Author: TechFlow
With the approval of the Bitcoin ETF, the crypto market will enter the public eye faster. This not only attracts the attention of traditional finance (TradFi), but also brings unprecedented opportunities to DeFi --- as the two worlds gradually merge, incremental funds and new market opportunities are waiting to be tapped.
Among them, the opportunities of physical assets (RWA) have already emerged. What other tracks are worth paying attention to? Interest rate swaps may be an overlooked opportunity.
Most crypto players are concerned about how to effectively manage the risks brought by volatility while pursuing high returns in DeFi; and interest rate swaps are an effective financial tool that allows people to manage the uncertainty of borrowing and lending rates.
A piece of hot knowledge that is easily overlooked is that the interest rate swap market is the world's second largest financial derivatives market and is quite mature in operation; however, in DeFi, this market is still a blue ocean.
IPOR is the only interest rate swap agreement in the current crypto market, which introduces extremely important market mechanisms in traditional finance into DeFi. It provides the IPOR index and related interest rate derivatives, providing stability for fixed income market participants in DeFi, enabling them to effectively deal with the risks of interest rate changes.
Paying attention to and participating in leading projects in a certain track can often capture more profits in advance; however, the professional financial concept of "interest rate swap" has a certain threshold for understanding, and it is difficult for ordinary readers to understand it quickly, let alone practice and research.
Therefore, in this issue, we will provide an in-depth interpretation of the role of IPOR and interest rate swaps, fully explore this groundbreaking financial tool in the DeFi field, and explore its huge value that has yet to be unlocked.
The interest rate swap market brings more liquidity to DeFi
So, what exactly is an interest rate swap?
You can actually simply understand it as a risk management strategy that allows different people to exchange their interest rate terms when borrowing to cope with uncertain changes in future market interest rates.
If this is still confusing, consider the following example, which is closer to life.
Alice and Bob are both coffee shop owners, but they pay their shop rent in very different ways. Alice's rent fluctuates with the market, meaning it goes up when the economy is good and down when the economy is bad. In contrast, Bob's rent is fixed, regardless of market fluctuations.
Faced with potential economic fluctuations, Alice worries about rising costs due to future rent spikes, while Bob is concerned that he will not be able to reduce his expenses when rent drops.
In order to control the impact of possible future rent changes on them, they decided to do a "swap".
In this “swap,” Alice agrees to pay Bob a fixed rental amount, and Bob agrees to pay a variable amount that is tied to market rent.
That way, if market rents rise, Alice doesn’t have to pay extra because she’s locked in a fixed, lower price; similarly, if market rents fall, Bob’s total payment decreases because he’s now paying the variable cost.
Now, let's relate this story to interest rate swaps in the financial market:
Alice and Bob’s “rent” is actually the “interest rate” in the financial market.
The rising or falling costs they each worry about reflect the concerns of financial market participants about future interest rate fluctuations.
By “swapping” rents, they are effectively doing an interest rate swap – fixing a steady stream of payments to hedge against uncertainty about future interest rates.
In fact, interest rate swaps in traditional financial markets allow borrowers holding floating rate loans to exchange interest rates with borrowers holding fixed rate loans. Such an agreement allows each party to choose a more appropriate interest rate model based on their own predictions of future market development and risk tolerance.
In traditional finance, this market is mature and large-scale.
According to the OTC derivatives market data report released by the Bank for International Settlements (BIS) at the end of 2023, as of the first half of 2023, the total nominal amount of outstanding interest rate derivatives was US$573.7 trillion, which is the largest market share in global financial derivatives, showing its popularity.
But in DeFi, interest rate swaps are currently facing a blue ocean.
According to DeFi Pulse statistics, the total TVL of all interest rate swap products in DeFi is only US$600 million, which is a relatively small part of DeFi products; currently, the vast majority of DeFi products mainly provide fixed income and cash market (short-term capital lending).
In other words, the interest rate derivatives market in DeFi is still in its infancy. A financial instrument with basically the same principle and widely used in the traditional financial market must have gone through market selection and testing; while DeFi's lending rates fluctuate more, funds pay more attention to utilization, and also need more reasonable risk management and return balance tools. The interest rate swap market undoubtedly has huge potential in DeFi.
Therefore, IPOR aims to seize this opportunity and promote the evolution and maturity of DeFi into a new financial layer.
In the DeFi market, IPOR plays a similar role. It provides a transparent and reliable platform that allows Alice (a user seeking stable borrowing costs) and Bob (a user willing to take on a certain interest rate risk in order to obtain potentially higher returns) to conduct interest rate swaps.
It is worth mentioning that IPOR’s name has actually demonstrated its ability and willingness to introduce popular derivatives tools in the traditional financial market into DeFi:
The naming of IPOR (Inter Protocol Over-block Rate) is inspired by major indices in traditional finance such as LIBOR (London Interbank Offered Rate) and SOFR (Secure Overnight Financing Rate), and adapts them to the DeFi environment.
