DeFi new force IPOR: build DeFi benchmark interest rate and realize high leverage interest rate transactions

DeFi is learning from CeFi to improve its own financial tools and eat into CeFi's market. In March this year, the biggest risk in the financial market may come from the successive bankruptcies of Silvergate Bank, Silicon Valley Bank and Signature Bank in the US banking industry. When monetary policy is loose, banks receive a large amount of deposits and use these funds to buy long-term bonds. But when the policy is tightened, withdrawal demand increases, bond prices fall, and banks have to sell these assets at a loss to cope with the run. In the end, these three banks became victims of the Fed's interest rate hike.
There are enough interest rate derivatives tools in the traditional financial market to hedge the risk of interest rate changes. The scale of the interest rate derivatives market is as high as 450 trillion US dollars, and the daily interest rate derivatives trading volume in CME alone is tens of trillions of US dollars. In DeFi, this direction has been developed for several years, but there has been a lack of effective tools before.
Fixed-rate solutions in the early days of DeFi
The most commonly used model in DeFi is the floating rate model, where deposit and loan rates change at any time based on supply and demand. Aave, as one of the most well-known decentralized lending platforms, has also opened a fixed-rate lending function, but it has fewer users. Fixed-rate loans and floating-rate loans in Aave share the same funding pool, but the lending rate of the former will not change. However, Aave's fixed-rate pricing is not reasonable. Taking the data on April 18 as an example, in Aave V2 on the Ethereum mainnet, the deposit rates of USDT, USDC, and DAI are all between 2% and 3%, and the interest rates of floating-rate loans are between 3% and 4%, but the interest rates of fixed-rate loans are all above 12%. The lack of a reasonable benchmark interest rate as a reference standard for fixed-rate loans has led to unreasonable pricing.
Pendle Finance, a project that has recently risen due to the future returns of LSD, was originally designed for transactions between floating and fixed interest rates. Users can lock Aave and Compound deposit certificates in Pendle's smart contract and get two tokens, OT and XYT. OT represents the right to claim the collateral after maturity, and XYT represents future returns. Depositors of Aave and Compound can mint OT and XYT, and lock in future floating interest rates as fixed returns by selling XYT. This approach also has disadvantages. Neither interest rate traders nor liquidity providers can use leverage, which is less competitive than the thousands of times leverage in traditional financial interest rate derivatives transactions.
Low-cost, high-leverage, and relatively stable interest rate tools are the needs of DeFi interest rate trading. Notional Finance also proposed a relatively reasonable solution before, but its TVL has recently dropped from nearly $1 billion to less than $30 million, surpassed by IPOR. Let's take a look at IPOR's solution.
The three components of IPOR: IPOR Index, IPOR AMM and Asset Management Smart Contract
The name of IPOR (Inter Protocol Over-block Rate) comes from LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate), and is closer to SOFR. LIBOR and SOFR are both benchmark interest rates used in the financial market. Their main differences lie in the calculation methods and credit risks. LIBOR is calculated based on the quotes of the London Interbank Offered Market, while SOFR is calculated based on actual transaction data in the market; LIBOR lending is unsecured, while SOFR is secured. Therefore, SOFR is less likely to be manipulated and has almost no trust risk. In recent years, it has gradually replaced LIBOR.
IPOR Index
One of the main products of IPOR is the DeFi benchmark interest rate benchmarked against SOFR. Like SOFR, the source of the interest rate is collateralized lending. IPOR has currently created indexes for the three major stablecoins USDT, USDC, and DAI, and is currently creating an index for ETH. After the Shanghai upgrade, ETH LSDFi has ushered in rapid development and needs a benchmark interest rate.
Specifically, IPOR currently calculates the deposit rate and borrowing rate based on the weighted average of the deposit and borrowing rates and quantities of Compound and Aave, and then takes the average, as shown in the figure below. The IPOR index calculation is modular and can be updated. When the market changes, it can be changed through the DAO governance process. The data of the IPOR index is collected and monitored by the oracle, and then sent to the IPOR index calculation smart contract, and the results are sent to the oracle. In the event of a hacker attack, the oracle administrator can initiate an emergency delisting and produce results immediately.
 IPOR AMM
When trading interest rates, IPOR AMM quotes based on the IPOR index and has a certain spread. Factors affecting the spread include moving averages, transaction size, risk exposure of the liquidity pool, current volatility, and mean reversion. For example, the current IPOR USDC index is 2.653%. When trading USDC's fixed interest rate for a floating interest rate, the fixed interest rate paid is higher, and the floating interest rate received is the floating interest rate corresponding to the IPOR USDC index. Similarly, when converting a floating interest rate to a fixed interest rate, the floating interest rate corresponding to IPOR USDC is paid, and the relatively lower fixed interest rate is received. If a user converts a fixed interest rate to a floating interest rate under the current circumstances, although the current floating interest rate obtained is less than the fixed interest rate paid, if the interest rate rises in the future and the IPOR USDC index rises, it can also make a profit. When trading interest rates, traders use the corresponding stablecoin as margin, and the maximum leverage can reach 500 times.
