);
• Dashboard showing live trades and required actions;
• Initiate trade on the testnet;
• Post collateral / redeem collateral.

Intended Outcomes: A working prototype ready to settle test trades on the Cardano preview testnet

Milestone 3: Execute test trades on the testnet and fix bugs

Deliverables: Execute a trade on the testnet and run the following tasks

• Initiate a trade on testnet;
• Manage cashflows for 5 days;
• Closeout trade.

Outputs: A successfully completed transaction and lessons learned

Intended Outcomes: The transaction is initiated and completed correctly

Milestone 4: Extend the functionality to Forward Rate Agreements (FRAs)

Deliverables: Extend the smart contract to FRAs

Smart contract code will be open-sourced.

Outputs: 

• Adjust smart contract to include FRAs;
• Extend Risk engine and Pricer;
• Add an interpolation method.

Intended Outcomes: Initiate a trade, manage collateral and close a trade on a FRA on a testnet

Milestone 5: Release “alpha” product to Prod

Deliverables: Release product to Prod, execute alpha trades and fix any bugs 

Outputs: Smart contracta and web2 stack running on the mainnet

Intended Outcomes: The same trades that were tested on the testnet can be run on the mainnet

Milestone 6: Establish a working group with a bank and a corporate

Deliverables: Establish a working group with a bank and a corporate

Outputs: 

• Obtain regulatory legal opinion;
• Agree terms of the trade between a bank and a corporate.

Intended Outcomes: The terms of the trade are agreed and receive a favourable legal opinion to do the trade.

Milestone 7: Execute a Pilot trade between a bank and a corporate

Deliverables: Execute a Pilot trade between a bank and a corporate

Outputs: 

• Execute the trade;
• Produce daily updates;
• Monitor daily collateral settlement.

Intended Outcomes: The trade is executed, is monitored and the exchange of collateral takes place daily, the trade is closed at the end and a summary report is written

[RESOURCES & VALUE FOR MONEY] Please provide a detailed budget breakdown of the proposed work and resources.

The budget is estimated based on 40 hours per week and 4 weeks per month.

Milestone 1: Set up dev environment and tooling

• One Senior Developer 40h per week for 4 weeks @ $50/h

Total $8,000

Milestone 2: Building blocks to trade a Synthetic Future on SOFR rate

• One Senior Developer 40h per week for 8 weeks @ $50/h
• One regulatory Expert 20h per week for 8 weeks @ $40/h
• One Quant Modeler 20h per week for 8 weeks @ $40/h

Total $28,800

Milestone 3: Execute test trades on the testnet and fix bugs

• One Senior Developer 40h per week for 4 weeks @ $50/h
• One regulatory Expert 20h per week for 4 weeks @ $40/h
• One Quant Modeler 20h per week for 4 weeks @ $40/h

Total $14,400

Milestone 4: Extend the functionality to Forward Rate Agreements (FRAs)

• One Senior Developer 40h per week for 4 weeks @ $50/h
• One regulatory Expert 20h per week for 4 weeks @ $40/h
• One Quant Modeler 20h per week for 4 weeks @ $40/h

Total $14,400

Milestone 5: Release “alpha” product to Prod

• One Senior Developer 40h per week for 4 weeks @ $50/h
• One regulatory Expert 20h per week for 4 weeks @ $40/h
• One Quant Modeler 20h per week for 4 weeks @ $40/h

Total $14,400

Milestone 6: Establish a working group with a bank and a corporate

• One Senior Developer 40h per week for 4 weeks @ $50/h
• One regulatory Expert 20h per week for 4 weeks @ $40/h
• One Quant Modeler 20h per week for 4 weeks @ $40/h

Total $14,400

Milestone 7: Execute a Pilot trade between a bank and a corporate

• One Senior Developer 40h per week for 4 weeks @ $50/h
• One regulatory Expert 20h per week for 4 weeks @ $40/h
• One Quant Modeler 20h per week for 4 weeks @ $40/h

Total $14,400

Server costs @ $18/month for 9 months = $162

The total budget is 108,962 USD

At a price of 0.3 ADA per USD

Total in ADA: 363,206

[RESOURCES & VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

The project will onboard financial institutions, new businesses and new users into Cardano. 

Every new user will receive a Cardano wallet that they can use with other Cardano apps and therefore have a positive spillover effect by driving business to other apps in the ecosystem as new users experiment with other platforms in the ecosystem.

Trading in Interest Rate Derivatives is currently a very lucrative business for the banks because the volumes are very large (It is the biggest market in the world in terms of daily volume) and the banks can command relatively wide margins.

Moving this market on-chain will bring a lot of trading volume to Cardano in terms of the number of trades and also in terms of TVL

High-value transactions will justify higher fees on the Cardano tiered fee market when implemented. This will result in higher staking rewards to ADA holders and potentially higher ADA price as it grows in demand to pay for fees.

Discussion on the tiered fee market: https://iohk.io/en/blog/posts/2021/11/26/network-traffic-and-tiered-pricing/

Additionally, Financial institutions and corporates will be inclined to move their trading of interest rate derivatives on-chain due to the cost advantages that this presents.

Based on our market estimates, banks currently add a markup of between 0.5% and 1.5% on top of the interest rate they charge to clients to cover their operational costs. We think that can be reduced to between 0.01% and 0.05%, which would represent a 20x to 100x cost saving.

We will trial the newly released Marlowe smart contract language for financial contracts and become one of the first candidate projects for the privacy-oriented Midnight side chain.

[IMPORTANT NOTE] The Applicant agreed to Fund10 rules and also that data in the Submission Form and other data provided by the project team during the course of the project will be publicly available.

I Accept