From LIBOR to IPOR: TradFi to DeFi credit market evolution

Transcript

good morning to day two so my name is darren kamis i'm the ceo of ipoor labs i'm here to talk to you about from the libor to the ipoor the traditional finance to d5 credit market evolution uh so before i get started a little bit about my background so i've been building actually in the crypto space since 2011 across exchanges across payments and now i'm very excited to uh be building ipor so we're about 16 strong globally i've been working on this for about a year and a half and uh you know one thing is we'll be launching mainnet in august so uh that's uh quite exciting okay so the first time i gave this

presentation it was in in frankfurt so it was in front of a bunch of uh bankers so it was more contextualizing decentralized finance for for banks and i'm guessing that you guys are much more defy native so i'll skip over a lot of the simple contextualization and more be uh you know giving you a uh you know insights into how traditional credit markets work uh another thing this was done in march so you know we have an ode to a higher tvl um but the point of this slide is if we look at the construction of d5 markets almost everything is locked into these uh very short-term money markets right so you know if you go on on a flashlight you're obviously have this credit

instrument that lasts one ethereum block or about 13 seconds right so this is really nice it's useful it's really cool but it's really useless you know if we want to get to this point where we could actually take a 30-year mortgage to buy a house you know from a decentralized bank so the question is how do we get from point a to point b so if we look at the traditional financial markets actually these very short-term instruments are a tiny portion of the credit markets uh actually you have most things that are locked up uh you know you have this term structure you have these instruments that you have to keep in for a certain amount of time these would be fixed income markets

these are the bond markets and what's underpinning these uh these markets is actually this this monster market which is uh the interest rate derivatives which is about 450 trillion dollar notional uh notional volume uh so i don't have to go uh you know over the over collateralization with you guys but you know one of the interesting things is that over collateralization we know that it's it's a technical issue uh you have the infinite rehypothecation of assets risk but we actually do have a good uh you know proxy to this uh to this model which is securities lending in traditional markets so in traditional markets uh you know you can lend out a security you can borrow against it and

not effectuate capital gains for example um this is obviously not a a comprehensive list but you have the over collateralized markets you have ave you have compound or say trader joe and binky on avalanche uh but you also have these different uh you know uh models coming out like uh goldfinch you know which is essentially issuing an nft it's following a traditional a more uh securitization process it's doing uh it's assessing the uh the the risk of the counterparty or you have something like centrifuge which is tokenizing let's say the physical world assets and being able to issue them on chain or you have something like structured

products like for example fortuna fi which is up and coming and it's looking to actually create a basket of assets and issue a stable coin against that which has a diversified yield and maybe this is something that's very interesting in this market where you have actually the stable coin yields which are dropping to the floor but you have these uh you know the central bank rates which are you know earning a lot more than d phi yield right now um so what we need to go from is these uh these very liquid very short-term markets to much more longer-term structures much more stable structures because if we for example institutional finance requires some level of predictability some level of risk

management and risk management you know in this current market climate is something that a lot of people are talking about but we don't see a lot for example we see celsius paying down their debts on ave on compound but we also understand that they have full rate exposure so if we have these kind of market stabilizing instruments then we can have a much more secure market structure if you're familiar with how the the calculation for the interest rates is done on ave and compound and actually many money markets across other chains it's a simple utilization curve so cash cash borrows over cash available and so what happens is actually you kind

of get this hockey stick movement when you reach over a certain level of utilization then you get these massive volatility spikes in in the interest rate behavior which also creates uh let's say a very unstable market uh market dynamics where you can have uh where you take a rate uh you take a loan at three percent and 24 hours later it's sitting at 30 percent you know so this is obviously something again from uh institutional standpoint that's unacceptable okay but if we look at this leak out from the tvl side what do we see so we actually have this collapsing of the asset value

but we had a huge growth in stablecoin issuance and actually not a lot of the stablecoins have left the system so we actually have this huge oversupply or the surplus of stablecoins in the market and i mean actually what's happened is uh it's not that uh people are probably borrowing less it's not that a lot of assets have actually gone out of these uh of these defile lending protocols it's that you you're essentially your credit capacity is is capped right so all of a sudden we have this huge uh you know excess liquidity in the market in terms of stable coin you have fewer people borrowing you also have a lessened ability to borrow and so that has really driven the

interest rates down over time so you know if you talked about you know a d5 summer or maybe shortly thereafter you could guarantee maybe about 10 per annum lending stables well the usdc rate right now is hovering just about around one percent uh and you have this behavior all the all the stablecoin markets were pretty closely tracking each other but we had this uh this tether redemption i think around 16 percent of tether were redeemed in the past few months and so that's created this uh kind of divergent rate behavior between usdt and usdc okay so who here knows what the the libor is or

