After the DeFi Summer of 2020, various DeFi protocols focused on niche markets emerged, and decentralized finance became the most successful application of blockchain technology. Fast forward to today, four years later, DeFi remains the most mature application on blockchain, but the focus has begun to shift quietly. Swap, DEX, and lending/borrowing DApps have matured and become essential infrastructure for every public chain. Decentralized finance derivatives protocols have become an important innovative direction in this bull market. Through financial derivatives, investors can participate in various financial activities with lower costs, higher transparency, and stronger security.
In the financial derivatives space, in addition to decentralized contract leverage products, derivatives related to market interest rates are also a noteworthy direction. Interest rate fluctuations have a profound impact on financial markets, and both investors and institutions need tools to hedge and manage this risk. The introduction of interest rate derivatives will enrich the DeFi ecosystem, making it more diverse and robust, attracting more investors and institutions to participate, and driving the development of the entire industry. In traditional finance, interest rate derivatives have proven their importance and value. They are widely used in various risk management and speculation strategies, with a large market size and ample liquidity. However, there are very few decentralized interest rate derivative-related projects compared to various contract leverage protocols, creating a significant market gap for innovation.
Interest Rate Derivatives and IPOR
IPOR is an interest rate swap protocol. Simply put, different investors have different needs regarding deposit and loan interest rates; some expect to receive a fixed rate over a period, while others wish to adjust rates according to market conditions. This creates a liquidity market for swaps to meet their needs.
In fact, we can view this model as a DeFi protocol with interest rates as the underlying asset. Here, you can add funds to the interest rate pool or execute buy or sell orders for corresponding fixed or floating rates based on your predictions of future interest rate fluctuations to earn returns.
Interest rate swaps are widely applied in traditional finance, but they are still in the early stages of development in the DeFi market, with IPOR being a leader in this space.
The core products of IPOR include three aspects: the IPOR Index, AMM automated market making, and asset management contracts. The IPOR Index is an interest rate index that collects data from various DeFi protocols. Functionally, it is similar to the London Interbank Offered Rate (LIBOR), and we can consider it a market interest rate reference standard. IPOR provides interest rate derivatives and market-making services based on the index, as well as interest rate swap tools to manage market interest rate volatility risk.
IPOR Operation Logic and Tutorial
For most retail investors, products based on interest rates are relatively rare financial tools that ordinary people seldom encounter. However, they are crucial in market trading and arbitrage processes. Therefore, we will explain through practical operations using IPOR, making it easier for everyone to understand the interest rate market and swap transactions.
- Join the Interest Rate Liquidity Pool
By joining the interest rate liquidity pool, you can earn corresponding interest rate volatility returns and also receive IPOR token rewards.
First, open the official IPOR page:
https://app.ipor.io/deposit/ethereum and log in using the MetaMask wallet. Currently, IPOR supports the Ethereum mainnet and Arbitrum network; we will take the Ethereum mainnet as an example.
Select the corresponding interest rate liquidity pool, taking stETH as an example.
In the Zap in section, select the corresponding token name, such as ETH or USDC, and then choose the APR 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, at which point we will receive the base APR.
ipstETH is the stETH staked in the pool. You can directly use USDC or ETH to deposit through the protocol, and the system will automatically convert it to stETH and stake it, saving users a lot of operations. For ipTokens, the exchange rate between them and the native tokens is not 1:1. This is because the price of ipTokens also includes the interest generated from the yield over time, making its value slightly higher than that of the native tokens.
pwIPOR is the amount of IPOR tokens that need to be staked and is non-transferable. This means that to achieve a fixed rate, you need to stake IPOR, which also increases the application scenarios for IPOR tokens. The higher the adjusted rate, the more IPOR needs to be staked. If you later want to exchange pwIPOR for IPOR, there is a 14-day cooling-off period.
- Interest Rate Swap Pool Mining
We can also perform fixed rate and floating rate swap operations. In the upper left corner of the page, click earn——liquidity mining.
On the page, we can customize the amounts of ipstETH and IPOR and deposit them into the pool. This is somewhat similar to customizing deposits of two different amounts of tokens to form a liquidity pool in Uniswap, except that the underlying asset here is the interest generated by the staked tokens.
