This is the first in a series of articles intended to give an in-depth understanding of how the MetalSwap DeFi dApp works. Let's start with the heart of our Smart Contracts Live on Ethereum blockchain: The Hedging Swap Tool!

Hedging Swap: the Ultimate Solution for Commodity price volatility Using DeFi

What is an Hedging Swap?

"Hedging Swap" is traditional financial instrument that is used to hedge against potential losses on an underlying asset.
It is a type of derivative contract that allows two parties to exchange cash flows based on the performance of an underlying asset, such as a bond, currency, commodity, or index. Completely Decentralised.

Purpose of Hedging Swap?

The purpose of a hedging swap is to reduce or eliminate the risk of loss on the underlying asset by offsetting potential losses with the gains from the swap. Hedging Swaps are commonly used by businesses, investors, and financial institutions to manage risk and protect against potential losses on their investments.

Who does it Help?

This tool is very important for those who have a business that involves the use of raw materials. In fact, the recent volatility in raw material prices has put production chains in crisis that did not have protection instruments. According to the 2021 Report of the World Federation of Exchanges, the number of contracts for commodity hedging has doubled in the last 7 years, reaching 450 million contracts. The increasing volumes show that the actual need for protection systems has increased.

What is the Use case?

Like any financial derivative, these instruments can also be used for speculative purposes, thinking of this tool as a trading operation or to cover a trading operation that has already been started. The advantage of the Hedging Swap is having an operation that concludes at a certain date in time that allows you to evolve your trading strategies.

MetalSwap allows the use of this tool in Defi to protect yourself from volatility on digital assets, thus without the need for banking intermediation. This means having a much more accessible and economical tool that can be used without having to trust a centralized entity. The digital assets that are used for MetalSwap's Hedging Swaps are

The MetalSwap Hedging Swap does not need a centralized counterparty, in fact the product has been built entirely on Blockchain and every operation can be executed without the permission of any authority. The only things that anyone who uses the tool needs is the liquidity that will serve to cover the position and a Wallet that interacts with the blockchain.

Hedging Swaps are built on blockchain through public and consultable smart contracts. This brings advantages in terms of transparency and development, in fact the whole community has the possibility to improve this technological element over time. The MetalSwap Protocol is owned by the DAO (Decentralized Autonomous Organization) which has the responsibility of making strategic choices and improvements. Every member of the Dao has the possibility to make proposals for improving the Protocol.

How does Hedging Swap work?

To open a Hedging Swap we must choose the Target Size and the Cover. The Target size is the amount of Digital Asset to which we want to apply the Coverage and the Cover is the percentage of the Target Size that we decide to put as collateral for the Operation. The choice of the Cover has a direct effect on the Threshold, the higher the percentage of Cover and the more the Price of the Threshold moves away from the current price.

The Threshold Price indicates the price that once reached by the Digital Asset, the position is liquidated because the Cover has been completely eroded. Another parameter to set is the duration of the operation, called Expire Date, unlike other types of instruments the MetalSwap Hedging Swap has the possibility to choose a contract duration of the number of days that you prefer. The operation will then close on a certain date, it will close earlier only if the Threshold is reached and therefore liquidation. The Premium indicates the cost of the operation to be paid. Therefore, when one wants to open an operation, the Cover plus the Premium is locked in the smart contract.

The Hedging Swap therefore has 3 possible outcomes:

• The coverage closes in Profit, so the person who opened the operation receives back the Cover plus the Profit

• The coverage closes in Loss and the operator receives back the part of the Cover that has not been eroded, based on the price of the Digital Asset at the moment of the Expire Date

• The coverage is liquidated because the price of the Digital Asset has reached the Threshold Price and therefore the coverage has been closed prematurely, and the Cover completely eroded.

At any time, the operator has the possibility to close the operation manually if desired with the function. In addition, the use of the tool allows the operator to collect $XMT tokens that represent voting power in the decisions made by the DAO. The amount of collectible tokens are indicated by the Liquidity Reward, which will be fully collected only if the coverage closes on the natural closing date, otherwise the operator will receive a portion of $XMT proportional to the contract duration.

It is possible to use this tool in a Test Environment at this link to familiarize yourself with the tool and learn the operation step by step with this document. 

If you wish to ask more, please join our Telegram group and feel free to ask!

Goodbye volatility!

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To the MetalSwap!

… and beyond!

-The DeFi Foundation

✎ What is MetalSwap?

With MetalSwap we enable hedge swap transactions through the use of Smart Contracts, AMM style.