Interest Rate Swaps (IRS) is derivative that has a $450T market size in TradFi.@ipor_io saw this market opportunity and brings IRS on-chain through its 3 innovative products.How can you participate in this on-chain IRS market? Breaking it down based on use cases 👇🧵
Its good to have some understanding of what IRS is and how 's brings innovation through its 3 products.- IPOR Index- IPOR AMM- Asset ManagementWhich I have talked about in my previous thread here:
Unroll available on Thread Reader
https://twitter.com/arndxt_xo/status/1617552879979462656
IPOR rates, analogous to LIBOR, are freely available on IPOR.io reflecting the benchmark interest rates in DeFi. Being open source allow others to integrate into their smart contracts..Thus, a DeFi user can use IPOR to:1️⃣ Hedge2️⃣ Arbitrage3️⃣ Speculate
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1️⃣ Hedge
For hedging, users would need to:- have loans over multiple markets to follow IPOR rates or- take loans with an IPOR i/rThis is because IPOR aggregates rates from various credit markets and for a perfect hedge with IRS, both i/r needs to perfectly correlate.
Case Study 1: Borrower takes a floating rate loan
You would take a loan when floating rate is low. However, you want that rate to be fixed if i/r ⬆️,Else, you run the risk of paying more interest on your loan. So, you want to hedge that with long IPOR i/r.
Long IPOR i/r would mean you "pay fixed to receive floating".Your long position would profit (from receive floating) and this will offset the risk when i/r ⬆️You can use profits to payoff the differential i/r on your loan from the credit market✅ HEDGED against i/r ⬆️
Case Study 2: Lender makes a floating rate deposit
You would deposit when floating rate is high. However, you want that rate to be fixed if i/r ⬇️Else, you run the risk of receiving less interest on your deposit. So, you want to hedge that with short IPOR i/r.
Short IPOR i/r would mean you "pay floating to receive fixed".Your short position would profit (from receive fixed) and this will offset the risk when i/r ⬇️You can use profits to payoff the differential i/r on your deposit on the credit market✅ HEDGED against i/r ⬇️
2️⃣ Arbitrage
Stablecoin's interest rates varies. Different Stablecoins of the same value may have differing interest rates. Hence, offering arbitrage opportunity for the rates.i.e. USDC with an IPOR rate of 1%, DAI with an IPOR rate of 5%
Case study: "Buy low sell high"
Arbitrage would require the user to borrow cheap (buy low) and lend at a higher i/r (sell high)You would borrow the USDC at 1%, swap it out for DAI and then lend DAI at 5%.✅ ARBITRAGED differential i/r
3️⃣ Speculate
Speculators can take leverage positions by longing to shorting interest rates. This is possible with IPOR's interest rate derivatives.Analogous to a leveraged loan, you simply put down a collateral deposit that will be used to settle your derivative at maturity.
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