To facilitate user calculations, the official page also provides a calculator on the right side for precise calculations.
- Interest Rate Trading
Click on the upper left corner of the page trade——interest rates swap and select the trading asset, such as stETH, then click "open stETH Swap."
Here we can use the simple mode.
Select the corresponding collateral, which includes stETH, wETH, wstETH, and ETH, and choose whether the interest rate will rise or fall, as well as the leverage multiplier. Since interest rate fluctuations are very small in reality, leverage can increase their volatility and enhance returns. Currently, IPOR can provide up to 500 times leverage.
Choose the direction of the trade. For example, if we believe that interest rates will rise in the future, we select "rates will go on." Essentially, this means selling a fixed rate in exchange for a floating rate, which will yield positive income when interest rates rise.
Conversely, "rates will go down" means selling a floating rate in exchange for a fixed rate, indicating a bearish outlook on interest rates. If interest rates fall in the future, you can ensure that your fixed rate remains unchanged, earning additional income compared to the previous floating rate.
Here, the fixed rate can be considered a basic fixed rate. The fixed rates for shorting and going long are different, and there is a price difference between them. For example, in the image below, when we choose to short interest rates, the fixed rate is 3.22%, meaning we can only profit if interest rates drop below 3.22%. Conversely, when we choose to go long on interest rates, the fixed rate is 3.42%, meaning we can only profit if interest rates rise above 3.42%.
Then we need to pay an account opening fee (around $20) and a liquidation deposit (worth around $40). The account opening fee is non-refundable later, while the liquidation deposit can be refunded when we close the position.
How to Use IPOR for DeFi Arbitrage and Yield
- Hedge Against Rate Cuts
From the above functions, we can see that the interest rate trading feature of IPOR is a tool. For large holders, its main application scenario is as a hedging measure to mitigate their own risks or to engage in corresponding arbitrage activities.
For example, if you anticipate that the Federal Reserve will cut interest rates in the second half of this year, and this will also affect the interest rates on stablecoin deposits and loans in the DeFi market, you can use IPOR to lock in a relatively long-term fixed rate, allowing you to earn more interest than the market after the rate cut.
If you believe the Federal Reserve will keep interest rates unchanged, you can choose to provide liquidity to IPOR for market making, thus earning corresponding market-making rewards.
- Fixed Rate Borrowing and Lending
If you want to borrow at a fixed rate, you can hedge using Morpho, which optimizes borrowing rates on Compound and AAVE.
First, deposit collateral into Morpho, then borrow stablecoins like USDT or USDC. At this point, you will have a floating rate loan. Then, in IPOR, you can choose to pay fixed, meaning you are buying in the direction of rising interest rates.
When actual interest rates rise, the borrowing interest on Morpho increases, raising borrowing costs, but you will earn corresponding income in IPOR. Conversely, the same applies, ensuring that the interest rate remains approximately fixed.
Using the same method, we can also obtain a fixed deposit rate. Deposit tokens into Compound or AAVE, then buy into IPOR for a declining interest rate. When actual interest rates decline, we can earn additional income in IPOR, but the yield in Compound or AAVE will decrease, thus achieving a fixed rate effect.
- Increase ETH Returns and Reduce Loss Risks
Additionally, we can use IPOR to achieve fixed returns amid ETH price fluctuations. For example, when we are bullish on ETH, we can use IPOR to join the ETH liquidity pool. At this point, the zap function can automatically purchase ipstETH and pwIPOR using USDC, yielding an annualized return of 42.35%. Meanwhile, we can purchase put options for ETH at the current price on Premia or Deribit as a hedge.
This ensures that if ETH declines, even if the value of ipstETH in IPOR decreases, the put options will earn returns, and we will also receive IPOR token rewards, offsetting corresponding losses. If the price of ETH rises, the options will only incur limited losses, while the price of ipstETH will rise, yielding unlimited returns. Compared to stablecoin deposit yields, this can achieve the potential for limited losses and unlimited upside returns, with expected returns increasing accordingly.
