The leading interest rate swap protocol in DeFi, will it become the next "Pendle"?

Forwarded Title ‘IPOR: Will the leader in interest rate swap agreements in DeFi become the next “Pendle”?’

Approval of a Bitcoin ETF will accelerate the entry of the crypto market into the mainstream. This not only attracts the attention of traditional finance (TradFi) but also brings unprecedented opportunities for DeFi — as the two worlds gradually converge, incremental capital and new market opportunities await exploration.

Among them, the opportunity for Real World Assets (RWA) has already emerged, but what other tracks are worth paying attention to? Interest rate swaps may be an overlooked opportunity.

Most crypto players are concerned about effectively managing the risks brought by volatility while pursuing high yields in DeFi; and interest rate swaps are an effective financial tool that allows people to manage the uncertainty of borrowing and lending rates.

An easily overlooked hot topic is that the interest rate swap market is the world’s second-largest derivatives market, with mature operations; yet in DeFi, this market remains largely untapped.

IPOR, on the other hand, is the only interest rate swap protocol in the current crypto market, bringing the crucial market mechanism from traditional finance into DeFi; it provides the IPOR index and related interest rate derivatives, offering stability to participants in the fixed-income market of DeFi, enabling them to effectively manage the risk of interest rate fluctuations.

Focusing on and participating in a leading project in a certain field often allows one to capture more profits in advance. However, the concept of “interest rate swaps” in professional finance presents a certain threshold of understanding. Ordinary readers may find it difficult to grasp quickly, let alone practical application and research.

Therefore, in this issue, we will delve into an easy-to-understand interpretation of IPOR and the role of interest rate swaps, comprehensively exploring this groundbreaking financial tool in the DeFi field and uncovering its enormous untapped value.

The Interest Rate Swap Market Will Bring More Liquidity Into DeFi.

So, what exactly is an interest rate swap?

You can think of it simply as a risk management strategy that allows different parties to exchange their borrowing or lending interest rate terms to hedge against future fluctuations in market rates.

If that still seems confusing, consider the following example that’s closer to everyday life:

Alice and Bob are both café owners, but they have drastically different ways of paying their shop rent. Alice’s rent fluctuates with the market, meaning it increases during good economic times and may decrease during economic downturns. On the other hand, Bob’s rent is fixed, regardless of how the market changes.

Facing potential economic fluctuations, Alice is worried about future rent increases leading to rising costs, while Bob is concerned that he won’t be able to reduce expenses if rent decreases. To control the impact of potential rent changes, they decide to engage in a “swap”. In this “swap”, Alice agrees to pay Bob a fixed rental amount, while Bob agrees to pay a variable amount linked to market rents.

This means that if market rents rise, Alice doesn’t need to pay additional fees because she has locked in a fixed, lower price. Similarly, if market rents decrease, Bob’s total payments will also decrease because he now bears the variable costs.

Now, let’s relate this story to interest rate swaps in the financial market:

• Alice and Bob’s “rent” actually represents “interest rates” in the financial market.
• Their concerns about rising or falling costs reflect the worries of market participants about future interest rate fluctuations.
• By “swapping” rent, they are essentially conducting an interest rate swap - fixing a stable payment stream to hedge against the uncertainty of future interest rates.

In reality, interest rate swaps in traditional financial markets allow borrowers with floating-rate loans to exchange rates with borrowers holding fixed-rate loans. Such agreements enable each party to choose a more suitable interest rate model based on their predictions of market developments and risk tolerance.

In traditional finance, this market operates maturely and on a massive scale.

According to the Bank for International Settlements (BIS) report on over-the-counter derivatives markets released at the end of 2023, the nominal value of outstanding interest rate derivatives totaled $573.7 trillion as of the first half of 2023, making it the largest market share among global financial derivatives, highlighting its widespread adoption.

However, in DeFi, the interest rate swap market is currently a largely untapped opportunity. According to DeFi Pulse statistics, the total TVL (Total Value Locked) of all interest rate swap products in DeFi is only $600 million, making it a relatively small portion within the DeFi ecosystem. Currently, the vast majority of DeFi products primarily focus on providing fixed income and cash markets (short-term borrowing and lending).

It can also be said that the market for interest rate derivatives in DeFi is still in its early stages. A financial instrument with a fundamentally similar principle, widely used in traditional financial markets, must undergo market selection and validation. However, in DeFi, where lending rates fluctuate more significantly and capital efficiency is paramount, there is a greater need for reasonable risk management and yield-balancing tools. The interest rate swap market undoubtedly holds immense potential in DeFi.

Therefore, IPOR aims to seize this opportunity and facilitate DeFi’s evolution towards a new financial layer and maturity. In the DeFi market, IPOR plays a similar role. It provides a transparent and trustworthy platform that allows users like Alice (seeking stable borrowing costs) and Bob (willing to take on some interest rate risk for potentially higher returns) to engage in interest rate swaps.

It’s worth noting that the name IPOR itself reflects its capability and willingness to introduce popular derivative tools from traditional finance into DeFi:

The inspiration for the name IPOR (Inter Protocol Over-block Rate) comes from major indices in traditional finance such as LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate), adapted for the DeFi environment. The term “Block” signifies the collection of data block by block on the blockchain, aiming to reflect market rates as close to real-time as possible.

