ETHWarsaw 2023: Darren Camas, IPOR - Interest Rates Derivatives and Composable Structured Products

hi guys good morning uh my name is Darren cus I'm the CEO and co-founder of ipor labs uh thank you guys for coming to the 10:30 a.m. talk I guess the guys who are here didn't get liquidated last night at the opening party so uh I'm here to talk about iore so iore we consider it the base of the defi credit markets so we're Bridging the interest rate derivatives uh we're bringing interest rate derivatives and composable products to ethereum so if you know a little bit or if you were here last year you would have seen woash talk about iore uh and what are the fundamentals but just to give a little kind of background iore is both an index and it's an interest rate derivative protocol so what's the importance of an index last year we talked about for example the Vore right the warsa interbank offered rate or something like the liore uh this is how you understand what's the cost of capital in a market and then of course on top of that you can issue uh different deals uh derivatives you can offer a a home loan for example based on this index rate okay so we consider the iore index like the liore or the Vore of defi but if you're thinking about a central bank or or if you're thinking about an interbank offered rate uh you're thinking about a set of banks that you query you ask them you know what's the cost of capital that you would loan from one one another uh today right uh the issue was this liore was used to structure I think around 300 uh $360 trillion of deals debt and derivatives the issue was that you had actually corrupt Bankers that were under or over reporting it and then they were taking the opposite side of a trade and a derivative to pocket money right so if you guys are here in this industry you probably understand that it's not the best idea just to trust you need to verify so we take the idea of this decentralized uh or Benchmark rate and we apply the best of dii so what do we have in dii we have Smart contracts that are auditable they're verifiable they sit on chain they're rules based so we know how they work so instead of actually asking Banks what's the cost of capital today uh and you do it you know like the the live or was surveyed once a day Monday to Friday you know and accept uh weekends and holidays right and that's really something that's not a construct that matches the defi markets which is global it's open 247 so we take this idea of a survey and instead of applying it to Banks we apply it to Smart contracts so the iore index is based on what's happening on the different uh different money markets inside of defi so right now it's a composite rate of a V2 and compound V2 on ethereum L1 why because those are the most liquid markets uh but actually one thing cool about a benchmark rate that has this decentralized nature that has a dow is there are some proposals to update the ipor index right so you have this idea that Banks or protocols which are proxies to financial institutions inside of defi they may rise they may fall they may get hacked they may increase in TL they may decrease in tvl uh so right now inside of the ior Forum there's a proposal to actually potentially include AV V3 compound V3 and even Moro to the index so you can see how this construct it's really taking something that's built in trafi adapting it to Defi and embracing all the power that you get inside of Defi and on the other side iore is an interest rate derivatives Dex so so if you think of what an index does it's it it moves over time it tells you what's the cost of capital today tomorrow it may different it may be different you know uh 3 years down the road is going to be very different uh and what do you need to do inside of the credit markets so the whole idea of an interest rate derivative it it offers you some level of clarity of what's going to happen in the future so for example if you're a borrower you're exposed to the interest rate if the interest rate goes up obviously it's very painful for you because you need to pay more uh on your to service your debt in the future and so we can take a very simple example of this you know people that took a home loan in 2020 you know they were getting Market bottom rates but as the central banks hiked up the rates you know this actually can increase their debt cost by two or three times right so this whole idea of predictability in credit markets is very important so what can you do with an interest rate derivative inside the I or protocol well you can you can hedge you can Arbitrage or you can take a directional position right so if you're going to say that the that the rates are going to rise you're going to take a pay fixed position if you think that the rates are going to fall you're going to take a receive fixed position or naturally if you're a borrower you want to take the pay fixed because you don't want your cost of debt to go up and on the receip fixed side if you're a lender because you don't want to lose future income okay so that's that's the basic function of the iport protocol but what does it do on chain so the iport protocol is actually printed block over block uh that's why we call it the iore it's the interprotocol overlock rate so this index is printed on chain and so if we go back to the home loan uh situation when you go to your bank your bank is giving you a contract they say okay I'm going to I'm going to lend you a million dollars for the next 30 Years years to buy a very large house right so how do they set the rate terms well first of all they go to an interest rate uh index uh could be something like the the Vore or the sour and then