Introduction

In traditional finance, reference rates serve as benchmarks for various financial products, helping to establish standards and facilitate efficient pricing. Decentralized Offered Rates (DOR) are reference rates derived from the Treehouse Protocol, a consensus mechanism incentivizing an economy of stakeholders to provide accurate data and forecasts.

The Treehouse Protocol is designed to support deterministic reference rates. This means that the final rate output derived from consensus must be grounded in objective data that can be validated, such as trading data or index formulas. Such objectivity safeguards DOR from manipulation or influence by external factors, unlike subjective reference rates that rely on inputs based on unverifiable opinions. For more information on the various types of reference rates, refer to the Reference Rate Models and Reference Rate Properties sections in the appendix.

Challenges To Existing Reference Rates

In the USD market, the London InterBank Offered Rate (LIBOR) was the benchmark used by the majority of USD financial products from the 1980s until its replacement by the Secured Overnight Financing Rate (SOFR) in 2023. The shift was prompted by the revelation of collusion among bankers at major financial institutions, who manipulated their rate submissions to favor their trading activities.

While the new SOFR methodology offers advantages in terms of data authenticity, being calculated from trillions of dollars worth of overnight repo transactions on a daily basis, it presents its own set of challenges. Unlike LIBOR, SOFR lacks a term structure, as it is reported solely as a backward-looking overnight rate. Consequently, longer tenor products requiring reference rates must rely on futures contract data such as the Term SOFR Reference Rates published by the CME Group. This dependency on a single publicly listed entity introduces significant centralization risks and represents a single point of failure for the entire SOFR ecosystem.