IPOR: A Leading Interest Rate Swap Protocol in DeFi, Will It Become the Next "Pendle"?

Repost Original Title: IPOR: A Leading Interest Rate Swap Protocol in DeFi, Will It Become the Next “Pendle”?

History does not simply repeat itself; it rhymes.

With the approval of Bitcoin ETFs, the crypto market is set to become more visible to the general public. This not only draws the attention of traditional finance (TradFi) but also presents unprecedented opportunities for DeFi — as the two worlds gradually merge, incremental capital and new market opportunities await exploration. Among these, 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 enthusiasts are concerned with how to manage the risks brought by volatility while pursuing high returns in DeFi; interest rate swaps are an effective financial tool for managing the uncertainty of borrowing rates. An easily overlooked fact is that the interest rate swap market is the world’s second-largest financial derivatives market, operating quite maturely; yet, in DeFi, this market remains a blue ocean. And IPOR stands as the only interest rate swap protocol in the crypto market, introducing an extremely important market mechanism from traditional finance to DeFi; it provides the IPOR index and related interest rate derivatives, offering stability to fixed-income market participants in DeFi, enabling them to effectively manage the risks of interest rate changes.

Paying attention to and participating in leading projects in a specific track can often capture more profits earlier. However, the professional financial concept of “interest rate swap” has a certain understanding threshold, and it is difficult for ordinary readers to quickly grasp, let alone practice and research. Therefore, in this issue, we will explain in a simple yet detailed manner the role of IPOR and interest rate swaps, fully delving into this pioneering financial tool in the DeFi sector and exploring its yet-to-be-unlocked immense value.

The interest rate swap market introduces more liquidity into DeFi

So, what exactly is an interest rate swap?

You can simply understand it as a risk management strategy that allows different people to swap their borrowing interest rate conditions to deal with uncertain future market interest rate changes. If this still seems complicated, consider the following example that’s closer to everyday life. Alice and Bob are both coffee shop owners, but the way they pay their shop rent is drastically different. Alice’s rent fluctuates with the market, meaning the rent may skyrocket when the economy is good and decrease when it’s bad; on the contrary, Bob’s rent is fixed, regardless of how the market changes.

Facing potential economic fluctuations, Alice worries about future rent increases leading to higher costs, while Bob is concerned about not being able to reduce expenses when rent decreases. To control the impact of potential future rent changes on them, they decide to engage in a “swap.” In this “swap,” Alice agrees to pay Bob a fixed amount of rent, and Bob agrees to pay a variable amount linked to the market rent. This way, if market rent increases, Alice doesn’t need to pay extra because she has locked in a fixed, lower price; similarly, if market rent decreases, Bob’s total payment also reduces, as he now bears the variable costs.

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

• Alice and Bob’s “rent” is actually the “interest rate” in the financial markets.
• The cost increases or decreases they worry about reflect financial market participants’ concerns about future interest rate fluctuations.
• By “swapping” rents, they are effectively engaging in an interest rate swap—fixing a stable payment flow to hedge against future interest rate uncertainties.

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

According to the over-the-counter (OTC) derivatives market data report published by the Bank for International Settlements (BIS) at the end of 2023, the outstanding nominal amount of interest rate derivatives totaled $573.7 trillion in the first half of 2023, making it the largest market share among global financial derivatives and highlighting its widespread adoption. However, in the DeFi (Decentralized Finance) sector, interest rate swaps are currently seen as a blue ocean of opportunity. According to DeFi Pulse, the total TVL (Total Value Locked) of all interest rate swap products combined in DeFi amounts to just $600 million, making it a relatively small segment within DeFi products; the majority of DeFi products currently focus on providing fixed income and cash markets (short-term capital borrowing and lending).

This means that the interest rate derivatives market in DeFi is still in its infancy. A financial instrument, fundamentally similar and widely used in the traditional financial markets, must have gone through the market’s selection and scrutiny; while DeFi experiences larger interest rate volatility, emphasizes more on capital utilization, and also requires appropriate risk management and yield balancing tools, the interest rate swap market undeniably holds immense potential in DeFi.

Thus, IPOR aims to seize this opportunity to facilitate 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 trustworthy platform, allowing the previously mentioned Alice (a user seeking stable borrowing costs) and Bob (a user willing to take on certain interest rate risks for potentially higher returns) to engage in interest rate swaps.

It’s worth mentioning that the name IPOR itself already demonstrates the capability and willingness to introduce popular derivative tools from the traditional financial markets into DeFi:

The name IPOR (Inter Protocol Over-block Rate) is inspired by major financial indices like LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate) from traditional finance, adapted for the DeFi environment.

The inclusion of “Block” signifies the collection of data block by block on the blockchain, aiming to reflect market interest rates as close to real-time as possible.

