Using the IPOR Protocol
Providing Liquidity
Trading
Providing Liquidity FAQ
1. Why provide liquidity in the IPOR Protocol?
Liquidity providers (LP) are Protocol service providers. An LP deposits an asset to the pool (currently USDC/USDT/DAI/stETH), and traders can open Interest Rate Swaps (IRS) against the pool (stETH swaps are in the works). For that service, LPs are rewarded with fees, Sum of all Payoffs (SOAP), and through yield generated by asset management smart contracts earning yield from external money markets. Starting from January 25, 2023, LPs will also be rewarded with pwIPOR tokens that are exchangeable for IPOR tokens. To learn more about the three types of rewards, look here and here. You can also refer to the liquidity provisioning section in the Docs.
2. What is SOAP?
SOAP, or Sum of All Payoffs, is a snapshot of the unrealized P&L of all open positions against the pool. It is the amount that the Liquidity Pool would be liable to payout should all the swaps be closed immediately. You can learn more about SOAP here and here.
3. What are the risks of providing liquidity?
As with any liquidity provision, supplying stables to IPOR is associated with certain degrees of risk. Outside of standard third-party risks, there are also economic risks to consider. Spread and utilization thresholds are the measures implemented by the AMM to control the risk of LPs. Refer to the Docs section dedicated to spread calculation or to this paper on pricing AMM risk for more information. You can also read this blog post.
4. How to provide liquidity?
The process of providing liquidity to the IPOR Protocol is similar to other DeFi protocols. The prerequisites are a Web3 wallet (MetaMask or similar) credited with one of the IPOR Protocol-supported assets and some ETH for gas fees payment. Watch this video for step-by-step guidance.
5. Are there any fees for providing liquidity?
There are no fees when providing liquidity. A user will deposit a token and receive ipTokens tokens in return. These are interest-bearing tokens (AKA liquidity tokens) that represent liquidity deposited in the IPOR Protocol.
Liquidity tokens can be redeemed for the underlying collateral at any point, given that the utilization allows that to happen. To prevent an early exit, a fee of 0.5% is charged on withdrawal which is then redistributed to the remaining holders of ipTokens within the same pool.
An ETH-denominated fee (gas fee) is also charged for any operation performed on the Ethereum network, including any mainnet interactions with the IPOR Protocol. You can refer to the Etherscan Gas Tracker for the latest information about Ethereum gas fees.
Trading FAQ
1. Why trade on the IPOR Protocol?
The IPOR Protocol delivers a vanilla interest rate swap. Traders on the Protocol can open and receive fixed or floating swap contracts with 28, 60, and 90-day maturity on available markets. All swaps reference the IPOR Index, calculated on-chain by on-chain data supplied by the largest DeFi money markets, currently AAVE and Compound.
IPOR Protocol traders may have different motivations, including hedging, arbitrage, or speculation. Refer to this Docs section for more information about each.
2. What are the risks associated with trading?
Outside of standard 3rd party risks related to potential exploits, for the duration of their open swap contracts, IPOR Protocol traders are exposed to uncertainty stemming from the volatility of the IPOR indices. Trader losses are capped at 100% of their provided collateral.
3. How to trade on the IPOR Protocol?
To trade on the IPOR Protocol, it’s advisable to have at least a basic understanding of interest rate swaps. To learn how IPOR-based interest rate swaps work, consider this Docs section. For a detailed overview of the IPOR DApp interface and how to open an interest rate swap, watch this walkthrough.
4. What fees are associated with trading swaps on the IPOR Protocol?
The IPOR Automated Market Maker charges several fees, including an opening fee (currently 1% of collateral), a base flat fee (currently $10), and an income fee (currently 10% of trader and liquidity provider profits). A refundable liquidation deposit (currently $25) is also charged upon opening an interest rate swap on the Protocol. For more information about swap fees, consider this Docs section.
5. How are the trading fees used by the IPOR Protocol?
The opening fee is paid to the Liquidity Pool as compensation for underwriting the derivative contract risk. The base flat fee is used to subsidize the oracle publications on-chain. The income fee is deposited in the IPOR DAO Treasury. For more information, check the fee section in the Docs.
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