IPOR, the Inter Protocol Over-block Rate, is a decentralized protocol that enables the creation and trade of interest rate derivatives such as interest rate swaps

The IPOR Protocol consists of three main parts:

1. The IPOR Index benchmark interest rates for DeFi

2. AMM for interest rate swaps - i.e. IPOR Interest Rate Derivatives (IRDs)

3. Asset management smart contracts

The IPOR Index benchmark interest rates for DeFi

The IPOR Indices aim to foster the maturation of DeFi credit markets and become the benchmark reference rates for a wide range of derivative products, acting as fully transparent DeFi equivalents of the Secured Overnight Financing Rate (SOFR) and the London Interbank Offered Rate (LIBOR) previously.

In TradFi, when financial institutions come up with an interest rate, they use benchmarks like LIBOR to reflect the fair market cost of borrowing and lending capital (also known as the “risk-free” rate).

There are currently three IPOR indices: USDC, USDT & DAI

The indices are calculated in real-time on-chain and can be adjusted by DAO governance. Since external protocols’ interest rates can be volatile, the IPOR index can serve as an adequate proxy for the risk-free rate, as the collateral effectively mitigates default risk.

The index is calculated as the market cost of money defined by a weighted average from money markets like AAVE and Compound. The data is weighted by liquidity with a formula

AMM for interest rate swaps - i.e. IPOR Interest Rate Derivatives (IRDs)

Interest rate swaps allow users to exchange the cash flows of a fixed interest rate for a floating interest rate and vice versa. Two bets can be taken with an interest rate swap:

Long interest rate — Betting on an increasing interest rate by paying a fixed rate and receiving a floating rate (Fixed to Floating)

Short interest rate — Bet on a decreasing interest rate by paying a floating rate and receiving a fixed rate (Floating to Fixed)

The positions are settled by the losing party to the winner. In IPOR, the counterparty is the liquidity pool. Participants pay the margin, the contract fee, and applicable network fees in exchange for the service.

The AMM price is based on the IPOR index. It offers a 28-day swap that uses a peer-to-pool model between the trader and the liquidity pool (the counterparty) for both pay-fixed and received-fixed contracts. Hence, there are only two parties involved, traders and liquidity providers (LPs).

IPOR allows traders up to 1000x leverage. The high leverage does not hurt because of the low volatility market. And, PnL accrues over time, with low risks of sudden liquidations due to market manipulations.

Asset management smart contracts

Protocol deploys low risk yield farming strategies on idle liquidity in the pool to generate extra yield for LPs

IPOR Marketplace

Traders:

• Open interest rate swap positions (28-day maturity)

• Hedge interest rate exposure - such as an AAVE or Compound loans

• Speculate by Fixing interest rate or take directional bets

• Arbitrage between interest rates - take advantage of market inefficiencies between stablecoin pairs and markets.

Liquidity Providers

• Deposit single-sided liquidity (no impermanent loss) in USDC, USDT, or DAI to receive a competitive APR.

• LPs act as the counterparty to all traders. Their revenue consists of:

• Fees paid by traders to open a trade — 1% of the collateral

• PnL from traders — traders’ gain is LPs’ loss

• The leveraged yield on assets — idle assets in the LP pools and collateral deposited by traders is lent out on money markets

There is no impairment loss for LPs because the liquidity pool is for one stablecoin only. LPs’ revenue mainly comes from fees from trading. However, the potential risk to LPs is AMM’s ability to automatically correct the price spreads. As IPOR’s request-for-quote AMM is different from general AMMs, it actively sets spreads (difference between floating and fixed rate) based on external conditions like volatility, trend, maturity, etc.

Momentum Thesis

• Interest rate derivatives (IRDs) is a $450 trillion market in TradFi.

• IPOR can be a attractive way for both individuals and institutions to hedge interest rate risks

• It has the potential to be an infrastructure for other complicated protocols and derivatives

• As IPOR keeps building, longer maturity swaps can be launched, a yield curve may be formed as a strong reference on the interest rate.

• IPOR’s interface is clean and simple with a hedging calculator for users to calculate how much swap they need and its built-in dashboard offers all the data the traders need

Tokenomics

The IPOR token is a digital asset that will be used to enable users of the IPOR protocol to take ownership of the protocol as it becomes a fully decentralized autonomous organization (DAO). A total of 100 million IPOR tokens will be minted at the beginning, and no additional tokens will be minted. The IPOR token will be distributed to users through a process called liquidity mining, which rewards users with Power Tokens for providing liquidity to certain pools. Power Tokens are a staked representation of the IPOR token and serve as the governance token for the protocol. They can be used to earn additional rewards from protocol revenue and to vote on proposals within the DAO. Users can delegate their Power Tokens to representatives who can vote on their behalf. Redeeming Power Tokens for the underlying IPOR tokens is only possible when the Power Tokens are not being used in any modules. The process of liquidity mining involves staking LP tokens, staking the native token to receive Power Tokens, and delegating Power Tokens to "power up" liquidity mining.