the libor was okay so we got a few hands so i guess i'll give some really quick context so the libor was the london interbank offered rate so the london interbank offered rate uh it was actually discontinued at the end of last year and i'll tell you why a bit later but it's this survey-based rate which is meant to be a free-market alternative to central bank rates so 16 london banks got together and they asked each other okay what's uh what's the cost of borrowing today you know across the different uh different currencies and across different maturities today one month three months six months one year for example uh and this uh was called uh the most

the most important number in the world right so if you take a home loan then your bank might quote you libor plus 50 basis points or a libor plus half a percent so this rate was used to structure hundreds of trillions of dollars in derivatives deals credit products uh but there was a problem so what was the issue so the libor is also known as the the biggest rate fixing scandal in history so this came out in the early 2010s but it had actually been going on since the late 90s which was inside the banks the traders themselves were under reporting or over reporting the libor by basis points and they were taking the

opposite side of this trade and pocketing the money so the people inside the banks that were trying to create this free market rate or manipulating the rate for their own personal gain so we have this function of a benchmark rate that is extremely powerful in in traditional finance actually the the libor's discontinuation caused uh you know a couple of different systemic risks which is essentially you had a couple of benchmark rates that were vying to take over from the libor but what that creates is you know it creates a fragmentation of liquidity risks uh discontinuation of different contracts uh but what we get from that is actually this benchmark rate is something that is

required by the market it's it's required to understand you know how the market works uh this uh this transparent uh rate on which we can base other behavior what we reject in the d5 world is obviously the manipulation point and what we can get in in decentralized finance is we don't have to ask banks we cannot just ask the smart contracts uh so this is the ipore the inter protocol offered rate or we can call it the inter protocol overblock rate which be its source block over block uh so the libor was you know it was published i think 11 a.m uh bst uh monday to friday and not counting holidays because you know bankers need their holidays or we can have this

transparent overblock uh or as close to real-time rate as possible in decentralized finance and this is really something amazing so we embrace at the ipoor this idea of a benchmark rate we reject the idea of manipulation and we can get this proxy to as close to real time as possible and so this is a this is something really interesting so another thing uh there's there's a couple of different rates uh so if we talk about the libor libor was financial institution based right you have a subset of banks that are reporting to the libor so we can also copy that inside of the inter protocol offered rate where essentially these uh

these credit market protocols are proxies to financial institutions so we have this construction of understanding what what protocols or what proxies to financial institutions should be included in this iport rate and this is something you know that i shouldn't be in charge of uh this is something that is a very good case for community governance so for example uh right now the iport rate is is uh it's a summary of ave and compound why it's simply a volume weighting the other the other markets uh you know in terms of magnitude they just wouldn't move the rate enough at this time right and there's also technical limitations that

it just makes it more more complex and and really no reason but let's imagine that there's protocol x protocol x comes up and it really has a better interest rate model has has something changed from this you know simple bonding curve this utilization curve and they're really killing it with this uh you know uh with their new credit protocol right so what happens how does this credit uh this protocol x actually get included into the iport well we think this is a great case for decentralized governance and the ipore as it's a volume weighted uh as liquidity flows into that credit protocol the iport rate would actually

[Music] you know the ipo rate would show essentially reflect the behavior of what's happening in the market so the ipore isn't setting the rate it's not setting the market it's it's more like a barometer it's a thermometer it's reading the temperature in the room and so this is something that's very interesting on the decentralized governance side and the other thing is let's say how does another stable coin you know spin up a new ipo rate and this is other things that are going to centralize governance decentralized governance and also how does the ipore go across chain so for example the ipor is launching on ethereum layer one why because that's where the most liquid credit markets are but

ipore is essentially long decentralized credit markets it's not pegged to ethereum it's long defy credit so how does this rate go across chain and i'll speak a little bit about the about the infrastructure uh the technical infrastructure later uh sorry one last point about this uh you know uh you have this proxy to financial financial institutions through the protocols but you have something like the bsby which is the bloomberg short-term uh bank rate uh and this is uh market-driven right so what we get from smart contracts is actually all of the activity that happens you know across that smart contract is included into the rate so you have this transparent also

transaction driven and market driven approach so the ipoor is let's say maybe the best of both worlds where we have this proxy to uh the actual market activity and the market transactions uh as well as uh you know the proxy to financial institutions okay so this is the inner protocol offered rate or the i pour rates right so we can see here actually in march we had this kind of divergent behavior we had a little higher yield you know across all markets uh and you know again because of this dynamic of the collapsing price and the the surplus of stable coins we have this rate dynamic uh but this is essentially how how the i-4 looks and we can consider it a spot