Furthermore, IPOR can combine more strategies to achieve arbitrage and low-risk, high-yield strategies, which will require more investors to explore and uncover wealth opportunities. At the same time, IPOR is developing an automated asset management system through its team to help investors manage their on-chain investment assets and achieve higher yields.
IPOR Fusion—Automated Asset Management System for DeFi Ecosystem
As seen above, the emergence of IPOR brings new strategies and arbitrage opportunities to the DeFi market. IPOR has launched IPOR Fusion, which aims to integrate different routing and aggregation protocols into a single smart contract, driven by algorithms and artificial intelligence (AI), to help users find opportunities for various arbitrage and investment, creating greater value.
The core of IPOR Fusion consists of two aspects: an elegant smart layer and an automated execution core, allowing for the integration and management of liquidity providers, borrowers, and leveraged participants, optimizing yields, managing risks, and establishing higher return investment strategies.
Currently, IPOR Fusion has begun integrating into the DeFi market, including AAVE, Compound, Morpho, Gearbox, and more markets will be integrated in the future, such as Pendle, Notional V3, Term Structure, etc. For example, leveraging the cycle between ETH borrowing and stETH yield returns, achieving fixed yield rates through IPOR ETH borrowing rate swaps and staking rate swaps, could potentially yield 40%.
Using IPOR SRS to Hedge ETH Staking Yields
SRS stands for Stake Rate Swaps, which is simply 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 Lido's official data published every 24 hours. Moreover, IPOR has launched the IPOR stETH Index, which is related to the rewards of Ethereum's execution layer (EL) and consensus layer (CL). For instance, CL rewards are inversely proportional to the fixed percentage of ETH, while EL rewards increase with network activity.
Through the IPOR stETH Index, these volatilities can be traded in the market. For example, if Ethereum ETFs are approved, increased on-chain activity also indicates that stETH yields will rise, allowing for arbitrage in IPOR.
IPOR Token Information
The total supply of IPOR tokens is 100 million, distributed as follows:
Token release is as follows:
The project team, IPOR Labs, is located in Zug, Switzerland, known as "Crypto Valley." The team consists of experienced quantitative financial analysts, three PhDs, and software developers from the banking and insurance industries, with 22 years of experience in fixed income.
CEO and co-founder Darren Camas has experience working in investment banking and derivatives trading, with a deep understanding of financial products. He entered the cryptocurrency industry in 2011 and has held important positions in projects like Cardano and 1inch, as well as being responsible for the BD team of one of the earliest exchanges (second only to MT GOX) and has experience working at Binance. The team's chief scientist, Mauricio Hernandes, holds a PhD in computer science and leads the cryptocurrency department of Japanese securities giant SBI.
IPOR completed a $5.55 million funding round 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, and others.
IPOR is currently listed on Gateio and Bitget exchanges, with a market capitalization of around $13.67 million and a circulating supply ratio of less than 20%. This is mainly because the on-chain interest rate derivatives protocol is still in its early development stages.
However, compared to traditional finance, interest rate derivatives have wide applications in traditional finance, and clients are generally institutional users. Therefore, it is foreseeable that the current on-chain interest rate derivatives space is still a blue ocean, and IPOR has significant development prospects.
Conclusion
With the approval of BTC and ETH spot ETFs by regulatory agencies, more and more traditional investment institutions are paying attention to cryptocurrencies and actively positioning themselves. We all know that the current blockchain ecosystem is still in its early development stage, and the bull market expectations for 2024 and 2025 are also the focus of capital attention. Interest rate derivatives have already matured in traditional centralized finance, and blockchain brings new possibilities for decentralized finance, indicating a broad prospect in decentralized finance. However, currently, aside from Pendle, there are no other mature applications related to on-chain interest rate derivatives, representing a significant market gap.
IPOR's products are pioneers in the current interest rate derivatives market, and on-chain data shows signs of rising. The platform token IPOR has risen from $0.36 at the beginning of the year to $0.81, and with the trading and arbitrage strategies brought by IPOR in conjunction with other DeFi derivatives protocols, it can help institutions and large funds achieve low-risk stable returns. In the future, IPOR is likely to become a leader in the interest rate derivatives market, driving the development of the entire Web3 industry.
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