Competitors

The following protocols are involved in the interest rate derivatives space, however not all are direct competitors of IPOR.

• Pendle

• Timeswap

• Element Finance

• Alchemix Finance

• Flashstake

• Apwine

• 88mph

Conclusion

In conclusion, IPOR is a critical piece of infrastructure to the decentralized finance sector. It is poised to revolutionize the way that interest rate derivatives are traded, providing a decentralized alternative to traditional financial systems. By offering a benchmark index and a market maker for interest rate swaps, IPOR enables users to hedge interest rate risks and speculate on interest rate movements. Its high leverage and competitive returns make it attractive to traders and liquidity providers alike, and its decentralized governance model allows for transparency and fairness in the system. Overall, IPOR is an innovative and important development in the world of decentralized finance, and it has the potential to have a significant impact on the financial industry as a whole.

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The first major announcement of the month was the U.S unemployment rate showing an increase from 3.5% to 3.7% — this result was better than market expectations leading to a brief rally in markets. Soon after, inflation figures in Europe came in at 9.1% which the ECB responded to through a 0.75% interest rate hike, its biggest ever single hike since the ECB began setting monetary policy in 1999.

Another narrative which drove markets in the first half of September was the substantial increase in European energy prices due to increased geopolitical tensions straining supply chains and driving up the price of crude oil & gas. This trend reversed in the second half of September as fears of a global recession heightened and the strengthening of the U.S Dollar.

Another reason behind the market decline in mid-September was the higher than expected 8.3% U.S. inflation rate for August casting doubt on previous beliefs that inflation has peaked. Stocks and crypto markets fell in response as panic led to sell-offs dragging prices down triggering massive liquidations.

Global markets took another dive after the U.S Fed raised rates by 0.75% for a third consecutive time and projected hiking rates to 4.6% by end of 2023. This matters because higher interest rates increase cost of debt, remove liquidity from markets and lower spending levels, which lead to the contraction of the economy resulting in higher unemployment rates, companies’ bankruptcies, and decline of markets.

One notable development this month was that cryptocurrencies were the best performing asset (behind only the U.S dollar) while stocks, bonds, commodities & gold fell considerably more than the overall crypto market. S&P 500 fell by 10.85%, Nasdaq fell by 11.97% while Total Crypto Market ended the month with a 5.77% decline and Bitcoin was down 4.05% in September.

3GI Updates

We did a deep dive into the blockchain gaming sector and studied the different layers and aspects of the industry. There are over a thousand blockchain-based games, some already released while others are still in development. The blockchain gaming sector has attracted billions of dollars in investments as it has proven to be the sector onboarding the most users into Web3.

Given the broad competitive landscape with many different players involved, and prematurity of Web3 games, we decided to focus on the gaming infrastructure layer before investing in any specific blockchain games. Gaming infrastructure protocols include blockchains, game development tools, game engines, etc.

Furthermore, we also opened a position in a decentralized identity protocol, doubled down on two blockchain infrastructure protocols which we believe have a lot of room to grow and resumed our Dollar Cost Averaging (DCA) into some of our high conviction bets.

3GI Top Gainer of The Month

Our biggest gainer this month was XRP, rising appx. 45.73% in price from the period starting September 1st, in part due to positive developments relating to the legal disputes between the Securities & Exchange Commission (SEC) and Ripple. Ripple, powered by XRP, offers a cross-border payments product that allows enterprise customers to move money across borders and currencies with instant settlement at an extremely low cost. The SEC filed a lawsuit back in 2020 accusing Ripple of selling XRP, which they consider a security and not a cryptocurrency. Recent updates have pointed out that the fight against SEC has been going exceedingly well, and the matter should be closed by early 2023. Not only is this a big win for Ripple and its growth potential, but also can have a lasting impact on crypto.

The Merge

The Merge successfully took place on September 15th.

Context: Today, for an internet business to stay online continuously, their servers need to be maintained and ensured that they’re consistently working. In the Web3 world, because it is decentralized, there is no one server that one entity needs to maintain to ensure everything is running smoothly. The network needs to build an incentive mechanism to ensure 100% uptime of all the separate servers (computer owners scattered all over the world) operating the blockchain. This is where Proof of Stake (PoS) comes in: PoS requires computer owners (called validators) to put collateral to participate in the network and earn a return. If the computer owner turns off their device or unplugs it from the internet, they will be penalized by slashing part of the collateral they staked.

The Merge saw Ethereum switch from relying on miners, which operate expensive mining hardware and expend vast amounts of electricity to verify transactions and secure the network, to validators that will do the same through staking ETH in smart contracts. The Merge upgrade will reduce the network’s energy consumption by over 99% as illustrated below (0.2% of global electricity consumption).