rate right now why because we have no semblance of really a term structure in in decentralized finance right now uh so think of it as an iport usdc spa index i-4 usd t-spot index iport die but in the future you could see different stable coins uh here and some interesting other things you know are both uh tether and circle are issue issuing euros which you know given to the exchange rate is not so different from the dollar at this point uh but there's a you know different kinds of you know trading opportunities different basis trades uh different cross-currency swaps that are that are potentially possible in decentralized finance and these are huge markets in

traditional finance okay so again some advantages that you know we we talked about this already a bit but you know it's sourced directly on chain um it's uh it's it's a volume weighted average and we reject the manipulation so uh maybe i'll use this time to talk a little bit about the construction right so we could really calculate the ipor on chain block over block but that would just be a great subsidy for uh for ethereum miners so if you guys are ethereum miners sorry we're not subsidizing you know every block because it would be a ridiculous waste uh but we have this kind of off-chain on-chain construction simply because of

gas fees so how the i-por oracle is structured and it's it's a bespoke oracle is essentially uh listening to full nodes uh indexing this behavior block over block and that's published uh every so often so it's published via function called heartbeat which is a time and volatility function so a short time requires high volatility to be republished over a long time the volatility lessens right and so this is just a way to have this nice dynamic of of market behavior not subsidizing the uh the the publication online and so you'll actually have like two different eyeballs one is kind of the off chain i pour which is being sourced block over

block which also can be verified the the formula is open source and then you have the on-chain publication so this on-chain oracle publication you can have also these entire new models around this so in the long term you know there could be multiple validators multiple essentially iport calculators that are vying to publish this through you know through the oracle so you have something like a chain link style economy around the publication and the sanctity of the ipor raid itself okay so the ipoor uh you know as an oracle construct it exists as a public good you know we have the modularity and adaptability and the composability so

what do you do with this public good and so this is a big question that you know we're actually leaving to the the builders and this is one of the things that we want to talk about here especially at ecc so if you have this rate that lives transparently it's on chain it's immutable and you know it's essentially sitting there for anyone to use can we reconstruct this value for example of the libor can we use this as the base of you know the different credit markets uh so what are some things that you can do uh with this on-chain chain with zhanchin good so we'll get to some ideas uh you know later on about more complex structures but for example let's say if you want to fork ave or you want a fork compound and

you want to come up with a new rate structure well you could just quote essentially the live the iport index and add some spread between the borrow and asked right so you have this uh these new kinds of possibilities that are are are possible because of this uh this construction okay so the first instrument that ipore labs has built to essentially leverage the iport is an interest rate swap so interest rate swap it's one of the most it's one of the deepest markets uh you know in in otc derivatives uh and it essentially hedges rate exposure and so this is something for example if you're taking a home loan and they ask you if you want a variable rate

or a fixed rate a lot of people take fixed so what's happening is this rate exposure is being hedged likely from an interest rate swap so what what do we do in ipor interest rate swap it's a peer to pool model so peer to pool so if for example if you want to go long or short versus the ipore usdc usdt or die rate uh on one side you have a depositor in one of those stable coins on the other side you're taking an instrument so you're taking a you know either essentially a long or short a pay fixed or received fixed position and you're betting against the pool you have the amm which is essentially pricing risk in terms of volatility and volume

and so it's essentially fixing that risk into a spread so you'll get quoted once you open your contract you'll get quoted a fixed rate and that fixed rate will be determined by determined by the amm and then the payoff between these two contracts will be determined by the i-por over time which would be the floating rate so a little we have uh we have a uh you know several quants uh working on the ipore index we have a team of three quants uh our chief scientist who was uh he set up a trading desk at one of the large uh crypto houses in japan and actually we have two points that are of over 20 years in fixed income so one thing that we looked at is

actually the extremely volatile rate behavior in defy it resembles something like an emerging market bond market a rate market so we're actually looking in so our chief quan is actually brazilian living in tokyo and actually the you know the brazilian rate structure it very closely resembles the volatility that we find in decentralized finance so we took this model for example called jump diffusion and uh essentially taking this entire toolkit and putting it into an on-chain uh constant function market maker and so this is really let's say the magic uh behind the interest rate swap profile uh we'll be launching uh let's say i think four white papers in the next month uh

if you want to read more about that uh so you can follow ipor on any of our you know any of the social accounts um and we have a couple of other things but you can imagine that it's it's it's some kind of this this this manifold between uh volatility and and volume so instead of uh let's say you know kind of a two dimensional approach as in uni swap we're thinking about three dimensions when talking about interest rates okay so here's here's a stop from the interface so for example um what are what do you use i-4 interest rate derivatives for well you can hedge essentially your your your borrowing or lending right so typically if you're a lender you're going to take receive fix because you don't want your yields to go

