Kairos Protocol Whitepaper
March 2026
Thomas Harrison [email protected] Vince DePalma [email protected]
Abstract
Kairos is a non-custodial interest rate swap protocol implemented for the Ethereum Virtual Machine. Kairos introduces a new onchain primitive for hedging interest rate risk and taking directional positions on rate movements through permissionless, trustless swap markets. Anyone can create a market by specifying immutable parameters that define the underlying rate, swap term, collateral token, risk management rules, and oracles used for rate pricing. In each market, one party pays a fixed rate and the other pays a floating rate over a defined term; at settlement, only the net difference is paid from posted collateral. Because the swaps are fully synthetic, they enable leveraged exposure to rate movements without market reliance on principal exposure to the underlying asset or rate. Liquidity is supplied to markets either directly or through vaults managed by curators, who select which markets to support and set risk parameters for their depositors. The protocol is implemented as a singleton contract with minimal governance footprint.
Introduction
Motivation
Decentralized finance (DeFi) crypto loan balances have surpassed $40B, exceeding centralized finance (CeFi) crypto loan balances, yet the infrastructure supporting this credit market remains incomplete. Nearly all DeFi lending operates on variable rates, which can exhibit high volatility depending on utilization, liquidity conditions, and broader market dynamics. Volatile rates are tolerable for short-term positions, but they are impractical for the use cases that drive the majority of borrowing demand in traditional finance: real estate investment, capital expenditure financing, and large structured purchases. Both retail and institutional borrowers cannot take on long-duration liabilities with unpredictable interest expense, and lenders cannot commit capital at extended durations without tools to hedge the associated rate risk.
The missing primitive is an interest rate swap market: the mechanism that allows lenders to offer fixed rates by hedging their own floating-rate exposure. In traditional finance, interest rate swaps serve exactly this function, forming the backbone of fixed-income hedging for corporations, banks, and asset managers. Their core function is simple: one party pays a fixed rate, another pays a floating rate, and the difference is settled periodically. This mechanism is what makes long-duration fixed-rate lending possible. Often, lenders will offer borrowers a fixed rate while using a swap to hedge their own exposure to rate movements, making it economically viable to commit capital at duration. Without this hedging layer, neither side can confidently enter long-duration credit arrangements, which is a core reason why long-duration, fixed-rate loans are largely absent from DeFi today.
Previous attempts at fixed-rate lending and interest rate swap protocols have largely been unsuccessful, in part due to timing and a fundamental chicken-and-egg problem. The primary use cases for DeFi borrowing have historically been short-term: yield farming, leveraged longs, and arbitrage trading, which don’t require fixed rates. But the deeper issue is that fixed-rate lending and interest rate swaps are codependent: lenders won't offer fixed-rate loans at duration without a way to hedge their rate exposure, and swap markets won't develop without underlying lending demand to drive it. Prior protocols attempted to solve one side of this equation in isolation, which is why neither gained traction. This dynamic is beginning to shift as DeFi borrowing matures and new entrants, including institutions and retail users (many interacting with DeFi through centralized exchange front-ends), create sustained demand for longer-duration, fixed-rate credit that didn't exist in DeFi's earlier years. As dominant lending protocols work to meet this demand by supporting fixed-rate loans (e.g. Morpho V2), Kairos operates as a complementary primitive that enables participants of those protocols to hedge the rate risk of their loan positions.
Beyond hedging, onchain interest rate swaps unlock a broader opportunity: the development of fixed-income products in DeFi such as those tied to staking and lending. Fixed-income instruments such as bonds, structured credit, and yield-bearing instruments with predictable cash flows are the largest asset class in traditional finance, yet they are limited in DeFi today. Their existence depends on predictable interest rates, which in turn depend on the ability to swap between fixed and floating exposures. By enabling deep, liquid interest rate swap markets onchain, Kairos provides the foundational infrastructure for a new class of fixed-income products.
