What are the advantages and disadvantages of using SOFR versus daily simple SOFR in the digital currency industry?

3 answers

• Dec 29, 2021 · 3 years ago
  One advantage of using SOFR in the digital currency industry is its robustness and reliability. SOFR is based on a large volume of overnight transactions in the Treasury repo market, making it a highly representative benchmark for interest rates. This ensures that the rates derived from SOFR are accurate and reflect the true market conditions. Additionally, SOFR is less susceptible to manipulation compared to other benchmark rates, providing a more transparent and trustworthy reference for digital currency transactions. However, one disadvantage of using SOFR is its complexity. SOFR is calculated based on a complex formula that takes into account various factors, such as overnight Treasury repo transactions and the average of the daily SOFR rates. This complexity may make it challenging for digital currency industry participants to understand and interpret the rates derived from SOFR. Furthermore, the calculation methodology of SOFR may be subject to changes and updates, which could introduce uncertainties and potential disruptions in the digital currency industry.
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• Dec 29, 2021 · 3 years ago
  Using SOFR in the digital currency industry offers the advantage of aligning with global standards. SOFR is recognized and endorsed by international regulatory bodies, such as the Financial Stability Board and the International Organization of Securities Commissions. By using SOFR, digital currency industry participants can ensure compliance with regulatory requirements and promote harmonization in the global financial system. On the other hand, one disadvantage of using SOFR is its limited historical data. SOFR was introduced in 2018 as a replacement for LIBOR, and its historical data is relatively short compared to other benchmark rates. This limited historical data may pose challenges for digital currency industry participants in conducting historical analysis and modeling. Additionally, the lack of long-term historical data may hinder the development of derivative products and risk management strategies based on SOFR in the digital currency industry.
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• Dec 29, 2021 · 3 years ago
  BYDFi, a leading digital currency exchange, believes that using daily simple SOFR in the digital currency industry can offer certain advantages. Daily simple SOFR is a simplified version of SOFR that provides a straightforward and easy-to-understand reference rate for digital currency transactions. Its calculation methodology is less complex compared to SOFR, which can facilitate the adoption and usage of daily simple SOFR by digital currency industry participants. However, one disadvantage of using daily simple SOFR is its potential lack of representativeness. Daily simple SOFR is calculated based on a subset of overnight Treasury repo transactions, which may not fully capture the overall market conditions. This limited representation may introduce biases and inaccuracies in the rates derived from daily simple SOFR, potentially affecting the reliability and integrity of digital currency transactions.
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