The Block here means collecting data block by block on the blockchain to reflect market interest rates in a manner as close to real time as possible.
In IPOR, you can not only deposit, pledge and earn income, but also use your own crypto assets for lending and borrowing, and enjoy the best interest rate combination from fixed rate to leveraged rate; at the same time, through the interest rate derivative trading method native to DeFi provided by IPOR, you can also effectively hedge, speculate or arbitrage DeFi's lending rates.
From complex to simple, quickly understand IPOR's product structure
However, interest rate swaps are still very complicated for ordinary novice users.
IPOR simplifies the complex interest rate swap mechanism and forms three common elements that are easier for DeFi players to understand: market index, AMM pool and smart contract.
IPOR Index: Creating a “benchmark interest rate” for crypto assets and hearing the “heartbeat” of DeFi
The premise of an interest rate swap is to have a "reference" as a benchmark for comparison.
The IPOR index provides a transparent, on-chain data-based benchmark interest rate for users to refer to when conducting lending or derivative transactions. Similar to benchmark interest rates such as LIBOR or SOFR in traditional finance, the IPOR index gives corresponding risk-free interest rates for various crypto assets (currently supporting stEth, USDT, USDC and DAI). These indices are updated regularly to reflect the latest market conditions.
Since the interest rate data of the IPOR index is derived in real time from different DeFi lending protocols, such as Compound and AAVE, its openness and transparency can be guaranteed; the IPOR index calculated based on multiple interest rate data is more like a "heartbeat" of DeFi:
Just as heartbeat is the basis of life activities, the IPOR index, as a benchmark interest rate, reflects the real-time changes in the cost of funds in the DeFi market.
It aggregates data from various DeFi protocols, providing users with a clear and reliable reference point, allowing them to make lending and investment decisions based on real-time market conditions.
Liquidity pool: Providing interest rate swap venues in the form of AMM
With the benchmark index, the next step is to find a place to conduct interest rate swap transactions based on market conditions, earn returns for yourself and manage risks.
IPOR provides such a venue by offering liquidity pools involving crypto assets such as stablecoins and liquidity staking tokens.
Among the different liquidity pools, understanding IPOR’s “Request for Quote” automated market maker (AMM) is key to understanding how it facilitates interest rate swaps.
The liquidity pool and AMM together form the collective counterparty of the transaction. LP liquidity providers can earn income such as deposits and liquidity mining by providing counterparties to market participants;
Users can choose to receive or pay a fixed interest rate in a specific liquidity pool by dynamically adjusting quotes based on historical data through quantitative models and fair value pricing mechanisms.
In interest rate swaps, "receive fixed" interest rate and "pay fixed" interest rate are two basic trading positions. If you choose "receive fixed", it means that you will receive a fixed interest rate and pay a floating interest rate in the transaction; conversely, if you choose "pay fixed", it means that you will pay a fixed interest rate and receive a floating interest rate.
In this way, both borrowers looking to lock in future costs and investors seeking high-yield opportunities can find suitable swap opportunities based on their needs to manage their risks or seek returns.
Judging from IPOR’s official governance roadmap and proposals, it will also add eETH and USDM liquidity pools in March this year to enrich the types of interest rate swap assets; at the same time, USDe and uniETH are also under consideration in the project.
Smart contracts: ensuring automatic and transparent execution of interest rate swaps
The concept of smart contract is relatively easier to understand. It is to create a derivative contract between market participants and liquidity pools based on the IPOR interest rate and AMM pricing, agree on various rules, such as rates, expiration time, stakeholders, etc., and distribute corresponding profits at the end of the contract.
In general, the IPOR index provides a benchmark interest rate, the AMM liquidity pool provides interest rate swap counterparties and venues, and smart contracts ensure that everything is automatically and orderly executed. An interest rate swap product in the DeFi world has been fully built.
Keep improving, the changing path to user growth
The next topic we are more concerned about is how the IPOR product is currently running and what measures are there to attract user participation and use?
Attracting liquidity: Liquidity mining and revenue acceleration
In terms of rewarding the supply of liquidity, IPOR also follows the classic idea of DeFi protocol to attract liquidity - liquidity mining.
As early as January last year, IPOR’s liquidity mining function was launched.
To increase the income from providing liquidity, in addition to providing more crypto assets, users can also pledge the project's native token $IPOR to obtain pwIPOR for accelerating income.
IPOR also considerately provides a profit calculator to quickly calculate how much profit can be obtained by holding different amounts of pwIPOR and crypto assets.
Optimized experience: Changes brought by version V2
IPOR carried out a major V2 version upgrade in December last year, which greatly optimized the user experience.
As a user who has been following IPOR since its inception, the most obvious feeling I have after the V2 upgrade is "simplifying the complex."
The v2 version has completely updated the DApp interface. Now users can quickly select the annual interest rate that matches their income target through simplified operations, making entry and operation more intuitive and convenient.