Kairos Protocol
Kairos enables permissionless creation of interest rate swap markets in which parties can exchange fixed and floating-rate payments based on an underlying rate. To purchase a swap, a buyer supplies margin and locks in a swap rate for a fixed duration. A liquidity pool takes the opposing side of each swap, posting its own collateral, and is compensated through fees added to the buyer’s rate. When the swap expires, the buyer's rate is netted against the pool's rate and the difference is paid from the losing party's collateral. Collateral requirements are deterministic, enabling buyers to calculate their maximum profit or loss ahead of a trade. Equally important, each swap is independently collateralized so the pool's maximum loss on any individual position is limited to its posted collateral for that swap.
A buyer who purchases a fixed-rate swap is effectively betting that the floating rate will rise above the fixed rate they locked in; a buyer who purchases a floating-rate swap is betting the opposite. This allows participants to hedge rate exposure or take leveraged directional views on where rates are headed.
Because swaps are settled on margin rather than delivered against the underlying asset, markets are not constrained by the supply or liquidity of the asset whose rate they reference. This enables derivatives markets with the potential to significantly exceed those of the underlying markets. Additionally, a single collateral token can back swaps across many different rates, enabling participants to express rate views without taking on multi-token price risk.
The following sections describe the protocol architecture in detail, covering market creation, swap pricing, core protocol functions, and the liquidity provision and vault layer.
Protocol Architecture
Market Creation
Kairos markets are created in pairs via a public contract call. Each market is isolated in the pair: one market sells fixed-rate swaps and its paired market sells floating-rate swaps, with the pool taking the opposing exposure in each case. This separation allows liquidity providers to allocate capital based on their risk tolerance and directional view on rates. When creating a market, the creator specifies immutable parameters that define how the market functions:
Collateral token: the asset used for all margin and liquidity deposits as well as payments in the market.
Swap term: the fixed tenor of every swap purchased in the market.
Oracles: a reference rate oracle that tracks the underlying floating rate, a base swap rate oracle used to price new swaps, and an optional risk premium oracle that adds a spread to the buyer's rate.
Risk parameters: the leverage multiplier, which governs margin requirements and maximum leverage, minimum collateral, which sets a floor value, and the liquidation incentive paid to third parties who liquidate undercollateralized positions.
Utilization fee parameters: a kinked fee model that increases the cost of purchasing swaps as pool utilization rises, protecting LPs from concentration risk.
LP whitelist: this enables permissioned markets where only approved LPs may provide liquidity, a feature designed to support institutional liquidity providers with compliance requirements. Market creators can update this list at any time.
Since these parameters are immutable, market participants can rely on consistent behavior without exposure to governance changes or risk parameter modification after the fact.
Inherent Incentive for Model Improvement
Market creation is permissionless which allows LPs and curators to compete on offering the most accurate and attractive pricing. Markets that better reflect true risk-to-reward will attract more liquidity, enabling greater swap volume and fee revenue for LPs. This creates a natural selection dynamic: markets with well-calibrated base rate oracles, appropriately priced risk premiums, and well-structured utilization fees will outcompete those with poor pricing models, as liquidity aggregates in best-calibrated markets, which in turn creates more attractive pricing through lower utilization fees. Over time, this incentivizes continuous improvement in pricing accuracy as curators refine their models to capture greater swap volume and buyers gravitate toward markets where they believe they are getting the fairest price.
Market creators are further incentivized through a market creator fee. If enabled by the protocol admin, a share of the protocol fee collected on each swap is paid to the creator of the market in which the swap was purchased.
Swap Pricing
Buyers pay the swap rate on each swap they purchase, although the components differ based on whether they are purchasing a fixed-rate or floating-rate swap. The swap rate is composed of three components: the base rate (for fixed-rate markets) or the realized floating rate (for floating-rate markets), plus a risk premium and utilization fee. Each component addresses a distinct concern and their sum produces the final rate the buyer pays at settlement. The protocol supports negative rates throughout: base rates, floating rates, and swap rates are all signed values, enabling markets referencing rates that may go negative.
