After the DeFi Summer in 2020, various DeFi protocols focusing on niche tracks emerged, and decentralized finance became the most successful application of blockchain. Four years later, DeFi is still the most mature application on the blockchain, but the focus has quietly changed. Swap, DEX, and deposit and loan DApps have matured and become essential infrastructure for every public chain. Decentralized financial derivatives protocols have become an important innovation direction in this bull market. Through financial derivatives, investors can participate in various financial activities at a lower cost, with higher transparency and greater security.
In the financial derivatives track, in addition to decentralized contract leverage products, derivatives related to market interest rates are also a direction worthy of attention. Interest rate fluctuations have a profound impact on the financial market, and investors and institutions need tools to hedge and manage this risk. The introduction of interest rate derivatives will be able to enrich the DeFi ecosystem, making it more diversified and sound, attracting more investors and institutions to participate, and promoting the development of the entire industry. In the traditional financial field, interest rate derivatives have proven their importance and value. They are widely used in various risk management and speculative strategies, with a large market size and sufficient liquidity. Compared with various contract leverage protocols, there are very few decentralized interest rate derivatives-related projects. This market gap provides huge development space for innovation.
Interest rate derivatives and IPOR
IPOR is an interest rate swap agreement. Simply put, different investors have different demands for deposit and loan interest rates. Some expect to get a fixed interest rate for a period of time, while others hope to adjust the interest rate at any time according to market conditions. This creates a swap liquidity market to meet their needs.
In fact, we can regard this model as a DeFi protocol with interest rates as the underlying asset. Here you can add funds to the interest rate pool, or you can earn income by buying or selling corresponding fixed or floating interest rates by judging future fluctuations in interest rates.
Interest rate swaps are widely used in traditional finance, but are currently in the early stages of development in the DeFi market, and IPOR is a leader in this field.
IPOR's core products include three aspects: IPOR Index, AMM Automated Market Making, and Asset Management Contracts. The IPOR Index is an interest rate index that obtains data from various DeFi protocols. It is similar in function to the London Interbank Offered Rate (LIBOR), and we can regard it as a reference standard for market interest rates. IPOR uses interest rate derivatives and market making services and interest rate swap tools provided by the index to manage market interest rate volatility risks.
IPOR operation logic and operation tutorial
For most retail investors, products with interest rates as underlying assets are relatively rare financial instruments, and ordinary people seldom come into contact with them. However, they are a very important key in market transactions and arbitrage processes. Therefore, we use IPOR to explain them in actual operations, which will facilitate everyone's understanding of the interest rate market and swaps.
1. Join the interest rate liquidity pool
By joining the interest rate liquidity pool, you can obtain the corresponding interest rate fluctuation yield, and you can also get IPOR token rewards.
First open the IPOR official page
https://app.ipor.io/deposit/ethereum Use the Little Fox wallet to log in. Currently, IPOR supports the Ethereum mainnet and Arbitrum network. We take the Ethereum mainnet as an example.
Select the corresponding interest rate liquidity pool, here we take stETH as an example
In Zap in, select the corresponding token name, such as ETH or USDC, and then select the APR interest rate. The page will calculate the amount of ipstETH and pwIPOR that need to be staked. If we do not want to use pwIPOR for boosting, we can directly adjust the APR to 0, and we will get the basic APR.
ipstETH is stETH pledged in the pool. It can be deposited directly using USDC or ETH through the protocol. The system will automatically convert it to stETH and pledge it, saving users a lot of operations. For ipTokens, the exchange rate between it and the native token is not 1:1. The reason here is that the price of ipTokens also includes the interest generated from the yield over time, and its value will be slightly higher than the price of the native token.
pwIPOR is the number of IPOR tokens that need to be staked and is non-transferable. In other words, when a fixed interest rate is achieved, POR needs to be staked. This also increases the application scenarios of IPOR tokens. The higher the adjusted interest rate, the more IPOR needs to be staked. If you want to convert pwIPOR to IPOR later, a 14-day cooling-off period is required.
2. Interest rate swap pool mining
We can also swap fixed and floating rates. Click earn in the upper left corner of the page - liquidity mining
On the page, we can customize the amount of ipstETH and IPOR and deposit them into the pool. This is similar to how we customize the deposit of two different amounts of tokens in uniswap to form a liquidity pool. The difference is that the target here is replaced by the interest rate generated by the pledged target currency.
To facilitate users' calculations, the official also provides a calculator on the right side of the page to facilitate accurate calculations.