At the same time, in places that users cannot see, the introduction of new risk engines, risk oracles, and AMM pricing mechanisms based on pool risk upgrades has greatly improved the trading experience, provided more accurate pricing, and higher trading efficiency.
Finally, from an overall perspective, the V2 version also completely reforms the smart contract architecture of interest rate swaps, improves Gas efficiency and improves product composability, laying the foundation for the composable structured products on IPOR's 2024 roadmap.
Enter Arbitrum: Introducing Interest Rate Swaps with Liquidity-Staking Tokens
As we all know, Arbitrum has always been a paradise for DeFi products.
Thanks to lower gas and ample liquidity, there are many derivatives exchanges and DeFi users such as GMX and GNS on Arbitrum; the on-chain derivatives ecosystem is also developing rapidly.
IPOR also chose to enter Arbitrum, but its product business does not compete with GMX - while trading assets on the chain, it provides interest rate swap products to complete the entire derivatives ecosystem.
The composability of IPOR's interest rate derivatives allows it to be used to create a pool with a high annualized percentage return (APR) and a fixed interest rate, where liquidity providers (LPs) can deposit and earn generous returns. This is also significantly different in product structure from Pendle, which uses relatively low leverage.
Therefore, IPOR has cleverly found a unique ecological niche on Arbitrum. It does not directly compete with mainstream DEXs, but can also find its own advantages in the credit field and reap the liquidity dividends generated by the scale effect of DeFi projects on Arbitrum.
For specific products, if you hold stETH, you can provide liquidity on IPOR. The corresponding pool allows users to choose a custom APR and get its zap-in function with two quick clicks, quickly completing the operation of providing liquidity and enjoying the benefits.
The unique product, coupled with its entry into the Arbitrum ecosystem, has put IPOR on the fast track to user growth, while also allowing more people to begin paying attention to the value of its native token $IPOR.
By staking IPOR tokens, users can obtain an equal amount of pwIPOR, which not only significantly increases the annualized rate of return (APR) of participating liquidity mining positions, but also gives users the right to vote on the IPOR Improvement Proposal (IIP) , participate in the governance of the project. This mechanism further enhances the vitality and sustainable development capabilities of the IPOR ecosystem by motivating users to participate and provide liquidity.
In addition, thanks to the flexible smart contract architecture of Power Tokens, pwIPOR corresponding to $IPOR can be easily introduced into different modules. You can use it for liquidity mining, governance voting, and even realize a secondary market similar to Convex or Penpie, further expanding the application scenarios and functions of tokens.
This not only provides a new value-added path for IPOR token holders, but also matches more opportunities for liquidity providers, thereby enhancing the connectivity and efficiency of the entire DeFi ecosystem.
The market performance of the IPOR token has responded to its value. The main milestones in 2023 show that the $IPOR token has increased its liquidity by 6.5 times and the trading volume has exceeded 4 billion US dollars. The token price at the end of the year has increased by 10% compared to the beginning of the year.
The next "Pendle"? The narrative potential of IPOR
Once again, IPOR is currently the only protocol that provides interest rate swaps on the chain, and its potential is closely related to the team behind it.
The project team is composed of senior cryptocurrency natives, enterprise-level developers, and several PhDs with a deep quantitative analysis background. Such an open, transparent and experienced team is the key to IPOR's ability to stand out in the fiercely competitive DeFi market.
In addition to the team's basic strength, we can feel that IPOR's potential is somewhat similar to the previously popular Pendle.
Pendle focuses on DeFi protocols that tokenize future returns and interest rates, allowing users to trade and manage long-term returns by separating asset ownership and future returns;
IPOR’s innovation is that it enables users to hedge the risk of interest rate changes by offering interest rate swaps, similar to the tokenized future returns offered by Pendle.
While both create value and opportunities through relatively complex financial derivatives and serve a user group that is proficient in trading, don’t forget that IPOR also provides interest rate swaps for LST assets on Ethereum and Arbitrum, which can also hit the rhythm of this year’s hot “liquidity (re)pledge” narrative;
As long as the product is properly communicated, has easy-to-understand and engaging features, and is relevant to “restaking,” IPOR is likely to be discovered again in this round of mainstream narrative and come to center stage.
According to public information, IPOR is about to announce a new product in the next few weeks. In addition to expected increases in returns and reductions in gas fees, it will bring the IPOR protocol closer to the vision of a DeFi credit hub by enabling “smart liquidity routing” and lightning-fast integration of any DeFi lending protocol.
Finally, if you want to learn more about IPOR’s interest rate swaps, you can also click here to participate in the official event on Galxe (ends on the 22nd).
The event consists of a series of popular science quiz sessions. After completing all the tasks, participants can participate in the sharing of a 6,000 IPOR prize pool. At the same time, IPOR has also launched a trading competition, and participants who actually conduct interest rate swap transactions can also share a reward of 50,000 IPOR.
History will not simply repeat itself with the same rhyme.
Let us wait and see whether IPOR can replicate Pendle's success in a different way.