- Ming Wu is the CEO of Strips Finance, a decentralized interest rate derivatives trading platform.
- Wu told Insider why he wanted to introduce the interest-rate swap market to decentralized finance.
- He also shares two key trends within DeFi and the six high-conviction tokens in his portfolio.
In a trading career spanning Goldman Sachs, a high-frequency trading firm, and blockchain company Paxos, Ming Wu has dealt with everything from stocks to equity index futures to cryptocurrencies.
But it is decentralized finance, or financial activities automated by software, that truly piqued the trader’s interest.
“I realized that DeFi is one of the best use cases of this technology and probably was what Satoshi envisioned when he created bitcoin as a digital currency to serve a digital financial infrastructure,” Wu said in an interview.
Strips Finance
He first dabbled in DeFi through a popular investing strategy called yield farming where traders generate potentially high returns by staking or lending their crypto assets. While yield farming can produce as high as triple-digit annual percentage yields, it is fraught with risks such as
volatility
, impermanent loss, rug pulls, hacking, and fraud.
The potential perils didn’t escape Wu. Soon, he grew frustrated with the lack of venues where he could hedge his yield farming returns in an easy and convenient manner.
“I spent a couple of months trying to find various projects that might be building something for hedging yields and trading yields, and I came up empty,” he recalled. “I’m a very hands-on person. If I don’t see something that I need, I will just think ‘well if no one’s building it, I have to build it myself.'”
That’s the genesis of Strips Finance, which claims to be the world’s first decentralized interest rate derivatives exchange that allows investors to trade, speculate and hedge interest rates. The exchange, which is built on the ethereum layer-two network Arbitrum, serves as a venue for the trading and pricing of interest rates.
Accessing the interest rate swaps market via DeFi
A seasoned trader, Wu knows all too well the significance of interest rate swaps in traditional finance.
These OTC interest rate derivatives, which allow traders to exchange one set of cash flows for another, reached a staggering daily volume of $6.5 trillion per day in 2020, with much of it attributed to hedging and speculators, according to Strips Finance’s whitepaper, citing a JPMorgan report.
“It is the most critical financial market in the world and yet most people do not have the ability to participate in this market,” Wu explained. “The interest rate market has always had a very high barrier to entry, and only institutions and fund managers with ISDA agreement have had the privilege to participate in this market.”
To broaden access to the interest rate market, Strips Finance users can trade, speculate, or hedge interest rates on DeFi lending platforms and funding rates on centralized crypto exchanges, according to Wu. He adds that the team is also working on adding the secured overnight financing rate (SOFR) and potentially the Fed Funds rate too.
Trading interest rates is no easy feat even for the most math-minded traders. Strips Finance, built with the philosophy of “simple complexity” in mind, aims to abstract away all the complexities of interest rate swaps and leaves users with a simple interface, Wu said.
For example, if a user wants to hedge their portfolio against rising rates in the future, all they need to do is to open a long position on Strips Finance in order to profit from any upward movements in interest rates, and vice versa. If they want to hedge against falling interest rates in the future, they can put on a short position that would profit when interest rates fall. If a professional trader wants to put on more sophisticated strategies, that can be customized too, he added.
To be sure, as with all DeFi protocols, there are risks of heavy losses should traders’ bets on interest rates not pan out. Their positions can also get liquidated if their margin collateral ratio falls below the minimum. Other risks such as the increasing regulatory scrutiny of DeFi lending in the US could also come into play.
2 DeFi trends and 6 high-conviction tokens
Despite a string of new product launches in the DeFi space, many blue-chip tokens in the sector have seen steep declines since reaching all-time highs. Meanwhile, the total value locked in DeFi applications has also retreated to $208 billion from over $256 billion in December, according to DeFi Llama.
“I don’t really think too much about the current market price because we are in the space to build for the next five to 10 years,” Wu said, adding that the firm has lots to work on after raising $8.5 million from Multicoin Capital, Sequoia Capital India, Fabric Ventures, and Morningstar Capital last year.
These days, instead of trading actively, he keeps a close eye on shifting trends in the DeFi space. What has caught his attention is the “much-needed service” of on-chain prime brokerages, which protocols like Gearbox are trying to build, he said. Another trend worth noting is the continued growth of fixed-rate lending and borrowing, which he believes more and more people will seek out as the sector grows.
In a sign of his high conviction in DeFi, Wu’s crypto portfolio is comprised of what he calls the “stalwarts of the DeFi ecosystem,” including aave (AAVE), compound (COMP), and uniswap (UNI). Aave and compound have plunged 65% and 71%, respectively, while uniswap has tumbled 44%, in the past year, according to CoinGecko data.
Aside from having bitcoin (BTC) and ethereum (ETH) in his portfolio for broad market exposure, Wu also holds the native utility token of his own trading platform strips finance (STRP). The STRP token has declined 48% over the last month and was trading at $2.09 as of Wednesday afternoon in New York, per CoinGecko pricing.