The pool takes the opposing side of each swap and pays a corresponding rate, but without the risk premium or utilization fee. The pool pays only the base rate for floating-rate swaps and the realized floating rate for fixed-rate swaps. This asymmetry is intentional: the risk premium and utilization fee exist to compensate LPs for the risks and opportunity costs of providing liquidity. The net difference between the buyer's rate and the pool's rate determines the settlement payment between the two parties.
Because swap pricing is derived from oracle-provided rates rather than a bonding curve, the protocol mitigates adverse selection risk for LPs. In traditional AMMs, liquidity providers are exposed to informed traders who arbitrage stale prices. In Kairos, the base rate, risk premium, and utilization fee all reflect current market conditions at the time of each swap purchase, ensuring LPs are not systematically disadvantaged by lagging price discovery. LPs further control their exposure by selecting which markets and oracles to supply liquidity to, or by creating markets with pricing models/oracles they believe best reflect risk.
Base Rate
The base rate is an oracle-provided value representing the expected time-weighted average floating rate (TWAR) over the duration of the swap. It serves as the foundation of the fixed swap rate, anchoring pricing to the underlying market rate the swap is referencing. Because fixed-rate buyers are locking in a rate at purchase, the base rate must reflect the best estimate of where the floating rate will average over the swap's tenor.
Realized Floating Rate
The realized floating rate is derived from a continuously updated onchain rate index that tracks the cumulative floating rate over time. It determines the buyer's rate obligation in floating-rate markets and the pool's rate obligation in fixed-rate markets. Each rate index is tied to a unique spot rate oracle and is updated during core protocol interactions. Because multiple markets can reference the same underlying rate oracle, a single rate index can serve many markets simultaneously, updating whenever any of those markets are interacted with.
The rate index targets continuous compounding by applying simple interest, (1 + r·dt), over each update interval. As update frequency increases, the cumulative product converges toward e^(r·t). Because any interaction with a market sharing the same rate oracle triggers an update, markets with higher activity naturally produce more accurate rate tracking.
The realized rate for a swap is derived from two index snapshots; one taken at swap entry and one at closing. The annualized rate is calculated as
(closingIndex / entryIndex - 1) × (seconds per year / time elapsed)
producing a measure of the floating rate actually realized over the swap's duration.
Risk Premium
The risk premium compensates LPs for the uncertainty inherent in the base rate: the possibility that the actual time-weighted average rate diverges meaningfully from what the oracle projected at the time of purchase. The risk premium can be set independently for fixed and floating markets, reflecting the fact that the two sides carry different risk profiles. A higher base rate uncertainty warrants a higher risk premium, allowing LPs to price risk more precisely and earn greater compensation for taking on more uncertain exposures.
Utilization Fee
The utilization fee incentivizes liquidity provision and compensates LPs as the pool becomes more utilized. It is defined by a marginal fee curve that is a function of global pool utilization:
u = lockedLiquidity / totalLiquidity
where lockedLiquidity is the pool's collateral currently backing open swaps and totalLiquidity is the pool's total collateral. The marginal fee follows a piecewise model, growing linearly below a configurable kink point and quadratically above it:
Three immutable parameters, set at market creation, define the curve:
The fee charged on a given swap is not a point evaluation of this curve but rather its integral over the utilization range the trade consumes. When a swap is purchased, the protocol computes pre-trade utilization (uPre) and post-trade utilization (uPost), then calculates the average fee rate as:
fee = (F(uPost) − F(uPre)) / (uPost − uPre)
where F(u) is the antiderivative of f(u):
F is continuous and differentiable at the kink by construction. This integral-based approach ensures that the fee is path-independent: splitting a trade into multiple smaller trades produces the same total fee as a single trade of the same size, eliminating any incentive to game trade sizing.
The quadratic region produces a steep, convex fee curve beyond the kink that serves two purposes: it ensures markets retain sufficient available liquidity for LPs to withdraw, and it compensates LPs when there is structural imbalance in demand between fixed and floating swaps. Swaps that would exceed available liquidity are rejected.