they add a spread on top of that right so they're actually pegging this contract to a reference rate and what we can do on chain is actually look at that at the Smart contract level where you have an external smart contract that's referencing the iore and the iore rates changing over time so instead of this kind of pin and paper thing that sits in a database at a bank we have this transparent smart contract that can be pged to the iore index that's printed on chain block over block and so that means that we actually get this uh very transparent onchain immutable rate that you can use to structure deals uh debt or derivatives and that's actually exactly what we do uh on the other side which is the iore interest rate derivative so the ipor interest rate derivative contract is a derivative instrument that references this onchain rate block over block and so what's the goal of printing this Benchmark rate which is just a number and printing it on chain well first of all it gives the entire Market Clarity of what's the cost of capital across the usdc usdt and D or pretty soon the E rate the state the E St taking rate as well second it allows this free data point this public good that any protocol can use to structure their different instruments so for example if you want to bootstrap a money market and you don't want to use this utilization curve that you find for example on a compound you can actually just reference the IPO rate and you can set a basis point spread or if you think that you can build a better derivative than the current iport interest rate swap you can do do so just using the iport index as a reference and so the value of the iport index over time in my mind will be the value the volume and the velocity of the future contracts that are actually using this Benchmark rate to set their terms okay so on the interest rate derivative side typically how it happens and typically why most retail users don't know about interest rate derivatives because actually it's not accessible to you so you typically go from Financial in institution to financial institution there's a broker in the middle and they set the counterparts they set the terms and this is an exchange of cash flows but when we wanted to design this for defi we wanted to actually take the best of defi especially because we're starting a market from zero so we decided to go with a pure to pool construction for the first generation of the interest rate swap uh so what does that mean uh so there's a couple of different iore indices right now there's an iport index for usdc iore index for usdt iore index for d uh so for example what happens when someone is underwriting the interest rate uh movement also the interest rate velocity is you have one side which is a passive depositor and you can consider this also an earn participant uh so for example if you're a die participant you would deposit die into the smart contract you would get your interest bearing token which can ACR value over time and that capital is going to underwrite the derivative instruments while it's underwriting the derivative instruments it actually goes out to different money markets to earn and why I mentioned D is for example the iore protocol is one of the first protocols to interg maker Dow's edsr uh the edsr if you're not aware it's subsidizing it was subsidizing the the dice savings rate up to 8% it's now been dropped down to 5% so for example if you are a passive depositor and you have D and you want to choose between let's say the maker Dow edsr contract or the spark uh s die contract you can also deposit into iore why because you're getting that underlying yield from the money markets and you also get two different revenue streams in the form of fees for the from the interest rate Traders and also the net outcome of the different swaps okay so that's the depositor side and actually iore depositors are in earning uh industry uh leading returns actually since the start of the protocol which is actually just one year ago in August uh so what happens is that capital is then used on the other side to offer a quote so if you're an interest rate Trader you come and you ask for a quote from the amm that amm is looking at the current state of the pool it's looking at the uh the near-term uh volatility of the iore index it's looking at some probabilities of what the index will be in the future and it's giving you a quote so you can consider it kind of a request for quote mechanism so for the past year we've run uh really instruments very short uh very short duration so uh 28 day or a 4-week period pool uh interest rate swap we're right on the verge of the V2 and that V2 will extend the the teners to two months and 3 months and Beyond with proper testing okay so you know I mentioned that kind of uh the process of a depositor actually putting their money in the protocol and this is something that can be very scary for defi users because you put your money in a protocol you see this APR but you have no idea how it's being generated and you know sometimes this leads to problems sometimes this leads to loss but what we really love about defi is we also Embrace this transparency that we get from things being built on chain they're auditable they're transparent you can track them in real time uh so this is a screener that we're just about to launch which is really tracking where is my money in the machine right so if we start from the left side you can see okay so here's the liquidity here's the liquid um uh sorry here's the uh liquidity that's going into into the pool so you can see where your deposit goes there's a reserve ratio that's underwriting the instruments and then you can go