IPOR v2: From the Heartbeat of DeFi to its Credit Hub
With the launch date of #IPORv2 rapidly approaching, it’s time to recap all the major innovations it will bring to the DeFi landscape.
Key takeaways:
- IPOR v1 focused on building MVP credit market fundamentals, such as the IPOR benchmarks and swaps, and evaluating their performance.
- A major takeaway from IPOR v1 is that the benchmarks and swaps and their underlying technology need to be simplified to become usable by a wider range of participants.
- IPOR v2 is a rolling release that starts with upgrading the derivatives engine and then an expansion of composable products leveraging the new swaps and architecture.
- In addition to improved usability, IPOR v2 focuses on several major themes driving DeFi: LSDs, liquid fixed rates, LP leverage, RWA bridging, and offering the best low-risk yields.
- The IPOR Protocol v2 infrastructure is completely revamped to accommodate a new term structure, risk oracle, and an improved AMM spread calculation and swap optionality approach.
- IPOR v2 also introduces the “Stake Rate Swap” — an adapted instrument that allows users to exchange fixed for floating ETH staking rates.
- IPOR v2 aims to create a yield bridge on which assets can flow seamlessly between TradFi and DeFi, seeking the best yields on the market.
- With v2, IPOR is becoming the base for structured products in DeFi, giving simple risk management functionalities to players big and small.
- Post-IPOR v2, IPOR LPs will be able to access the underlying Protocol yield but also borrow against their LP tokens.
Memes, Cycles, and the Middle Game
Pepes everywhere. We are so back! It’s so over. WAGMI. GM.
The crypto markets seem to run on memes and cycles. Sometimes we have to step back, get a rational head, and visualize the future. It’s easy to get caught up in the cycles and sentiment but the IPOR Protocol DGAF.
It’s designed to literally be a cornerstone piece of #TheFutureOfFrance.
IPOR v1 brought the introduction of the Index and Swaps as the base of the credit markets. It focused on the fundamentals of what can become building blocks for DeFi credit markets:
📈 The IPOR Index - a benchmark rate for DeFi.
🔄 The IPOR Interest Rate Swaps - the risk management primitive.
🤖 The IPOR AMM - designed specifically for volatile DeFi rates.
📊 The Asset Manager - the base of the decentralized investment bank.
Think of v2 as the middle game, building out the product suite that leverages the underlying Protocol and improves on the v1 construct. I’ll cover this extensively below.
Inevitably this brings up the question of what the future looks like, with IPOR as the base layer of the DeFi credit markets. I’ve talked about it time and again, but let’s recap here:
🔶 The IPOR Index is the DeFi native reference rate for credit markets, structured products, debt instruments, and derivatives.
🔶 The IPOR Protocol is a global investment bank underwriting interest rate derivatives, composer of structured products, and bringing depositors the best returns in DeFi.
🔶 The IPOR DAO governs the Index, instruments, risk parameters, asset management, and continued operations of the Protocol.
Simplification and productization
Here’s a question:
❓ Have you ever gone to a car dealership and sales started walking you through the exhaust manifold, the suspension system, and the blend of the upholstery on the seats?
If you have, I guarantee you they’re selling it to maybe 5% of the clients. The vast majority of people want to know things like: what’s the fuel efficiency, how much does it cost, and can I get it in red?
In IPOR v1 as a community, we did an amazing job at engaging that 5%, and the IPOR Discord is full of amazing and knowledgeable community members. But few on the street are crying about the death of the LIBOR. How many people worry about their interest rate derivatives portfolio risk every time JPow opens his mouth? In honor of the v1, I will use retro memes only.
IPOR v2: Give the People What They Want!
Well maybe that’s an oversimplification but that’s the goal of IPOR v2 to give the user the simplest user experience that enables them to leverage the dominant narratives in DeFi.
IPOR v2 Smashing the Prevailing DeFi Narratives
🔷 LSD Stake Rate Swaps: Get a predictable return on your ETH staking rate.
🔶 Liquid Fixed Rates: Borrow from the deepest liquidity at the best fixed rates on the market.
🔷 LP Leverage: Get your yield as an LP, and loop borrow against it to leverage, farm, or make it productive elsewhere
🔶 RWA Bridge: Leverage yield-bearing positions to capture the top yields from either DeFi or RWA.
🔷 Best Low-Risk Yields: Earn at some of the best low-risk pools in DeFi.
To provide this type of experience, the IPOR Protocol had to undergo some huge changes. IPOR v2 is a rolling release that starts with upgrading the derivatives engine and then an expansion of composable products leveraging the new swaps and architecture.
Major Protocol Upgrades: Architecture, Derivative and Risk Engine, Tenor Extension
The IPOR Protocol is in the second phase of its maturity. That means taking lessons learned from the previous version and applying them to the next generation, taking inspiration from other protocols, integrating with innovative and secure players, and first and foremost managing risk.
