CryptoSlate spoke with Simon Jones, CEO of Voltz, a pioneering DeFi protocol building capital-efficient interest rate markets. Jones, an expert in market risk assessment, dissects the critical errors made by Three Arrows Capital (3AC) and Celsius. He points to a recent report which links the downfall of these crypto giants to their exposure to staked Ethereum on the Terra ecosystem, highlighting a systemic failure in risk management across centralized entities.
In the following interview, Jones shares his expert analysis on why DeFi urgently needs interest rate swaps to instill stability in a volatile market, the specific risk miscalculations that led to the collapse of Celsius and 3AC, and the critical lessons the industry must learn from this unprecedented market fallout.
Voltz is described as providing access to "DeFi's synthetic, capital-efficient IBOR market" - what does this mean to the average investor?
At its most fundamental level, interest rate swaps enable us to create products that have stability built directly into them. Until now, DeFi has primarily been an ecosystem for those seeking high-risk, high-volatility products. However, if we want DeFi to become the financial system for the entire world, we need to support the financial needs of everyone—and having stability in some products is absolutely crucial.
Interest Rate Swaps facilitate this by allowing users to transition from a variable-rate to a fixed-rate asset (or vice-versa). This unlocks a broad spectrum of sophisticated products and trading opportunities, providing the ability to easily switch between a 'risk-on' and a 'risk-off' position.
The key is the capital efficiency and synthetic nature of the pools. The markets on Voltz Protocol are true derivatives; you can trade with leverage, and you don't need to own the underlying asset to trade. These are essential features when trading basis points and using them as a mechanism to build innovative and appealing products.
In terms of risk management, how did Three Arrows Capital misjudge this systemic risk?
This systemic risk was severely misjudged by the lenders who provided 3AC with capital. These loans were often made against some form of collateral. However, much like in 2008, that collateral was overvalued, suggesting the positions were collateralized when in reality they were deeply undercollateralized.
Compounding this, the liquidation of the collateral occurred nearly simultaneously. This meant all that capital flooded onto the market, causing asset prices to plummet even faster—creating a death spiral on asset prices and exposing the undercollateralized nature of the lenders' positions. This death spiral was a systemic risk that hadn't been properly priced in by the lenders, resulting in systemic failure.
What similarities and differences do you see between this crash and the 2008 financial crisis?
The 2008 crisis had several similar characteristics—particularly the system's dependency on assets that were either overvalued or at significant risk of massive price corrections. This led to systemic risk that caused a market collapse when the assets dropped in value.
However, there are some key differences today. Most notably, the emergence of DeFi, a system built to be censorship-resistant and unstoppable, rather than relying on a legal framework. This has meant that a large portion of the 'crypto financial system' has continued to operate as normal, mitigating some of the impacts from the poorly managed CeFi players.
It's worth reiterating—CeFi is not DeFi. Many DeFi founders, myself included, entered this space to build a financial system that is more equitable, transparent, and antifragile. Seeing parallels to 2008 play out with CeFi entities only reinforces my conviction that permissionless, antifragile protocols are the future.
What about Celsius? What did they do wrong, and what can other companies learn from them?
Celsius appears to have entered highly leveraged positions with customer deposits to offer incremental yield as a form of 'competitive alpha' against other CeFi platforms. This might have worked in a bull market, but it was an enormous risk that would leave them insolvent if assets were to devalue significantly and investors tried to withdraw their funds, which is precisely what happened.
Not only is this poor risk management, but it also reeks of the opaque shadowy world of TradFi, which is exactly what we're trying to move beyond.
Contrast this with DeFi, a world where transparency and system health are paramount to the network's survival, and where the rules are made public for everyone to see. It's a stark contrast to how some of these CeFi players have operated.
What are your thoughts on FTX's SBF offering loans in exchange for shares in companies like Voyager? Do you believe his actions are in the best interest of the industry?
FTX has effectively acted as the Federal Reserve did during the 2008 crisis—bailing out failing lenders. However, unlike in 2008, it's encouraging to see the industry bailing itself out rather than taxpayer money being used to save poorly managed businesses.
Do you see any lasting damage from the Terra/Luna fallout?
Many people lost money with the Terra collapse, and that will sadly leave some long-lasting scars. However, the fundamental principles of DeFi haven't changed—so there are many reasons to be bullish for the future. Today is also the best possible time to be building, so I'm excited to see what we can create as a community, and I'm even more excited about what we'll do for society by providing everyone with equal access to a global, antifragile, and transparent financial system.
A recent report highlighted the fallout from Terra Luna and how it impacted companies like Celsius and 3AC. Does the report align with your thesis?
The report is consistent with the fact that many CeFi players hadn't properly priced in systemic risk. Whether it was the Terra collapse or, more broadly, the risk of a massive drop in asset prices across the market, they all had assets on their balance sheets that weren't equal to the 'liquid value' they could realize when everyone rushed for the exit. They hadn't properly accounted for systemic risk, leaving them vulnerable to insolvency.
The contrast with DeFi is striking—where protocols are built with worst-case scenarios in mind to ensure they remain solvent. The fact that this has happened to CeFi players only reinforces the reality that decentralized, permissionless protocols are the future of finance.
Simon Jones, CEO & Co-Founder of Voltz Labs, champions a future built on transparency, fairness, and community governance, where technology provides equal financial opportunities for all.