3. Interest rate trading
We click trade-interest rates swap in the upper left corner of the page, select the subject of the transaction, such as stETH, and click "open stETH Swap"
Here we can use the simple mode
Select the corresponding collateral, there are stETH, wETH, wstETH and ETH, select the interest rate to rise or fall, and the leverage ratio. Since the fluctuation of interest rates is very small in reality, leverage can increase its volatility and increase returns. Currently, IPOR can provide up to 500 times leverage.
Choose the direction of the transaction. For example, if we think that interest rates will rise in the future, that is, we are bullish on future interest rates, then we choose rates will go on. Its essence is to sell fixed interest rates in exchange for floating interest rates. When interest rates rise, positive income will naturally be obtained.
On the contrary, rates will go down means selling floating rates in exchange for fixed rates, which is shorting rates. Assuming that when interest rates fall in the future, you can guarantee that your fixed rate remains unchanged, and you will earn extra income compared to the previous floating rate.
Here, fixed rate can be considered as a basic fixed rate. The fixed rates for shorting and longing are different, and there is a price difference between them. For example, in the figure below, when we choose to short the interest rate, the fixed rate is 3.22%, which means that we can only make a profit when the interest rate drops below 3.22%. On the contrary, when we choose to go long, the fixed rate is 3.42%, which means that we can only make a profit when the interest rate rises above 3.42%.
Then we need to pay the account opening fee (about 20 US dollars) and the liquidation deposit (worth about 40 US dollars). The account opening fee cannot be refunded later, and the liquidation deposit can be refunded when we close the position.
How to use IPOR for DeFi arbitrage and profit
1. Hedge against interest rate cuts
From the above functions, we can see that IPOR’s interest rate trading function itself is a tool. For large investors, its main application scenario is to use it as a hedging measure to protect against their own risks or to conduct corresponding arbitrage activities.
For example, if you estimate that the Federal Reserve will cut interest rates in the second half of this year, and the interest rate cut will also affect the stablecoin deposits and loan interest in the DeFi market, then you can lock in a relatively long-term fixed interest rate through IPOR, so that you can obtain more interest income than the market after the interest rate cut.
If you believe that the Federal Reserve will keep interest rates unchanged, you can choose to provide liquidity for IPOR to make a market, so that you can obtain corresponding market making income.
2. Fixed-rate deposits and loans
If you want to borrow coins using a fixed interest rate, you can hedge by using Morpho, which can optimize the borrowing and lending rates of Compound and AAVE.
First, deposit the collateral into Morpho, then borrow stablecoins such as USDT or USDC, at which point we get a floating interest rate loan. Then, in IPOR, Pay fixed, which means the buying direction is an increase in interest rates.
When the actual interest rate rises, Morpho's borrowing interest will rise, and the borrowing cost will increase, but the corresponding income will be obtained from IPOR. And vice versa, thus ensuring that the interest rate is approximately maintained at a fixed borrowing rate.
Using the same method, we can also get a fixed deposit rate. Deposit tokens in Compound or AAVE, and then buy them through IPOR. When the actual interest rate drops, we can earn extra income in IPOR, but the income in Compound or AAVE will decrease, thus neutralizing and achieving the effect of a fixed interest rate.
3. Increase ETH return rate and reduce loss risk
In addition, we can use IPOR to obtain fixed income from ETH price fluctuations. For example, when we are bullish on ETH, we can use IPOR to join the ETH liquidity pool. At this time, the zap function can use USDC to automatically purchase ipstETH and pwIPOR and obtain an annualized rate of return of 42.35%. At the same time, we buy put options for the current price of ETH on Premia or Deribit as a hedge.
This ensures that when ETH falls, even if the value of ipstETH in IPOR falls, the put option earns income, and at the same time, you can get IPOR token rewards to hedge the corresponding losses. If the price of ETH rises, the option will only have limited losses, and the price of ipstETH will also rise, bringing unlimited gains. Compared with the deposit income of stablecoins, it can realize the possibility of limited losses in the future and unlimited rising income, and the expected rate of return will increase accordingly.
In addition, IPOR can also combine more gameplay to achieve arbitrage and low-risk, high-return strategies. Of course, this also requires more investors to explore and discover the wealth opportunities. At the same time, IPOR uses its own team to create an automated asset management system to help investors manage their on-chain investment assets and achieve higher returns.
