IPOR refers to a set of protocols, smart contracts, and software that forms a set of Decentralized Applications (DApps) for Decentralized Finance (DeFi) focused on interest rate derivatives. The core IPOR infrastructure consists of three main parts: the IPOR Index (Index), Liquidity Pools with an Automated Market Maker (AMM), and Asset Management smart contracts. The first type of interest rate derivatives supported by the AMM are Interest Rate Swaps (Swap or IRS). The system also incorporates a Decentralized Autonomous Organization (DAO) and a Treasury in the spirit of decentralization.
The IPOR Index(or indices)
The IPOR Index is a benchmark reference interest rate sourced from other DeFi credit protocols and is published on-chain based on the heartbeat methodology. This component is the cornerstone of the IPOR protocol. In fact, there will be multiple IPOR Indices representing the risk-free interest rate for a corresponding asset, such as IPOR USDT, IPOR USDC, IPOR DAI, IPOR ETH, and so on. There will also be time-based rates such as IPOR USDC 1M, 3M, 6M, and so on for each asset as the yield curve develops.
Risk-free rates in credit markets have long been a cornerstone of financial markets. This is why the IPOR can be referred to as "The Heartbeat of DeFi." The value of a benchmark rate comes from its ability to synthesize the credit markets into a single metric and serves as a public good upon which derivatives, financial instruments, and deals can be structured. The IPOR's value will depend on both the quantity and quality of assets based on the indices. The IPOR DAO will govern the evolution of the indices as public goods, which provide market transparency and utility.
Liquidity Pools and AMMs
The Liquidity Pools and AMM work together to form a collective community counterpart for trades. Decentralized depositors can earn a yield on deposits by providing a trade counterpart for market participants. In exchange, the liquidity providers receive a proportional share of net contract payouts, contract fees, and a leveraged risk-free return from the money markets.
The AMM is a dynamic pricing mechanism that takes into account the current IPOR Index rate of a given asset and a number of market-driven data to price the instruments, and it sets the price proportional to the demand. The function of the AMM’s dynamic pricing is to manage the risk of the LP.
Derivative Contract and Swap
The derivative contracts are based on the IPOR rate and the AMM pricing to open a derivative contract between a market participant and the pool. The contract manages the agreement between the market participant and the LP and, once closed, allocates the parties the corresponding contract payoff.
The first IPOR derivative is an interest rate swap that allows a market participant to Pay the fixed rate and Receive the floating rate (Payer) or Receive the fixed rate and pay the floating rate (Receiver). Interest rate swaps are some of the most widely traded derivatives in traditional markets, accounting for around ⅔ of the global derivatives market value (~$10.5t), as they provide stability by allowing borrowers and lenders to control costs and forecast income.
The IPOR DAO is intended to be a fully on-chain governance mechanism that allows community token holders to make decisions about the protocol with respect to development, maintenance, updates, proceeds, and finances.