How does IPOR Labs bring interest rate derivatives and swaps to Web3?
In this episode of DeFi Sparks, Nick Drakon is joined by Darren Camas, CEO of IPOR Labs to discuss history and importance of LIBOR, cost of capital, interest rates in DeFi, role of finance and more.
Read our notes below to learn more.
About IPOR Labs
They have developed and launched the IPOR indexes which benchmark the cost of capital that interest rates in DeFi.
Built products and services on top of that in the form of interest rate derivatives and swaps.
What is LIBOR?
It stands for London InterBank Offered Rate.
It is a risk-free rate or premium over Central Banking policy that is meant to be a free market alternative.
It is set to be discontinued in the middle of next year.
It’s used as the base of hundreds of trillions of dollars in debt, deal structure and derivatives.
It was formerly called the most important number in finance.
It’s one of the few levers the central bank has to facilitate market activity.
It was a subset of 18 London banks and they’re reporting on different currencies at different tenors which are 1 month, 2-3 months, 6 and 12 months.
The LIBOR was being manipulated by bankers within the banks that were supposed to keep the benchmark rate pure.
The manipulation was happening at least since the mid 90s.
It had almost a decade of discontinuation because they had these long-term derivative instruments that were really pegged to the LIBOR that had to be wound down.
IPOR vs. LIBOR
IPOR is the Inter Protocol Overblock Rate.
Rates can differ and vary wildly in different money markets like Aave or Compound.
The birth of IPOR is to give the industry standardization and an instrument to peg other instruments on but also these derivative instruments where you can arbitrage inefficiencies and actually bring the market more into balance.
IPOR Index is a smart contract that is recording other smart contracts.
The first construction of it is it takes the average borrowing and lending rates then cuts mid-market rates and it is volume weighted.
LIBOR is only published once a day at 11AM BST excluding weekends and holidays while IPOR is a very transparent and real-time rate in DeFi.
It’s designed to be adaptable, modular and upgradeable by the community to fit the very fast moving and innovative DeFi dynamic.
Interest rate swaps and derivatives
Interest rate derivatives are like betting on what will happen on the interest rates either to the upside or the downside.
The vast majority are actually used to construct a fixed income or fixed borrowing.
Interest rates are like an invisible market that everyone feels but people are very unaware about.
⅔ of all OTC derivatives are interest rate derivatives.
IPOR Products
What’s live right now is a 28-day cancelable fixed-first floating interest rate swap and it’s pure to pool.
There’s an aggregated pool of liquidity that consists of $USDC, $USDT or $DAI, and soon there will be an $ETH market, then it offers a quote and this quote is delivered by an AMM that is built by some of the quants that they have which are 2 guys with over 20 years of experience.
A user is actually exchanging cash flow as a trader with the pool so if the IPOR rate goes above their fixed rate, the pool is paying them and if the IPOR rate goes below the fixed rate, the user is paying the pool.
Fixed income means that you have this income that is fixed and predictable going into the future.
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Is IPOR Index needed for a benchmark rate?
IPOR isn’t needed for a benchmark rate.
IPOR isn’t magical and creating a benchmark rate isn’t rocket science.
IPOR doesn’t set the market, it reflects the market.
The interest rate swap that’s currently on $ETH mainnet, they consider it the first instrument that represents the IPOR.
Future of IPOR Labs
The index is the most important part of the entire protocol.
They have set up a community which is 15,000 in discord and 8,000 on Twitter that serves as a nice base set which they can start to draft as a community of decentralized governance.
The investing round was led by Arrington Capital.
Their focus is liquidity and longevity.
It is launched on $ETH because that’s where the most liquid debt markets are but it’s not particularly on one chain only.
It takes around 150,000 gas units to update the index onchain and as you add, that scales linearly.
The IPOR swaps also have an index subsidy fee that’s going to be published onchain.
Are multiple indexes necessary
The more fragmented the rates are, the more fragmented the liquidity is around the rates then that leads to more volatility and more market risk.
The IPOR interest rate derivatives are all about aggregated liquidity.
Different IPs in different chains could definitely happen but the problem is it fragments the liquidity across different markets but there could be ways to have different arbitrage strategies between markets.
Business model of IPOR Labs
IPOR labs is a software builder that’s building for the IPOR DAO.
At some point when they run out of funds, IPOR Labs will propose a DAO to continue working on this.
There’s an entire monetary economy around the publication of IPOR that’s also very viable.
It is a public good and transparent data piece that anyone can use.
DAO governance is more important than monetization around the IPOR rate.
LPs earn in different ways, they earn from a fee that is taken to open up a swap, they earn from the net outcome of the swap and others.
They released a piece called Power Tokens that is separated from the global yield but it can be deployed to different modules.
Stake/LP Breakdown
A lot of mechanisms play favorites towards large holders or old holders and that means there’s this lack of fair market dynamic.
The log curve does something at some point where your marginal gain can boost your reward to infinity but the marginal gain that you get at some point just tapers off where it doesn’t make any sense because you’re holding more risk in holding power tokens than providing liquidity.
Darren
You can fork a protocol but you can’t fork a community and brain power.
How to participate in IPOR
The power token dynamic is essentially a booster but it can also be delegated for governance.
LPs are service providers to a protocol.
The IPOR token was minted but there are no IPOR token liquidity pools yet.
Common Misunderstandings
IPOR adds one part of risk management which is interest rate risk.
He hopes in the future that a lot of people will use IPOR to understand their cost of capital or use the swaps to hedge against this cost of capital.
IPOR as a data point becomes this transparent standardized way to view and assess risk-free rate in DeFi.
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Navigating the waters of crypto is risky; even the biggest CEXs & stablecoins can have huge risks…
Act now, click the link below & become your own bank via self-custody.