The total maximum utilization fee at 100% utilization is: kink × slope + maxKinkFee.
Core Protocol Functions
Purchasing a Swap
By purchasing a swap, the buyer is agreeing to pay the pool a certain rate (i.e. swap rate) over the course of the term in exchange for a different rate paid by the pool. To ensure the buyer will make good on their payment, they must supply margin to purchase a swap, which is calculated based on the expected payment the buyer may owe over the duration of the swap. A leverage multiplier, set immutably in the market parameters, determines the amount of margin required and can enable lower or higher leverage swaps. The pool posts a corresponding amount of collateral to cover its expected payments to the buyer. This bilateral collateralization ensures both parties have capital pledged for the duration of the swap.
Buyer margin is calculated as:
buyerMargin = notional × (|baseRate| + utilizationFee + riskPremium) × term / (SECONDS_PER_YEAR × leverageMultiplier)
The numerator represents the buyer's expected rate exposure over the swap's duration based on current oracle rates, scaled to the swap's term as a fraction of a year. The leverage multiplier acts as a divisor: a higher ratio reduces the required margin relative to notional, enabling higher leverage. A leverageMultiplier of 2 means the buyer must post margin covering half the expected rate-time exposure; a ratio of 1 requires full coverage. Since the leverage multiplier is specific to each market, buyers and LPs can choose to participate in lower or higher margin markets.
Pool collateral is sized using only the base rate:
poolCollateral = notional × |baseRate| × term / (SECONDS_PER_YEAR × leverageMultiplier)
The pool's collateral excludes the utilization fee and risk premium since only the buyers pay these components as part of their overall rate to compensate LPs for providing liquidity. This asymmetry means the buyer always posts more collateral than the pool for the same swap, reflecting the additional fee burden the buyer carries. The base rate is floored at a protocol-defined minimum (0.01%) to prevent degenerate margin calculations when rates approach zero.
For fixed-rate swaps, the swap rate is locked at purchase and comprises the base rate, risk premium, and utilization fee. For floating-rate swaps, the risk premium and utilization fee are fixed at purchase while the time-weighted average floating rate is determined at settlement. This structure gives fixed-rate buyers certainty on their cost while preserving the floating-rate buyer's exposure to actual rate movements over the swap period.
Protocol Fee
If enabled by the Kairos protocol admin, a protocol fee will be charged on each swap purchase, calculated as a percentage of notional proportional to the swap's tenor (e.g. a 0.2% fee on a 6-month swap charges 0.1% of notional). The fee is paid by the buyer at purchase and transferred directly to the protocol admin multisig, separate from the buyer's margin. The fee rate is set by the protocol admin and capped at 3%.
Market Creator Fee
If enabled by the Kairos protocol admin, a portion of the protocol fee is paid to market creators on each swap purchased in their created markets. This incentivizes new market creation and rewards markets where there is significant volume. The fee rate is set by the protocol admin and capped at 25% of the protocol fee.
Swap Settlement
When a swap expires, anyone can call the contract to settle. Settlement computes two payment legs (one for the buyer and one for the pool), nets them, and transfers the difference from the losing party's collateral to the winning party.
Payment legs are calculated as:
payment = notional × rate × timeElapsed / SECONDS_PER_YEAR
For fixed-rate swaps (BUY_FIXED), the two legs are:
buyerPayment = notional × swapRate × timeElapsed / SECONDS_PER_YEAR
poolPayment = notional × realizedFloatingRate × timeElapsed / SECONDS_PER_YEAR
where swapRate = baseRate + utilizationFee + riskPremium (all locked at purchase), and realizedFloatingRate is derived from the rate index:
realizedFloatingRate = (closingIndex / entryIndex − 1) × SECONDS_PER_YEAR / timeElapsed
For floating-rate swaps (BUY_FLOATING), the structure is inverted:
buyerPayment = notional × realizedFloatingRate × timeElapsed / SECONDS_PER_YEAR + notional × (utilizationFee + riskPremium) × timeElapsed / SECONDS_PER_YEAR
poolPayment = notional × baseRate × timeElapsed / SECONDS_PER_YEAR
The floating-rate buyer pays the realized floating rate plus the utilization fee and risk premium locked at purchase. The pool pays only the base rate.
