The Kairos Protocol
Overview of the protocol and popular use cases
Interest Rate Prediction Markets: The Missing DeFi Primitive That Unlocks Long-Term Fixed Rate Lending
The Current State of DeFi
Today's DeFi lending markets are dominated by variable, and at times volatile, rates. Whether you're borrowing from Aave, lending to Morpho, or saving in Ethena, your interest rate can fluctuate in real-time with market conditions. While variable rates are practical for certain use cases, the uncertainty is not ideal in many other instances where the user wants to know exactly what rate they will receive or pay over a period of time, such as a 2-year loan.
Additionally, there are limited options to bet on rate directions in a capital efficient manner onchain. If a trader expects Ethena's yield to rise, SOFR to drop, or Aave's borrow rate to spike, they have limited options in expressing that trade.
Interest Rate Swaps in Traditional Finance
In traditional finance, interest rate swaps are the critical piece that enables traders to bet on rate directions, borrowers to receive fixed-rate loans, and more. An interest rate swap is an agreement between two parties to trade fixed and floating payment obligations for a set period of time based on a reference rate. For example, a bank may agree to lend at a 5-year fixed rate to a borrower and then purchase a swap in which they receive a fixed-rate payment. This allows them to match their assets and liabilities. Or a trader may purchase a floating rate swap for SOFR on the expectation the FED will raise rates. Because interest rate swaps are for the payment obligations, participants can get high leverage relative to the notional amount of the swap.
Kairos
Kairos is an onchain primitive that enables the creation of permissionless interest rate prediction markets in which parties can exchange fixed and floating-rate payments based on a variety of reference rates and swap terms. The markets function using automated-market makers and pools liquidity from curated vaults, ensuring aggregated liquidity and permissionless swaps for buyers. Each market is created with a set of parameters that determine how the market functions including a collateral token, reference rate, swap term, and swap type. For example, a market could be created that offered 3-month fixed-rate swaps based on Ethena’s (USDe) yield and using USDC as the collateral token. Buyers in this market could provide USDC collateral to purchase a swap which locks in a yield rate for Ethena, regardless of whether they hold USDe. And because the swap payments are based on rate, buyers can benefit incredibly high ratios of leverage (over 5,000x in some instances) on their collateral.
Each market uses creator-determined oracles which offers two key benefits. The first is that it allows the market to decide which oracles provide the most accurate data. The second is that is allows markets to be created for any reference rates, off or onchain. Markets also incentivize liquidity through a utilization fee that rewards curators for allocating liquidity to markets when demand is high.
Currently, Kairos is in alpha so only permissioned parties can create markets. Additionally, only mock tokens are used at this time so there is no exchange of actual value. We appreciate your patience as we work through the beta period in a thoughtful and diligent manner.
Unlocking the Next Wave of Growh Onchain
Interest rate prediction markets aren't just another trading tool—they're the missing infrastructure that enables:
Long-duration, fixed-rate loans: lenders can offer multi-year fixed rates without taking on excess interest rate risk
Sophisticated trading strategies: traders can bet on interest rate movements and capitalize on market inefficiencies
Predictable corporate financing: companies can issue cost-effective debt while locking in stable borrowing costs
Deeper credit markets: expanding access beyond just over-collateralized loans Without this primitive, DeFi lending stays limited to short-term, variable-rate, crypto-native use cases. With it, we unlock trillions in traditional credit market demand that's been waiting for the infrastructure to exist.
Use Case 1: Capital Efficient Bets on Rates
Suppose a trader expects USDe yields to rise from 7% to 10% over the coming months. Instead of just holding USDe passively, they can use your Kairos to turn that view into profit.
Here’s how it plays out:
Notional swap Amount: $1,000,000 — this is the size of the swap which determines the potential profit or loss.
Swap Term: 30 days — this is the length of the swap.
Collateral posted: The trader deposits, for example, $5,000 USDe as margin — sufficient to secure the swap position per protocol requirements and providing leverage of ~200x.
Swap Position: They enter into a pay-fixed / receive-floating swap. The fixed leg is set at 7% (the current market swap rate), while the floating leg tracks the realized USDe yield.
Scenario:
If yields rise to 10%, the floating payments they receive exceed the 7% fixed rate they pay. On a $1,000,000 notional, that’s roughly $2,500 in profit ($30,000 in annualized profit) (10% – 7% = 3% spread). This is in addition to the yield they are already earning by holding USDe.
If yields instead fall to 5%, the trader owes more on the fixed leg than they earn on the floating leg, realizing a ~$1,667 loss on the same notional.
By doing this, the trader has leveraged exposure to yield movements without selling their USDe or taking on additional crypto price risk. They can scale the position by adjusting notional size, hedge it with offsetting swaps, or combine it with other DeFi strategies.
Use Case 2: Enabling Fixed-Rate Loans Onchain
Imagine you’re a lender considering offering a 2-year fixed-rate loan at 6% APY. Here’s the risk without hedging:
Month 1: You originate a 2-year loan at 6% fixed.
Month 6: Market borrowing rates on Aave spike to 12%. You’re now locked into earning 6%, while new borrowers pay 12%. The value of your fixed-rate loan has declined relative to the market.
Month 24: Rates remain elevated around 12%. You’ve effectively lost ~6% per year for the remaining 18 months — a potential loss of millions on large exposures.
This interest rate risk is exactly why most DeFi protocols only offer variable rates or extremely short fixed-rate terms. Lenders simply won't commit capital for long periods without protection against rate movements.
Here's how a lender can use Kairos to mitigate this risk:
Notional swap amount: $1,000,000 — the size of the swap, which determines potential profit or loss.
Swap term: 760 days — the duration of the swap.
Swap position: Pay-fixed / receive-floating. Fixed leg set at 7% (current market swap rate); floating leg tracks Aave USDC borrow rates.
Scenario outcomes:
Aave rates rise to 12%: Floating payments exceed the 7% fixed payments owed on the swap, generating additional yield on top of the 6% fixed-rate loan income.
By using swaps, lenders can hedge their fixed-rate loans against rising market rates, enabling longer-term, predictable lending without losing out when rates spike on protocols like Aave.
With Karios, a variety of borrowing use cases are supported:
Business loans: Companies can lock in predictable borrowing costs to plan operations and manage cash flow.
Leveraged strategies: Traders can know their exact carrying costs for multi-month positions.
Real estate: Property developers can secure fixed rates for construction loans.
Consumer credit: Individuals can gain certainty on future payments when financing large purchases.
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