In IPOR, not only can you deposit, stake, and earn rewards, but you can also use your crypto assets for borrowing, enjoying the best rate combinations from fixed rates to leverage rates. Additionally, through the native interest rate derivatives trading provided by IPOR, you can effectively hedge, speculate, or arbitrage against DeFi borrowing rates.

From Complex To Simple, Quickly Understand IPOR’s Product Structure

However, interest rate swaps can still appear very complex to the average user. IPOR simplifies the complex interest rate swap mechanism into three elements that are easier for DeFi players to understand and commonly encountered: market indices, AMM pools, and smart contracts.

• IPOR Index: Creating the “benchmark interest rate” for crypto assets, it hears the “heartbeat” of DeFi.

The premise of interest rate swaps is to have a “reference point” as a benchmark for comparison. The IPOR Index provides a transparent, chain-based benchmark interest rate, serving as a reference for users when engaging in borrowing or derivative trading. Similar to traditional financial benchmarks like LIBOR or SOFR, the IPOR Index provides corresponding risk-free rates for various crypto assets (currently supporting stEth, USDT, USDC, and DAI). These indices are updated regularly to reflect the latest market conditions.

Due to the real-time sourcing of interest rate data for the IPOR Index from different DeFi lending protocols such as Compound and AAVE, its public transparency can be guaranteed. The IPOR Index, calculated based on various interest rate data, is more like a “heartbeat” of DeFi:

Just as the heartbeat is the foundation 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, enabling them to make lending and investment decisions based on real-time market conditions.

• Liquidity pool: providing an interest rate swap venue in the form of AMM

With a benchmark index in place, the next step is to find a place to engage in interest rate swap transactions based on market conditions, to earn profits and manage risks. IPOR provides liquidity pools involving assets such as stablecoins and liquidity collateral tokens to serve as such a venue.

Understanding IPOR’s “quote request” automated market maker (AMM) is key to understanding how it facilitates interest rate swaps.

In different liquidity pools, the “quote request” AMM plays a crucial role in facilitating interest rate swaps. Liquidity pools and AMMs collectively form the counterparties for trades. Liquidity providers (LPs) earn income through deposit fees and liquidity mining rewards by providing counterparties for market participants.

Users can participate in specific liquidity pools and utilize quantitative models and fair value pricing mechanisms to dynamically adjust quotes based on historical data. They can choose to either receive a fixed rate or pay a fixed rate in these pools.

In terms of interest rate swaps, “receive fixed” and “pay fixed” are two fundamental trading positions. Choosing “receive fixed” means you will receive a fixed rate and pay a floating rate in the trade, while choosing “pay fixed” means you will pay a fixed rate and receive a floating rate.

Through this method, both borrowers looking to lock in future costs and investors seeking high-yield opportunities can find suitable swap opportunities according to their needs, to manage their risks or seek profits.

From IPOR’s official governance roadmap and proposals, it appears that in March of this year, they will also add liquidity pools for eETH and USDM, enriching the variety of assets available for interest rate swaps. Additionally, USDe and uniETH are also under consideration by the project.

• Smart contracts: ensuring automatic and transparent execution of interest rate swaps

The concept of smart contracts is relatively easier to understand. It involves creating derivative contracts between market participants and liquidity pools based on IPOR rates and AMM pricing. These contracts specify various rules such as fees, expiration times, interested parties, etc., and allocate corresponding profits upon contract termination.

Overall, the IPOR index provides a benchmark interest rate, AMM liquidity pools offer counterparties and venues for interest rate swaps, and smart contracts ensure that everything is executed automatically and orderly. Thus, within the DeFi world, the interest rate swap product is fully constructed.

Continuous Improvement Is The Path to User Growth Amidst Change

Our next topic of interest is how the IPOR product is currently performing. What initiatives are being implemented to attract user participation and usage?

• Attracting Liquidity: Liquidity Mining and Yield Acceleration

In incentivizing liquidity provision, IPOR adopts the classic approach of DeFi protocols: liquidity mining.

As early as January last year, IPOR’s liquidity mining feature was already launched. To increase the yield of providing liquidity, users can pledge the native token $IPOR to earn pwIPOR, in addition to providing more cryptographic assets. These pwIPOR tokens are used for yield acceleration.

IPOR also provides a very user-friendly yield calculator, allowing users to quickly calculate how much yield they can earn by holding different amounts of pwIPOR and cryptographic assets.

• Optimizing Experience: Changes Brought by the V2 Version

IPOR underwent a major V2 upgrade in December of last year, significantly improving the user experience.

As someone who has been following IPOR since its inception, the most noticeable change after the V2 upgrade is the simplification of processes.

The V2 version has undergone a comprehensive update of the DApp interface. Now, users can quickly select the annual interest rate that matches their profit goals through simplified operations, making entry and operation more intuitive and convenient.

