Binance FUD, Interview with Darren from IPOR Labs, Market news & announcements...
Issue #20 of The State of DeFi Lending newsletter
Welcome to issue #20 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover
It’s the 2022 year-end and the FUD merry-go-round has reached Binance. CT is blowing up with rumors about Binance resulting in major outflows and shrinking trading volumes.
Interest rate swaps are an emerging DeFi primitive that still has not seen mass adoption. Darren, co-founder of IPOR Labs, answers 7 questions about IPOR and the general market backdrop.
Market news, protocol launches & updates
Read below for more…
News
Uncertainty about the stability of Centralized Exchanges (CEX) has dominated headlines in the wake of the FTX bankruptcy. Now it also reached Binance whose rather solid reputation is taking a hit.
Binance experienced major outflows over the last week: $6bn were withdrawn, $2bn of which in a single day.
Mazars, an audit firm, canceled all proof of reserve appointments with clients (incl Binance, KuCoin, crypto.com and others).
The FUD has even impacted Binance’s trading activity and market share, although it has recovered since.
Binance had to pause USDC withdrawals which fuelled speculation about the exchange’s solvency. However, CZ was quick to play down any doom mongering, pointing out technical reasons for delayed USDC withdrawals.
Binance’s staked Ethereum token $bETH further depegged, at a time when Coinbase’s $cbETH is moving back towards ETH-parity.
There is still tremendous stress in the CEX system and it remains to be seen what 2023 holds in store.
Announcements and short news
Q&A with IPOR Labs
IPOR is a new protocol focused on interest rate swaps which allows DeFi users to borrow/lend fixed vs floating rates. The protocol aspires to make the IPOR Index, short for Inter-Protocol Offered Rate, the backbone of interest rate markets in DeFi. The IPOR protocol is based on a peer-to-pool model (AMM) with which traders interact when they carry out interest rate swaps. IPOR protocol launched on ETH mainnet in October 2022 and has attracted a TVL of $1.6m and cumulative open interest of $1.3bn. This Dune dashboard summarizes additional datapoints.
Interviewee: Darren Camas, co-founder of IPOR Labs
How would you describe the IPOR protocol in a few words? And how should our readers think about it conceptually: Is IPOR a DEX, a derivatives platform or a margin protocol?
The IPOR Protocol is a set of DeFi primitives which form the base of the DeFi credit markets.
The name itself highlights the IPOR Index as the focal point of the protocol. As benchmark rates such as the SOFR or the LIBOR are used to structure hundreds of trillions in debt instruments and derivatives, the IPOR rates live on chain as a public good upon which other protocols can build. The IPOR represents the cost of capital within DeFi. The IPOR Interest Rate Derivatives are the first instruments which reference the IPOR.
You can consider the current Interest Rate Swap live on ipor.io as an interest rate derivative DEX. It can be used to hedge, arbitrage, or take a directional position on the IPOR Rates in DeFi for the underlying asset USDC, USDT or DAI.
Fixed rate borrowing is paramount in tradFi. Why has it not taken off in DeFi yet?
As an industry we are bad at risk management. Look at the current fallout and tell me who was properly managing risk. Everyone is crazy for speculative exotic instruments and assets, but the credit markets are some of the largest in the world, and in OTC derivatives ⅔ are interest rate derivatives totalin $450T notional.
Fixed income will act as a bridge for capital to enter into DeFi. On the fixed borrowing side, more mature firms will properly hedge their rate risk, and instruments like IPOR will allow for composable fixed borrowing rates an order of magnitude more efficiently than that of the native protocol.
Given the recent DeFi and rates volatility, how have traders and LPs fared on IPOR protocol so far?
The IPOR pools are relatively small currently (approx $1.6m TVL) but have underwritten over $1.28B in notional since inception four months ago.
The USDC and DAI pools have been stable and predictably profitable since inception, trending in the 8-9% APR range from pure yield (fees, swaps, money market). The USDT pools had a rough November ending at a loss when the IPOR USDT rate spiked over 40% (less than -1% APR down on the month), but are up 10.2% since inception.
LPs underwrite swaps and the AMM prices for volatility. As USDT has the highest volatility the spread is often higher and typically the highest yielding pool. All protocol stats can be viewed here.
Would you consider IPOR a stand-alone protocol or an integration layer for existing money markets like Aave, Compound etc? Where will adoption come from?
IPOR is a standalone protocol. It is different from say a yield stripping protocol which reutilizes a/c tokens from AAVE/Compound to create a coupon market. The IPOR IRS DEX is a pure derivative protocol. Stablecoin depositors underwrite derivatives in the native token: USDT for USDT, USDC for USDC, DAI for DAI, and soon ETH. This also means that risk is siloed to the specific pool where anything to happen to the underlying stablecoin.
Adoption will come with other protocols building on the IPOR Protocol: Lending markets referencing the Index, money markets integrating swaps to create fixed rate markets, delta neutral vault strategies, or fixed income products for DAOs.
In the future, the IPOR protocol will be governed by a DAO. What will the main governance focus (eg risk, parameter)? Have you seen governance best practices that you aim to roll out?
Governance in the IPOR Protocol will focus on two main areas: Index and Instruments. We actually just released a new DeFi primitive Power Tokens designed by my co-founder Dimitar Dinev which outlines part of the governance design of IPOR.
The Index will be DAO governed. This includes decisions such as which protocols are considered for entry into the weighting of the Index, and from which chains. How will the index go cross chain, spin up a new asset index, add or remove a protocol from the index and the corresponding re-weighting.
On the IRD side there are different risk parameters to tune as well as which instruments to spin up. For example, on the current AMM it needs to be tuned for near term volatility trends every so often, a timeframe which will be set by the IPOR DAO.
For risk, consider the AMM is a good risk manager over time. Can the pool underwrite more collateral than it holds? What about a reserve or insurance fund? Currently the parameters are set conservatively, it can underwrite 80% of the collateral it holds and no more than 48% in either direction. Any of these parameters will be able to be tuned by the DAO.
Other instruments are in process of being created and studied. Which instruments shall be spun up next? Again this would defer to decentralized governance as well as budget for R&D. I would hope that IPOR Labs is in a good position with the community to be hired by the DAO to continue work, but other developers could impress and take over this work. This is the decentralized future we envision for the protocol
Do you think interest rate swaps is a winner-takes-all-market with one big platform having >80% of the market?
No, the market is just too big of an opportunity. The long term bet of the protocol is the importance of the Index to the credit markets in the future. As a reflection of the market activity the IPOR Index would be the reference point on which the multiplicity of interest rate derivatives markets use to structure different strategies and instruments. Crypto markets are efficient and capital flows freely, and it will make its way through the instruments which have the most utility.
What do you think would be the most wildly optimistic scenario for the interest rate swaps market in the following 18-24 months?
Wildly optimistic? Imagine we’re back in a bull run in that time frame and rational players take measured bets with proper risk management. The IPOR swaps would be used to fix income or borrowing for the credit market players, integrated into multiple vault strategies, and be used by HFT firms for basis trades to arb inefficiencies between cross-stablecoin markets. The IPOR Indices would have developed into 1, 2, 3, and 6 month rates with traders trading various yield curve strategies.