Swap Token
TL;DR: The Cork Swap Token (cST) is a tokenized risk instruments that allows market participants to price, hedge, and trade the risk associated with a Reference Asset.
Introduction
Many assets in DeFi carry specific forms of risks, such as duration/illiquidity risk, credit risk or depeg risks. These risks affect numerous market participants and asset types, including institutional users, vaults and asset issuers. The Cork Swap Token is a DeFi primitive that allows you to price, hedge, and trade such risks.
How Swap Tokens Work
On Cork, every market pairs a Reference Asset (e.g. a RWA credit fund) with a Collateral Asset (eg sUSDS).
A Swap Token is a tokenized derivative that grants the holder the right, at any time before a set expiry date, to immediately exchange a specified Reference Asset plus the Swap Token for a Collateral Asset at pre-defined terms.
A Solution for Duration Risk
A major use case for Swap Tokens is to act as a liquidity facility to hedge against duration risk. Certain assets, such as RWAs with long redemption windows (eg 40+ days), are difficult to leverage in DeFi due to the lack of secondary liquidity whilst the asset carries significant duration risk. To make such asset composable with lending markets, vaults etc. which may require more immediate liquidity, a Cork Pool can be configured with the RWA as a Reference Asset and a liquid Collateral Asset. This means, that the previously illiquid RWA, can be instantly swapped to a liquid collateral through the use of the Swap Token. As a result, it can become composable with the rest of DeFi, solving the Duration Risk challenge of the RWA.
Applications of Swap Tokens
Swap Tokens can provide coverage for a wide range of risks and use cases including:
Looping: Swap Tokens can be used in looping trades to shield against liquidation events and provide instant liquidity in particular to illiquid assets (eg Vault Tokens, RWAs)
Duration Risk: In addition to RWAs, other market participants including Vaults and Bridges which may face significant duration mismatches in their business, can leverage Cork to gain a more capital efficient liquidity buffer to support smooth functioning in volatile market conditions.
Depeg risk: Temporary or permanent peg price deviations can be fully hedged with Swap Tokens.
Credit risk: Instruments with credit risks, such as credit funds or certain stablecoins, can be hedged.
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