Netting determines the settlement direction and amount:
netObligation = |buyerPayment − poolPayment|
For fixed-rate swaps, the buyer owes if the realized floating rate comes in below the swap rate as their fixed payment exceeds what the pool owes. For floating-rate swaps, the buyer owes if the realized floating rate plus fees exceeds the base rate as their payment exceeds the pool's base rate obligation.
The settlement amount is capped at the losing party's posted collateral:
settlementAmount = min(netObligation, losingPartyCollateral)
If the buyer owes, the settlement amount is deducted from the buyer's margin and added to the pool. If the pool owes, the amount is deducted from the pool's collateral backing and returned to the buyer along with their full margin. Because settlement only pulls from posted collateral, the maximum profit and loss for each party is capped at the counterparty's posted margin, and buyers know their maximum potential profit and loss before purchasing a swap.
Early Exit
Market creators can allow early swap settlement in markets. When a market is created with this setting, buyers may exit a swap before expiry, subject to an early exit fee, as a percentage of net settlement obligation. Early exits settle accrued payments using the realized floating rate and project remaining payments using the current base rate. The projection is asymmetric: if the remaining term favors the buyer, those projected gains are forfeited; if it favors the pool, the buyer must pay the projected losses. This asymmetry is a deliberate design choice: protecting the pool from selective early exits on profitable positions allows LPs to offer tighter pricing on all swaps, since they are not bearing the cost of one-sided optionality. Buyers retain optionality to seek other bids through minting an NFT as described below.
NFT Minting
Buyers may optionally mint an ERC721 token representing their swap position through a separate wrapper contract. This enables positions to be transferred or sold on secondary markets, while keeping the NFT layer decoupled from the core contract. The core contract exposes a view function that returns the current settlement value of any open swap, giving holders and prospective buyers real-time price transparency.
Liquidation
A swap can be liquidated by anyone before expiry if the net accrued obligation exceeds either party's posted collateral minus the liquidation incentive. Liquidation is bilateral: if the buyer is liquidated, the pool receives the buyer's collateral minus the liquidator fee. If the pool side is liquidated, the buyer receives the pool's collateral backing minus the liquidator fee, along with their own margin returned in full. Because liquidation is permissionless and evaluated in real time, the protocol remains solvent without requiring active management from either counterparty. Collateral is denominated in the same asset as swap payments, eliminating price risk for liquidators and simplifying liquidation. The liquidation incentive is set as an immutable market parameter, allowing for greater incentives in markets with more volatile rates.
Liquidity Provision and Vault Layer
Liquidity Provision
Liquidity is supplied to markets directly by LPs or through vaults managed by curators. Supplying liquidity to a market allocates shares to the depositor, which represent proportional ownership of the pool and track each LP's claim on the pool's collateral as swaps are opened, settled, and as other LPs enter and exit. When withdrawing, LPs redeem shares at the current share price based on available unlocked collateral.
Curators and Vaults
Curators manage vaults that allocate depositor funds across Kairos markets, selecting which markets to support and setting risk parameters for their depositors. This model separates the role of liquidity provision from risk management as depositors benefit from a curator's market expertise without having to actively manage their own allocations. Two vault types are supported: LP vaults that supply liquidity to market pools, and buyer vaults that open and manage swap positions on behalf of depositors. Each vault connects to the protocol through a dedicated adapter contract that translates between the vault's interface and the protocol's core functions, tracks positions across multiple markets, and reports mark-to-market value so the vault can accurately price its shares at all times.