Mature markets mean stability, rationality of actors, and risk management. Maturity in instruments means the end of an agreement at which financials must be settled. In IPOR v2 we refer to all of these concepts.
Architecture with Wings - The Phoenix
Let’s start with the architecture. Since the launch of v1 there have been many innovations in DeFi architecture. Since v2 is focused on simplicity the dev team focused on bringing simple user experiences to what is a complex architecture. This required the implementation of the diamond proxy to route users through the entire Protocol with a single approval. This also brings greater composability with other protocols which is imperative for the last section of this article.
Second, let’s talk about changes in the derivative engine itself. There are three main changes:
1. Extension of swap tenors up to 3 months (and beyond, with proper testing);
2. Removal of optionality from swaps (compression of spreads by AMM) and additional demand pricing;
3. Introduction of a risk oracle.
Extended Term Structure
In IPOR v2 let’s first talk about maturity related to tenor, or the time terms of a specific instrument.
The IPOR v2 AMM will offer swaps ranging from 4 weeks to up to three months.
Once these instruments are proven, the AMM would be able to underwrite longer-dated swaps depending on approval by the IPOR DAO and based on the performance of the risk modules of the AMM.
The tenor extension is important for bootstrapping the DeFi yield curve.
Long-dated swaps can also be an important data input when building out future IPOR Rates such as the IPOR USDC 6 Month rate, or the IPOR USDT 12 Month rate. Extended tenors also give way to new rate trading strategies. Don’t forget Kostis’ DeFi rates treatise. First on the menu - spread trades to capitalize on decompression or compression of rates between distinct assets.
AMM Overhaul
Second, the AMM has multiple changes, from the removal of optionality (closing of swaps before maturity) to the improvement of demand-driven spreads based on market conditions and pool exposure. While v1 swaps were able to meet the flexible term structure of the DeFi credit markets, from the quant perspective they were incredibly complex to price.
The removal of optionality in favor of closing with an offsetting position will reduce the complexity of AMM pricing and compress spreads for a better trading experience.
The spreads will dynamically adjust based on utilization, or what should really be termed as exposure when the pool’s risk profile changes due to a notional imbalance between pay and receive fixed positions.
Risk Engine and Oracle
Finally, the v2 overhaul introduces the Risk Engine and Risk Oracle which adaptively manage the risk the pool can underwrite given certain market conditions. The risk oracle, in particular, was inspired by a stress test of the credit markets allowing the Protocol to underwrite enough risk to be useful for hedging, while limiting the potential upside should a whale decide to weigh the cost of flushing borrowing cost up on the markets to try to profit from a swap.
IPOR on LSD: The Birth of the SRS
We like to give cute names to new products in crypto so let’s call it an SRS. The Stake Rate Swap is an adapted instrument that allows players to exchange fixed for floating ETH staking rates. The IPOR SRS will leverage the peer-to-pool construct and AMM featured in the interest rate swaps and adapted for the ETH staking rate behavior.
Within IPOR a few questions naturally arise:
1. Will there be an ETH staking rate index?
In the future there could be an ETH staking rate index, however at the moment given the immaturity of the market with short historical data, the varying levels of centralization of staking rate oracles between protocols, and the market dominance of certain players the first instrument will trade the LIDO stETH staking rate only. Actually, IPOR Labs has epoch-level data for LIDO so if you’re a data firm struggling with this technically happy to exchange data for magic internet tokens, just reach out.
2. Why staking rates? Doesn’t the IPOR Manifesto describe it as the base of credit markets?
The IPOR rates are specifically money market rates derived from credit activity. The Protocol’s core has always been to be the base layer of the DeFi credit markets. ETH is THE DeFi asset, and ETH staking rate is the native risk-free rate which as the primary collateral affects DeFi credit markets. The stake rate is essentially the monetary policy of DeFi. Therefore the ETH staking rate and the IPOR money market rates have a symbiotic relationship, making their corresponding rates and risk management inseparable.
3. What will be the collateral instrument and accounting?
The native accounting asset for the first Liquidity Pool and SRS will be stETH. Liquidity providers can provide liquidity with ETH, WETH, stETH, or zap in through any asset and will receive ipstETH as the accounting token of their LP in return.
In the future should there be other LSDs with SRS, another pool and accounting token with different deposit logic could be spun up for say an ETH Staking Index pool. The pool and SRS architecture is modular so other instruments can be added and LPs could shuffle their assets between pools depending on usage, APR, and Liquidity Mining rewards which would create a competitive LP market within multiple SRS pools.
The stETH SRS is most useful for two types of users: ETH whales who want low-risk predictable staking yields, and institutions seeking some crypto exposure and have hedging in their DNA. These players will be used in later examples, so have them in mind.