In IPOR AMM, LP directly provides liquidity in corresponding stablecoins, and the income that can be obtained includes: fees charged when traders open derivative positions, fees charged when withdrawing liquidity, profits and losses as counterparties to traders, and income obtained through asset managers.
Asset Manager
Thanks to the composability of DeFi, IPOR's asset manager will deposit idle stablecoins in AMM into Aave and Compound. Many DeFi projects will use the same mechanism to increase revenue, so I will not go into details here.
IPOR Token and Liquidity Mining
IPOR's native token is $IPOR, with a total of 100 million, which will be issued to all parties involved in the project. The specific distribution is as follows.
30% is allocated to the DAO Treasury. 25% is used as a liquidity mining reward, with 1.5 $IPOR distributed per block. 12.76% is used for operations and used by the DAO. 20% is allocated to the core team and released linearly over 3 years. 11.85% is allocated to investors and released linearly over 3 years. 0.39% is used as an airdrop for backdated rewards.
$IPOR also has a staking token form, called Staked IPOR or Power IPOR ($pwIPOR), $pwIPOR is not transferable. IPOR and pwIPOR can be exchanged 1:1, staking $IPOR can get $pwIPOR, only $pwIPOR corresponds to the governance rights of the DAO, holding $pwIPOR can also increase the liquidity mining rewards in IPOR. It takes 14 days to redeem $pwIPOR for $IPOR, and if you choose to redeem directly, you need to pay a 50% fee.
Liquidity is crucial to IPOR. When LP provides liquidity in IPOR, it needs to bear risks as the counterparty of the trader. The amount of liquidity also affects the upper limit of leveraged positions that can be opened and the spread in transactions. Therefore, IPOR has carried out liquidity mining from the beginning, and the rewards are issued in the form of $pwIPOR, which can be collected in real time.
When LP deposits any of the three stablecoins, USDC, USDT, and DAI, into the deposit contract, it will get the corresponding ipTokens (ipUSDC, ipUSDT, ipDAI). As shown in the figure below, excluding liquidity mining rewards, the exchange ratio of ipUSDC to USDC has increased from 1 to 1.0484 since it went online in August last year.
Liquidity mining can be started by staking ipTokens to the reward contract. Holding $pwIPOR can increase the rewards of liquidity mining, and the reward contract uses the ratio between the provided liquidity and the $pwIPOR held to calculate. As shown in the figure below, increasing $pwIPOR is more effective in increasing rewards at the beginning. As the amount of $pwIPOR increases, when it exceeds a certain critical value, it is more effective to increase liquidity. This is to make the distribution of $IPOR more decentralized and incentivize more balanced token demand.
As of April 18, the yields of liquidity mining for USDC, USDT, and DAI in IPOR were all above 21%.
IPOR Team
The development team behind the IPOR Index and IPOR Derivatives is IPOR Labs, a development company based in Zug, Switzerland comprised of crypto OGs, veterans of traditional financial markets, professional developers, and the crypto community.
Darren Camas is the co-founder and CEO of IPOR Labs, with 12 years of cryptocurrency experience, an early advisor to Cardano, and a pioneer in the crypto exchange space in 2011.
Dimitar Dinev is the co-founder and chief security officer of IPOR Labs. He has been working in the cryptocurrency field since 2016. He has a background in investment banking, venture capital, and Asian spot and derivatives exchange business. He is also an advisor to multiple DeFi projects.
Dr. Mau Hernandes is the Chief Scientist at IPOR Labs and previously built a trading platform at SBI Bits, the cryptocurrency subsidiary of the Japanese securities giant. He is a statistician, computer and data scientist.
The core of the IPOR protocol was built by software engineers with 15 years of experience in enterprise-level software development, who previously built core infrastructure for banking, payments, and insurance.
The product team is led by Wookash, who was previously CTO of 3 startups and focuses on designing solutions between business and economic logic and specific implementation.
The community is led by Vlad Dramaliev, who has been building the crypto community since 2013, and the IPOR Intern Twitter account publishes high-level opinions on the social platform.
Summary
The IPOR protocol consists of three core components: IPOR Index, IPOR AMM, and asset management smart contracts. It has pioneered a method of trading DeFi interest rates with high leverage and low cost. The IPOR Index is a DeFi benchmark interest rate that is benchmarked against SOFR. In IPOR AMM, floating and fixed interest rates can be traded with up to 500 times leverage.
$IPOR tokens also have a staking form, $pwIPOR. Holding $pwIPOR can obtain higher mining rewards. The increase of $pwIPOR increases the rewards of liquidity mining in a logarithmic form, thereby stimulating the demand and decentralized distribution of $IPOR.