At launch, the initial adapters integrate with Morpho Vault V2, which implements the ERC4626 tokenized vault standard. Because the adapter layer is modular, additional adapters can be built to support other vault architectures or custom integrations without changes to the core protocol.
LP Share Price
LP share price equals the pool's total collateral plus unrealized P&L across all open swaps, divided by total shares outstanding. It is calculated through bucketing swaps and determining the Mark-to-Market (MtM) value of each bucket.
Bucket System
To ensure gas-efficient computations, Kairos uses a bucket aggregation system that reduces the computation from O(n) in swaps to O(k) in buckets. Each market is configured with a fixed number of buckets and a bucket interval. Swaps are deterministically assigned to a bucket based on entry timestamp. Rather than storing individual swap details for MtM purposes, each bucket maintains notional-weighted aggregates: fixed rate, entry time, floating rate index, fee components, and collateral totals for both parties. Opening or settling a swap updates only its bucket's aggregates, a constant-cost operation regardless of how many swaps the bucket contains.
Mark-to-Market Calculation
To compute total unrealized P&L, the protocol iterates over all buckets, deriving each bucket's weighted-average remaining tenor and querying the base rate oracle for a tenor-appropriate rate. This reflects the yield curve's term structure as buckets approaching expiry are valued with short-dated rates while recently opened buckets use longer-dated rates. The accrued floating leg is derived from the cumulative index between entry and now, and the fixed-versus-floating difference scaled by notional gives each bucket's unrealized P&L. Each bucket's unrealized P&L is capped by the collateral posted by both parties, ensuring the pool cannot gain more than the total buyer collateral in a bucket or lose more than its own posted backing. A minimum share price floor prevents shares from reaching zero when a pool is deeply underwater; deposits are blocked while the pool is at this floor with active swaps to prevent dilution of existing LPs. This design ensures accurate, up-to-date share pricing as LPs enter and exit markets, while keeping gas costs fixed regardless of the number of open positions.
Notable Smart Contract Patterns
Singleton Contract
The protocol is implemented as a singleton contract that holds all markets. This design reduces deployment costs, simplifies multi-market interactions, and provides a unified settlement layer across the entire protocol.
Account Delegation
All core functions accept an onBehalfOf parameter, allowing users to authorize third parties to act on their positions. This enables composability with smart contract vaults, relayers, and bundlers without requiring users to transfer custody of their collateral.
Adapter Pattern for External Vaults
Dedicated adapter contracts serve as the integration boundary between external vault protocols and the Kairos core contract. Each adapter is an independent contract that holds positions on behalf of its vault, isolating vault-specific logic from settlement mechanics. New vault integrations require only deploying a new adapter; no changes to the core contract are needed.
Governance
The protocol is designed to minimize governance surface area. All market-level parameters (e.g. oracle addresses, swap term, leverage multiplier, utilization fee curve, liquidation incentive, and early exit settings) are immutable once a market is created. The only mutable state is protocol-level fee configuration, managed by the admin, and market-owner controls over the LP whitelist and market termination.
Protocol Admin
A dedicated admin contract manages protocol-wide settings through a multisig with timelocked changes. The protocol fee rate is capped at 3% and requires a 3-day timelock to increase; disabling fees takes effect immediately since it always benefits users. The market creator fee share, capped at 25% of the protocol fee, follows the same 3-day timelock in both directions (enabling or disabling). Ownership transfers require a 7-day timelock with two-step acceptance, and renouncing ownership is permanently disabled. The admin may also set an optional market creation fee, payable in ETH or a designated ERC20 token.
Market Owner
Each market has an owner, initially its creator, who may transfer ownership. The market owner can manage the LP whitelist (if enabled at creation), and permanently terminate the market, which blocks new swaps and LP deposits while allowing existing swaps to settle normally.
Acknowledgments
This whitepaper draws on the contributions of many individuals and teams. The authors are grateful for the support from the Kairos Labs investors, advisors, and friends.
Disclaimer
This paper is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal, or tax advice or investment recommendations. The opinions reflected herein are subject to change without being updated.
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