The FI of TradFi: The Only Bridge That Matters
Forget bridging from L1 to L2 or yield farming the next rollup. There’s one bridge that matters the most and nobody in DeFi is talking about it. There’s this liquidity pool waiting to be bridged with much pent-up liquidity it makes Justin Sun look like a pleb. I’m talking about the behemoth Fixed Income markets of TradFi.
Right now yield farmers think they’re clever looking over the bridge at all that sweet juicy tokenized RWA yield from UST (treasuries, not Terra you degens) to money market funds just coming on-chain. All them sweet gov bonds look juicy right now. But what happens when everything breaks? What happens when the cycle reverses, the printers rev up, and risk assets rally? Will there be an inversion of rates with DeFi leading the yield race?
Oh you’re so cute thinking that TradFi is looking to take the piddly hundreds of billions of stables sitting inside DeFi. Just wait until the hundreds of trillions (FYI: that’s 1,000 of billions) are looking to take even a small allocation and experiment in the DeFi playgrounds.
IPOR v2 is positioned to create exactly this:
A yield bridge on which assets can flow seamlessly between TradFi and DeFi seeking the best yields on the market.
Got ETH?
Let’s say an established ETH whale is looking to get low-risk returns, lock in their staking rate, and yield on that yield. The flow goes a little bit like this:
Stake ETH -> Hedge ETH staking rate (IPOR SRS) -> Borrow against LSD -> Borrow cheap DeFi at a fixed rate (IPOR IRS) -> Deposit and milk the DeFi/TradFi delta.
Let’s reverse that flow for a traditional asset manager who wants productive yield, but also wants access to the ETH staking rate, and if they don’t want price risk, bolt on an ETH put option.
In either case, the IPOR Protocol becomes both an important data point for driving decisions (IPOR Index), and a core element for locking in the fixed rate of return (IRS, SRS).
Think of IPOR as the pillars on the bridge that leads from the land of the Trad straight to DeFiance City ready to pipe in that juicy liquidity.
Structured Products
With the upgrade of the AMM, the birth of the SRS, the introduction of multiple tenors, and the revamped architecture IPOR starts to become the base for structured products in DeFi giving simple risk management functionalities to players big and small.
From this:
To this:
The Deepest Fixed Rate Credit and Deposits at the Best Rates
Deep Liquidity + Capital Efficient Swaps = Best Fixed Rates on the market
What is a simple example of a product that could be built on IPOR? The hint has been hiding in plain sight in Morpho’s docs:
The ability has been there all along. Now with v2, the IPOR app interface will host the fixed rate borrow and lend products with a simple UI.
Morpho is an ideal alignment with the IPOR for multiple reasons:
✅ It is composable and rides on top of the very applications that make up the IPOR rates (AAVE and Compound) allowing for deep liquidity and large products;
✅ The liquidity matching is effectively a mid-market rate, tracks very close to the IPOR, and makes both parties happy since each party gets a better rate;
✅ It enables capital efficiency for IPOR-based credit positions.
Naturally, it becomes an ideal credit market to source deep liquidity for both lending (Fixed Income) and borrowing (Fixed Rate Credit) products by taking both a money market position and an IPOR Swap.
Tapping deep liquidity pools
Many fixed-rate products are built on limited liquidity in their own pools where the market dynamics create a quickly accelerating interest rate dynamic available for limited participants. Through composability, these new instruments will sit on top of multiple deep liquidity sources.
Capital-efficient IPOR swaps
On the other hand, IPOR Swaps are extremely capital-efficient. The Protocol was designed around the idea of aggregated liquidity, where the pool is always available to underwrite an instrument given buyer demand. The efficient use of leverage within the instrument allows the swap taker to hedge their rate with the smallest amount of capital.
Future structured products
IPOR is a flexible infrastructure as you can see with the SRS. The Index, the Swaps, the Liquidity Pools, AMM, and Asset Management can be revamped and repurposed for new assets such as bonds issued on-chain with their own interest rate dynamics.
Take the base recipe: Bond + Index + Swap
And this could be applied to any number of yield-bearing instruments coming to DeFi.
A v2 LP Bonus Feature: Leveraged Credit of ipTOKENS - New Capital Efficient Yield Strategies
IPOR LPs will be able to borrow against their collateral, effectively allowing an LP to have their yield and eat it too.
That’s right, as an IPOR LP you will be able to access the underlying Protocol yield, but you will also be able to borrow against your LP tokens.
Now that you know about IPOR v2 your mission, should you choose to accept it, is to join the IPOR Protocol in helping the trillions in liquidity that is trapped in opaque TradFi fixed income to find the beautiful, open, collaborative world of DeFi.
Thanks for reading!
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