At the same time, behind the scenes, the introduction of a new risk engine, risk oracle, and AMM pricing mechanism based on pool risk upgrades has greatly improved the trading experience, providing more accurate pricing and higher transaction efficiency.

Overall, the V2 version has thoroughly revamped the smart contract architecture of interest rate swaps, improving gas efficiency and enhancing the product’s composability, laying the foundation for the composability structure products planned for IPOR’s 2024 roadmap.

• Venturing into Arbitrum: Introducing Interest Rate Swaps with Liquidity Staking Tokens

It is well known that Arbitrum has always been a haven for DeFi products. Thanks to lower gas fees and ample liquidity, Arbitrum hosts numerous derivatives exchanges and DeFi users, such as GMX and GNS; the on-chain derivatives ecosystem is rapidly expanding.

Similarly, IPOR has chosen to venture into Arbitrum, but its product offerings do not compete with platforms like GMX. Instead, IPOR provides interest rate swap products alongside on-chain asset trading, complementing the entire derivatives ecosystem.

IPOR’s composability in interest rate derivative products allows it to create pools with high annualized percentage returns (APR) and fixed interest rates. Liquidity providers (LPs) can deposit assets and earn substantial returns. This structural aspect sets IPOR apart from platforms like Pendle, which employ relatively lower leverage.

Therefore, IPOR has cleverly found a unique niche on Arbitrum. It neither directly competes with mainstream DEXs nor ventures into the credit domain, leveraging the liquidity dividend generated by DeFi projects on Arbitrum due to economies of scale.

Regarding specific products, if you hold stETH, you can provide liquidity on IPOR. The corresponding pool allows users to customize APR and utilize the zap-in feature for quick liquidity provisioning with just two clicks, enabling them to enjoy returns promptly.

IPOR’s unique products, coupled with its entry into the Arbitrum ecosystem, have put it on the fast track to user growth and garnered more attention for its native token $IPOR.

By staking IPOR tokens, users can receive an equivalent amount of pwIPOR. This significantly boosts the annualized percentage yield (APR) for participating in liquidity mining positions and grants users voting rights in IPOR Improvement Proposals (IIPs), allowing them to participate in project governance. This mechanism incentivizes user participation and liquidity provision, further enhancing the vitality and sustainability of the IPOR ecosystem.

Furthermore, thanks to the flexible smart contract architecture of Power Tokens, the corresponding pwIPOR for $IPOR can be easily integrated into different modules. Users can use it for liquidity mining, participate in governance voting, and even explore secondary markets similar to Convex or Penpie, thereby expanding the token’s utility and functionality across various use cases.

This not only provides new avenues for value appreciation for IPOR token holders but also offers more opportunities for liquidity providers, thereby enhancing the interconnectedness and efficiency of the entire DeFi ecosystem. The market performance of the IPOR token has already responded to its value. Key milestones in 2023 show that the IPOR token has increased liquidity by 6.5 times and achieved a trading volume exceeding $4 billion, resulting in a 10% increase in token price by the end of the year compared to the beginning.

The next “Pendle”? The Narrative Potential of IPOR

It is worth emphasizing once again that IPOR is currently the only protocol offering on-chain interest rate swaps, and its potential is closely linked to the experienced team behind it. The project team consists of seasoned cryptocurrency natives, enterprise-level developers, and multiple Ph.D.s with extensive backgrounds in quantitative analysis. Such a transparent and experienced team is key to IPOR’s ability to stand out in the competitive DeFi market.

Apart from the team’s solid foundation, we can see parallels between IPOR’s trajectory and the previous hot project Pendle.

Pendle focused on DeFi protocols that tokenize future income and interest rates, allowing users to trade and manage long-term income by separating asset ownership and future income. IPOR’s innovation lies in providing interest rate swaps, enabling users to hedge against interest rate fluctuations, similar to Pendle’s offering of tokenized future income.

Both projects leverage relatively complex financial derivatives to create value and opportunities, serving users proficient in trading. However, let’s not overlook that IPOR also offers interest rate swaps for LST assets on Ethereum and Arbitrum, tapping into the current hot narrative of “liquidity (re)staking.” ;

As long as the product is effectively communicated, with easy-to-understand and engaging functionalities, coupled with its association with “restaking,” IPOR has the potential to once again be discovered in this round of mainstream narratives and take center stage.

Based on public information, IPOR is set to announce a new product in the coming weeks, expected to increase yield and reduce gas fees, bringing the protocol closer to the vision of becoming the DeFi credit hub through the activation of “smart liquidity routing” and lightning-fast integration with any DeFi lending protocol. Finally, for those interested in learning more about IPOR’s interest rate swaps, participation in the official activities on Galxe (as of the 22nd) is encouraged. This event consists of a series of educational quizzes, with the completion of all tasks making participants eligible to share a pool of 6,000 IPOR tokens. Additionally, IPOR has launched a trading competition where participants can share rewards totaling 50,000 IPOR tokens by engaging in actual interest rate swap transactions.

History never repeats itself exactly, but it often rhymes.

Whether IPOR can replicate Pendle’s success in a different way remains to be seen. Let’s wait and see how IPOR evolves and impacts the DeFi ecosystem.

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