see it being deployed to the different money markets so you can understand what it's earning here and here so you understand actually how your deposit is earning and I think this is a really nice thing that we would like to see a lot of other projects doing because you know with the collapse of all of these Ponzi schemes the collapse of these very high yielding products uh everyone is now starting to ask okay so I'm getting this High apy where is it coming from so we just built a simple screener slapped it on uh what's the blockchain infrastructure to tell you where's your money in the machine and how is it [Music] earning okay so here's the current state of the iport protocol actually these uh these figures are a little bit outdated but right now uh the pool has written underwritten over 4.1 uh billion in notional volume uh it's the pools are about 13.5 million and we're actually right on the verge of launching the B V2 so as I mentioned the io pools for the usdt usdc and Di pools uh have been earning industry-leading rate of return since the Inception we're talking about you know top 10 top 20 yields for those stable coins uh what's important about the V2 is actually that we're we'll be launching a new product which is the stake rate swap so you can consider it similar to an interest rate swap but it's off of the eth staking rate so what does that mean again you will be able to deposit eth you'll be able to be earning the eth staking rate and you'll also be able to earn from the fees and the net outcome of the swaps and on the other side as a Trader you'll be able to uh offset your variable staking rate risk so why are swaps interesting why swaps important so a swap actually allows you to exchange a fixed a floating rate for a fixed rate or in other words you can predict your cost of capital so for example again if you're a borrower you want to uh lock in your cost of borrow in case the interest rate goes up you don't want to uh pay more on your on on your debt cost right so you'd naturally be a pay fixed uh taker so we have a lot of these different mechanisms where we do leverage looping for example uh so you might be borrowing eth you have your eth debt cost you might leverage Loop that into the staked eth uh and really what's important is uh when you're building kind of these simple Structured Products you actually need to take a derivative to lock in this rate differential between the cost of borrowing e and your rate of return so this is where the interest rate swaps come into play in terms of Structured Products they also allow you to play different market conditions so if you can see there this is screen from Deli digital they did a a deep dive uh on the iore protocol uh earlier this year this is an example of what happened during the Silicon Valley Silicon Valley Bank crisis so there's a couple of different ways that you can play this but you can see uh you know if we go back to that time we remember that usdc rates spiked up the USD sorry the usdt rates spiked up the usdt uh exchange rate spiked up and the usdc uh exchange rate uh uh dropped right you have this kind of dpeg and so we saw a couple of very interesting things where people were playing this um kind of uh not only the rate differential but they were playing the uh the stable coin Arbitrage playing this reeg on the usdc so you also can take different interest rate trading strategies so if you think that it's going to be a Divergence or a convergence between two rates you can take fix for floating floating for fix or fix for fixed swaps between different currencies and so this is another interesting rate strategy that's possible inside of defi because really these stable coins they have their own rate risk they have their own interest rate Dynamics because they're fundamentally different instruments so I mentioned that we'll be launching this kind of stake rate swap which has the underlying pool so there's a lot of different opportunities uh that are possible with these different Structured Products now coming onto ethereum so let's imagine that you guys are eth whales and you want a very simple you want a very low risk and you want a predictable return right and let's look at the other side everyone's talking about real world assets everyone is going crazy about us treasuries so let's go ahead and walk through this kind of flow so you're an e whale you have your you you want to get that stake rate yield and in case you know over time the stake rate is going to drop you want to H yourself against that downside risk so you naturally be a receive fixed taker so you're effectively locking in your e stake rate yield then you want to make that productive you can potentially leverage Loop that borrow against it in what's now very cheap debt in Defi and you want to deposit into something like Ono or Matrix port or open Eden which is the tokenized treasury yields well you can do do that what you do is you borrow from the money markets you take the pay fixed uh swap uh on the IPO rates and you can go deposit into those different pools and so this is obviously uh something that you can do on your own but it's also very complicated so one of the things that we're doing for the V2 is we're creating simple Structured Products so you get that you know one button click where you can create this what's a very complex Loop into a single multi call and so this is one of the features that's going to be built on the V2 infrastructure uh and this is why we say that iore is this base of Structured Products inside of defi where you can actually make these different plays inside of the inside of the credit markets and let's imagine let's fast forward one