IPOR Fusion——DeFi Ecosystem Automated Asset Management System
As can be seen above, the emergence of IPOR has brought new strategies, arbitrage and trading opportunities to the DeFi market. IPOR launched IPOR Fusion. The goal of IPOR Fusion is to help users find opportunities for various arbitrage and investments by integrating different routing and aggregation protocols into a smart contract, driven by algorithms and artificial intelligence AI, and create greater profit value.
The core of IPOR Fusionist consists of two aspects: an elegant intelligent layer and an automated execution core, which can integrate and manage liquidity providers, lending and leverage participants to optimize returns, manage risks, and prioritize investment strategies with higher returns.
Currently, IPOR Fusion has begun to integrate DeFi markets, including AAVE, Compound, Morpho, Gearbox, etc., and more markets will be integrated in the future, such as Pendle, Notional V3, Term Structure, etc. For example, leveraged cycles between ETH borrowing and stETH returns, and fixed income rates achieved through IPOR ETH borrowing rate swaps and pledge rate swaps. Hedging may result in a 40% yield.
Using IPOR SRS to hedge ETH staking yield
SRS is the abbreviation of Stake Rate Swaps, which simply means staking rate swaps. Taking stETH as an example, IPOR Labs engineers predict the on-chain performance and activity of Lido stakers to derive the real-time staking rate and yield of stETH. This method is more accurate than the official data released by Lido every 24 hours. Not only that, IPOR also launched the IPOR stETH Index, which is related to the rewards of Ethereum's execution layer EL and consensus layer CL. For example, CL rewards are inversely proportional to the percentage of fixed ETH, and EL rewards increase with the increase of network activity.
Through the IPOR stETH Index, these volatilities can be traded in the market. For example, if the Ethereum ETF is approved, the on-chain activity will increase, which also means that the stETH yield will increase, thereby enabling arbitrage in IPOR.
IPOR Token Information
The total number of IPOR tokens is 100 million, which are distributed as follows:
Token release is as follows:
The project team IPOR Labs is located in Zug, Switzerland, which is known as the "Crypto Valley". The team has experienced quantitative financial analysts, three PhDs, and software developers in the banking and insurance industries. It has 22 years of experience in the fixed income field.
CEO and co-founder Darren Camas has worked in investment banks and derivatives exchanges and has a deep understanding of financial products. He entered the cryptocurrency industry in 2011 and held important positions in projects such as Cardano and 1inch, as well as being responsible for the BD team of one of the world's earliest exchanges (second only to MT GOX), and has work experience at Binance. The team's chief scientist, Mauricio Hernandes, has a Ph.D. in computer science and leads the cryptocurrency division of Japanese securities giant SBI.
IPOR completed US$5.55 million in financing in 2022, with major institutions including Arrington Capital, gumi Cryptos Capital, Space Whale Capital, New Form Capital, CMT Digital, C² Ventures, GSR, Bloccelerate, Mentha Partners, AG Build, Synaps, g1 vc, SOSV, Stateless VC, Next Chymia, Crypto Discover, NxGen, Panony, etc.
IPOR is currently listed on Gateio and Bitget exchanges, with a market value of approximately US$13.67 million and a circulation volume of less than 20%. This is mainly because the on-chain interest rate derivatives protocol is still in its early stages of development.
However, compared with traditional finance, interest rate derivatives are widely used in traditional finance, and the customers are generally institutional users. Therefore, it can be foreseen that the on-chain interest rate derivatives track is still in a blue ocean, and IPOR still has great development prospects.
Summarize
As BTC and ETH spot ETFs are approved by regulators, more and more traditional investment institutions are also paying attention to cryptocurrencies and actively deploying them. We all know that the current blockchain ecosystem is still in its early stages of development, and the bull market expectations for 24 and 25 years are also the focus of funds. The development of interest rate derivatives in traditional centralized finance is already very mature, and blockchain brings new possibilities for decentralized finance, so this will also have broad prospects in decentralized finance. However, at present, there are no other mature applications for interest rate-related on-chain derivatives protocols except Pendle, which is a huge blank market.
IPOR's products are pioneers in the current interest rate derivatives market, and we can see signs of rising from the on-chain data. The platform token IPOR has risen from 0.36u at the beginning of the year to 0.81u. In addition, IPOR combined with other DeFi derivatives protocols brings trading and arbitrage strategies, which can help institutions and large funds obtain low-risk and stable returns. In the future, IPOR will most likely become a leader in the interest rate derivatives market and promote the development of the entire Web3 industry.