In IPOR, you can not only deposit, stake, and earn returns, but also borrow using your own cryptocurrency assets, enjoying an optimal rate combination from fixed to leveraged rates. Moreover, through the trading method of interest rate derivatives native to DeFi offered by IPOR, you can effectively hedge, speculate, or arbitrage against DeFi’s lending rates.

Understanding IPOR’s product structure from complex to simple

However, rate swaps still seem very complex to the average layperson.

IPOR simplifies the complex mechanism of rate swaps and forms three elements that are easier for DeFi enthusiasts to understand and common: market indices, AMM pools, and smart contracts.

• IPOR Index: Creating a “Benchmark Rate” for Cryptocurrency Assets, Hearing the “Heartbeat” of DeFi

The premise of rate swaps is having a “reference” as a benchmark for comparison.

The IPOR index provides a transparent, on-chain data-based benchmark rate, offering a reference for users in borrowing or derivative transactions. Similar to traditional financial benchmark rates like LIBOR or SOFR, the IPOR index provides a risk-free rate for various cryptocurrency assets (currently supporting stEth, USDT, USDC, and DAI), which is regularly updated to reflect the latest market conditions.

Since the IPOR index’s rate data is sourced in real-time from various DeFi lending protocols, such as Compound and AAVE, its transparency is guaranteed; the IPOR index, calculated based on a variety of rate data, is more like the “heartbeat” of DeFi:

Just as a heartbeat is fundamental to life, the IPOR index, as a benchmark rate, reflects the real-time changes in capital costs 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.

Just as a heartbeat is fundamental to life, the IPOR index, as a benchmark rate, reflects the real-time changes in capital costs 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 Pools: Providing a Venue for Interest Rate Swaps via AMM

With a benchmark index in place, the next step is to find a venue for conducting interest rate swap transactions based on market conditions, thereby earning profits and managing risks for oneself.

IPOR has introduced liquidity pools involving cryptographic assets such as stablecoins and liquidity staking tokens to provide such venues.

Understanding IPOR’s “Quote Request” Automated Market Maker (AMM) in various liquidity pools is key to grasping how it facilitates interest rate swaps.

Liquidity pools and AMMs together form the collective counterparty to a transaction. Liquidity Providers (LPs) can earn revenues from deposits and liquidity mining by offering counterparties for market participants;

whereas users, within specific liquidity pools, can adjust their quotes dynamically based on historical data through quantitative models and a fair value pricing mechanism, choosing either to receive a fixed interest rate or to pay a fixed interest rate.

In interest rate swaps, “receive fixed” and “pay fixed” are two fundamental trading positions. Choosing “receive fixed” means you will receive a fixed interest rate while paying a floating interest rate in the transaction; conversely, selecting “pay fixed” means you will pay a fixed interest rate while receiving a floating interest rate.

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

According to IPOR’s official governance roadmap and proposals, it plans to add liquidity pools for eETH and USDM in March this year, expanding the variety of assets available for interest rate swaps; USDe and uniETH are also under consideration for the project.

Smart Contracts: Ensuring Automatic and Transparent Execution of Interest Rate Swaps

The concept of smart contracts is relatively easier to understand, involving the creation of derivative contracts between market participants and liquidity pools based on IPOR rates and AMM pricing, with predetermined rules such as fees, expiration times, stakeholders, etc., and allocating corresponding profits at the end of the contract.

Overall, the IPOR index provides a benchmark interest rate, AMM liquidity pools offer counterparts and venues for interest rate swaps, and smart contracts ensure everything is executed automatically and orderly, constructing a complete interest rate swap product in the DeFi world.

Striving for Perfection: The Path to User Growth Amidst Transformation

The next topic of our interest is, how is the IPOR product currently performing? What measures have been taken to attract users to participate and use it?

• Attracting Liquidity: Liquidity Mining and Yield Acceleration

In rewarding the supply of liquidity, IPOR has adopted the classic approach used by DeFi protocols to attract liquidity —- liquidity mining.

As early as January last year, IPOR’s liquidity mining feature was launched.

To increase the yield for providing liquidity, in addition to offering more crypto assets, users can also stake the native token $IPOR to get pwIPOR, which is used for yield acceleration.

IPOR has also thoughtfully provided a yield calculator, to quickly calculate the return on holding various amounts of pwIPOR and crypto assets.

• Experience Optimization: The Transformation Brought by Version 2

IPOR underwent a major V2 upgrade in December last year, significantly optimizing user experience.

As a user who has been following IPOR since its inception, the most obvious feeling after the V2 upgrade is “simplification”.

The V2 version has completely updated the DApp interface. Now, users can quickly select an annual interest rate that matches their income goals through simplified operations, making entry and operation more intuitive and convenient.