down on the other side if you're a net borrower you're going to uh you you're going to pay fixed so there's a very interesting dynamic a very interesting yield inversion that has happened right now so for example if you want to you know take an arbitrage or a carry trade right now there's a possibility to borrow usdc take a pay fixed contract and lend it out in short term u.s treasury bonds so i never thought that we would see kind of this this carry trade but it's possible right now and so this is one of the you know potential uses but again in this time where we're talking about risk management we're seeing that you know essentially risk management on the

credit side is really lacking then this is why ipor actually becomes a very important part of the market it becomes a stabilizing stabilizing layer under the d5 credit markets uh so you know again we have this uh you know if we're looking at how the iport looks in the traditional kind of business model uh you know if you're thinking about the decentralized governance side you have this uh let's let's say this kind of transparent data layer so you have the spot indexes but you have different fixed income protocols and will be also you know the next product or protocol that we'll be looking at is interest rate futures market and the interest rate futures market is

a good way to kind of bootstrap this yield curve in d5 and so the reason we're starting with the spot rate and essentially extending it you'll say one month at a time is because we don't have this semblance of of a yield curve we don't have this let's say term structure and decentralized finance but this is something that we're bootstrapping now and into the future so we'll start to see this development of the iport one month three month rate six month rate uh on the other side you get kind of this uh let's say this uh credit market stack right so you can have uh you can have a module that really calls to these uh calls to these rates to structure a credit product right you can have uh you can do a multi-contract call to let's say take a

uh you know take a a you know a debt position on on different money markets and have an instant hedge right and so these are some things of this kind of base layers that can be built into uh you know the interfaces zappers d bank you know a one click hedge but you can also create larger structured products and so this is kind of the base uh these are the base instruments that we're creating to create this uh let's say the the you know the base of the d5 credit markets but also uh these building blocks for structured credit products and so this is one of the things that we're really kind of excited about at ipoor uh and then finally uh the ipor labs team so actually mario mario is right

here uh in the front uh he is the the let's say the the man on all the smart contract side so if you want to understand the construction of the ipor the protocol be sure to grab him and talk to him afterwards but again you know we have we have guys coming from we're about 16 16 strong our developers come from enterprise software development uh you know anywhere from 10 15 years our quants again are coming from a deep background and uh yeah so that's that's a little bit about the iport protocol if you want to learn more you can go to iport.io uh follow us on twitter ipora underscore io my name is darren kamas

you can find me on twitter darrencamas and if we have any questions i don't know if we have time for questions five minutes hello yes thanks a lot um very

interesting presentation uh what's the current uh business model or plan to monetize the the hyper rate okay so like uh so there will there will be an iport token for example right so a couple a couple of different things right so you have these uh you have these uh instruments right the the interest rate swap for example it's it's it's a derivatives decks right so this is something that's not public yet it won't be public for a while uh but you know if we go back to uh this uh so my my co-founder dimitar he's our cso he's the uh he's the tokenomics gigabrain so we've iterated something like something uh like the v-curve model something like

badger dao so we have some kind of boost dynamic inside of the inside of the derivatives decks uh some kind of fair market uh some kind of fair market dynamic where there's no locking up so you'll have to stay tuned for that so that's one uh but the other side is really you know the decentralized governance around the rate so this it's maybe harder to uh conceptualize or you know from a fundamental uh perspective but imagine if there were there were decentralized governance around the libor itself right so this it's essentially this uh you know an index is it's not rocket science to create the point of this on-chain index is that

it's this public good one it provides transparency around what's happening in the credit markets two you can build on it so you know you might have these decentralized banks that are offering a 30-year mortgage uh that are quoting the i-4 some some spread and they're taking different derivatives on the back side to essentially hedge risk right and so you know in the way that the libor uh you know had hundreds of trillions in deals uh essentially tied to it the value of the iport index will be essentially how many external contracts are referencing the iport rate to structure of their own deals and you know if if if the iport takes this kind of libor-like importance inside this

ecosystem then there's going to be a huge amount of value around the the construction of the of the iport index which protocols are included what's the governance process if a protocol needs to is excluded from the rate let's say in the in the case of like cream which you know had multiple hacks let's say if cream was a part of the iport index how does this get excluded from the rate how does the index go across chain and then on the oracle side you know there can be this entire monetization by the different uh by the different index calculators so kind of this sanctity of the ipore and the importance of it living on chain you know there can be an entire uh token model around the publication of the ipor as long as

there's you know it's essentially the the volume that's pegged to this on-chain public good [Music] yes are we finished okay all right thank you guys