year right now the money markets are pricing in rate Cuts starting in about June of 2024 and let's say we're looking towards this uh this Bitcoin havening and maybe we get uh risk rally right so right now you have very cheap debt inside of Defi and you have this High yielding treasury bond treasury bills right in case the cycle inverts that means that the t- bill yield will drop in case we get a risk rally that may mean that D5 participants are more interested in taking risk they're more interested in taking debt and maybe you get this reinversion of the rates where it's actually interesting to go from the other side of the cycle where you're going to actually borrow against your T bills to actually get access to this defi yield uh so what does that mean that means that iore is at the center of this kind of two-way yield bridge and we're not talking bridge going across chain we're talking about a bridge of liquidity that's going from trafi to Defi and defi back and so this is one of the fundamental features of the ipor index that makes us uh you know very bullish about this infrastructure piece okay so this is a little bit of a visualization this is a in the case that you go through this flow uh you can get up to maybe about 4X leverage looping uh going be between one side and the other but the really differentiator of using the iore index and the iore swaps rather than just lever uh looping by yourself is that you get to actually lock in that rate of return okay so I I think I just already covered this so this is uh you know in case we get this this inversion I think people in dii will go back to loving defi yields and uh maybe a little bit more um um not bearish but uh not so crazy about us treasuries but uh the big thing is we have this massive opportunity and this massive yield bridge and right now we have stable coins that are leaking out of defi right we have uh you know from the what I think 130 uh billion stable coins and and creeping down all of this liquidity is now leaving defi to go park it in Money Market funds and if you guys think that trafi is very excited about getting these you know this 130 billion of uh defi stable coins no one cares but from the defi perspective we should be really really bullish about tradify people that are getting sub defi yields in in a market cycle inversion piping in trillions of dollars of liquidity into Defi and so this is the point that I want to make we have a very shortterm view to the market you know two years ago everyone was getting uh 10% on their stable coins and now everyone's talking about treasuries in the case of cycle inverts that's going to be potentially uh a huge influx of liquidity into the dii credit markets and we look at I por and the interest rate derivatives as this ability to bridge between these two worlds so we're on the verge of launching the V2 um there's a couple of huge things that are coming up here one we have an entire architectural overhaul so we're using the the Diamond proxy pattern which allows for uh a single smart contract that routes throughout the entire protocol that does a number of things one it reduces gas fees two it increases composite ability and so that allows uh the ipor uh protocol to be this infrastructure that you can build these um these Structured Products on so what that means is that on the front end you can offer these very simple kind of one-click products but that creates these powerful Dynamics where you can start looking to pipe this uh this massive trafi liquidity into defi the other thing again is the eaking rate swaps so we're starting out out with the stake rate for the Lio eth rates from there there's a possibility to expand to other LSD rates and then to create these Structured Products so if you guys are interested in learning more about iore uh here's the app right here uh keeps it tuned uh the V3 should uh sorry the V2 should be set to go live in Q3 which is ending this month uh so make sure to follow us on x.

com uh we're one of the very few protocols in the uh in the industry to have our own Quant library and if you're interested on building on top of iore uh you know whether you're a money market whether a yield aggregator whether you're an asset management protocol or whether you're a credit Market feel free to talk to us we have a booth downstairs uh thank you guys very [Music] [Applause] much anyone has any [Music] questions a very cool presentation and dar I have a question about your liquid staking slide uh sry what your liquid liquid staking slide uh maybe can you uh open it because uh yesterday uh Nia from exactly uh def saber was showing us that you can do a liquid staking leverage three times and then you can get 10% and in your example I think it's on the previous slide exactly you're doing cleverage four times and you are making uh even 15% and I understand the reason is because here behind you don't use AA but you use ior protocol well I mean iport protocol is actually leveraging other other money market protocols so for example it depends on where you Source your liquidity from uh it it it uh depends on you know what the liquidation thresholds are but for example if you something like a or you use something like Morpho Morpho is like you know with their pdb cursor is like this mid-market rate so that means that you can shave uh you can get even a little bit more juice out of it uh the other thing is why would you use the interest rate swaps again is to hedge in that yield right so if you're leverage looping without a derivative that means your your leverage yield can expand or contract you know at the same rate that you that you leverage Loop right so your apy it it you know