At the same time, behind the scenes where users can’t see, the introduction of new risk engines, risk oracles, and AMM pricing mechanisms based on pool risk upgrades has significantly improved the trading experience, providing more accurate pricing and higher transaction efficiency. In conclusion, from a holistic perspective, Version 2 also has completely overhauled the smart contract architecture for interest rate swaps, enhancing gas efficiency and improving product composability, laying the foundation for the composable structure products planned in IPOR’s 2024 roadmap.

Advancing into Arbitrum: Introducing liquidity staking tokens for interest rate swaps

As is well known, Arbitrum has always been a haven for DeFi products. Thanks to lower gas fees and abundant liquidity, Arbitrum hosts numerous derivative exchanges and DeFi users like GMX and GNS; the on-chain derivative ecosystem is also rapidly developing. And IPOR has also chosen to advance into Arbitrum, but its product business does not compete with the GMXs — while trading on-chain assets, it provides interest rate swap products, completing the entire derivative ecosystem.

The composability of IPOR’s interest rate derivative products allows them to be used to create pools with high annual percentage rate (APR) returns, fixed interest rates, where liquidity providers (LPs) can deposit and earn substantial returns, which also differs significantly from Pendle in product structure due to its relatively lower leverage. Therefore, IPOR cleverly found a unique ecological niche in Arbitrum, not directly competing with mainstream DEXs but finding its advantage in the credit domain, capturing the liquidity bonus generated by DeFi projects on Arbitrum due to scale effects. In terms of specific products, if you hold stETH, you can provide liquidity on IPOR, where the pool allows users to choose custom APR and quickly complete the liquidity provision process to enjoy returns through two fast clicks with its zap-in feature.

This unique product, along with the strategic positioning in the Arbitrum ecosystem, has put IPOR on a fast track of user growth while also attracting more attention to the value of its native token $IPOR. By staking IPOR tokens, users can obtain an equivalent amount of pwIPOR, which not only significantly boosts the annualized yield rate (APR) of participating in liquidity mining positions but also grants users voting rights on IPOR Improvement Proposals (IIP), involving them in the project’s governance. This mechanism, by incentivizing user participation and liquidity provision, further enhances the vitality and sustainability of the IPOR ecosystem.

Furthermore, thanks to the flexible smart contract architecture of Power Tokens, $IPOR’s corresponding pwIPOR can be easily introduced into different modules. You can use it for liquidity mining, governance voting, and even participate in secondary markets similar to Convex or Penpie, further expanding the token’s application scenarios and functions.

This not only provides IPOR token holders with new paths for value appreciation but also matches 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. Major milestones in 2023 show that the $IPOR token, with a 6.5-fold increase in liquidity and a trading volume of over 4 billion dollars, saw its price at the end of the year increase by 10% compared to the beginning of the year.

The Next “Pendle”? The Narrative Potential of IPOR

Once again, it’s worth emphasizing that IPOR is currently the only protocol offering interest rate swaps on-chain, a capability closely linked to the potential displayed by the team behind it.

The project team is composed of seasoned cryptocurrency natives, enterprise-level developers, and several PhDs with a deep background in quantitative analysis. Such a transparent and experienced team is key to IPOR’s ability to stand out in the competitive DeFi market.

Beyond the foundational hard skills of the team, we can discern the trajectory of IPOR’s emerging potential, somewhat reminiscent of the previously popular Pendle.

Pendle focuses on a DeFi protocol that tokenizes future income and interest rates, allowing users to trade and manage long-term returns by separating asset ownership from future income;

The innovation of IPOR lies in providing interest rate swaps, enabling users to hedge against interest rate volatility, similar to Pendle’s tokenization of future earnings.

Both platforms create value and opportunities through relatively complex financial derivatives, serving a user base skilled in trading. It’s worth noting that IPOR also offers interest rate swaps for LST assets on Ethereum and Arbitrum, hitting the narrative of this year’s hot topic of “liquidity (re)staking”;

As long as the product is properly promoted, featuring functionalities that are easy to understand and engage with, and leveraging its connection to “restaking”, IPOR could once again be discovered in this round of mainstream narrative and take center stage.

According to public information, IPOR is also set to announce a new product in the coming weeks that, besides expecting to increase earnings and reduce gas fees, aims to bring the IPOR protocol closer to the vision of a DeFi credit hub by enabling “smart liquidity routing” and lightning-fast integration with any DeFi lending protocol.

Lastly, for those interested in further understanding IPOR’s interest rate swaps, you can participate in the official event held on Galxe (ending on the 22nd) by clicking here.

This event consists of a series of educational quiz segments, with participants who complete all tasks having a chance to share in a pool of 6000 IPOR rewards; IPOR has also launched a trading contest, where actual interest rate swap trades could share in a reward of 50000 IPOR.

History doesn’t simply repeat itself, but it often rhymes.

Whether IPOR can replicate Pendle’s success in a different manner remains to be seen.

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