Noteworthy Crypto Related News

• Russia legalized cryptocurrency in international trade

• Starbucks will leverage blockchain technology to conduct its loyalty rewards program

• Helium partnered up with T-Mobile to launch a new 5G network that will run on Helium’s decentralized network

• Nasdaq to launch an institutional crypto custody service

• Financial behemoths Charles Schwab, Citadel, Sequoia and Fidelity will launch a crypto exchange called EDXM

• SWIFT has partnered with crypto protocol Chainlink to work on a project which would allow traditional finance firms the ability to transact across blockchain networks

The crypto market rallied at the end of July and the beginning of August. The movement was predominantly driven by global macroeconomic news when the July inflation print came in lower than that of June. Markets interpreted that as having seen peak inflation. The second factor that drove markets up during that period was excitement about the Ethereum Merge, a major upgrade impacting the second largest blockchain. Click here if you would like to learn more about the Merge.

We saw the positive sentiment reverse in the third week of August as fear of a global recessions were heightened after the U.S Federal Reserve Chairman, Jerome Powell, gave a hawkish speech at Jackson Hole warning that inflation is still a concern and the Fed will continue hiking rates in its fight to bring down inflation despite consequences that will hurt the job markets and lead to “some pain for households and businesses”.

Risk assets such as crypto were impacted negatively and are expected to continue moving in tandem with the overall markets until a crypto-related force renews market sentiment.

3GI Key Highlights

3GI onboarded two new investors in August while two other existing investors topped up their initial investments. We currently have a total of 40 investors.

We opened a total of five new positions this month, of which the majority were invested in the Decentralized Finance (De-Fi) sector. We currently hold over 50 different assets in our portfolio.

All 3GI investments prior to August were based on a long-discretionary strategy but this month saw the introduction of two new strategies as part of our multi-strategy efforts. The first was a narrative based investment while the second is an event-driven investment. Long-discretionary strategy will continue to be our main focus and dominant portfolio strategy.

We are currently satisfied with our portfolio allocation in De-Fi and Infrastructure projects and will be turning our attention next month towards blockchain gaming.

Performance Vs Overall Crypto Market

The chart above illustrates 3GI fund performance versus the overall crypto market. As we can see, the total crypto market is down approximately -52.3% since the end of March 2022 ( 3GI launch date) while 3GI is down only -32.98%. Bitcoin and Ethereum are down -49.87% and -50.15% respectively.

Price of 3GI token is up 5.26% over the past 30 days and 6.21% over the past 90 days.

Yield Farming

Yield farming is analogous to earning yield on your shares in the form of dividends

From the approximately 50 assets we currently hold, 15 assets have been deployed across 24 yield farming strategies such as staking to earn a share of the relevant protocol fees or theta vaults. We have earned approximately 10.4% annualized yield on farmed assets.

Crypto Market Outlook

We believe that there might be further downside in crypto prices as the market narrative is still controlled by inflation, rate hikes and the increased chances of the economy slipping into a recession (if we aren’t already in one) and while the job market is still strong, it is starting to show signs of cracking. Nevertheless, we have measures in place, that not only hedge the risk, but rather take advantage should such a scenario play out.

In light of the recent macroeconomic and crypto related events, we thought we would provide you with an update on the current state of the market, and why we believe we are facing an unparalleled opportunity going forward. 

Due to the Fed raising interest rates, Russian war on Ukraine and the supply chain disruption in China, global financial markets and crypto markets have been trending downwards due to investors losing confidence in risky assets amid fear of a global recession. 

The crypto market has witnessed similar crashes in the past such as those of 2014 and 2017. At every crash, people criticized and feared crypto, which resulted in the system cleaning itself up from all the speculators and rent seekers who came for the quick buck without a real belief in the crypto space. To put things in perspective, the record high Bitcoin had reached in 2017 was $20,000 after which it dropped significantly to $3,900 before going back up to $69,000 in November 2021. Despite the recent fears and decline, Bitcoin is currently priced at around $30,000, still 50% up from its record high of 2017, which shows a clear long term upward trend regardless of short term volatility, and proving the technology is here to stay. In short, we are confident that short term market volatility is mere noise, and the value that Web 3.0 brings will not be affected in the long term. 

With our investment strategy, we are not affected by short term fluctuations and volatility as we invest with a long term time horizon in mind. Additionally, the current timing is favorable for investing in the crypto space given the overall decline in prices, and the fund has a significant portion in dry powder cash to capture the great opportunities lying ahead. 

We are very confident and excited about the opportunities that lie ahead, and are looking forward to sharing this journey with you. If you have any questions or require any further clarifications regarding the above or anything related to crypto, please do not hesitate to grab the phone and ring any of the partners. 

Sincerely Yours, 

The 3GI Partners** **

***Note on Terra Luna: ***

Many of you have heard of the collapse of Terra Luna by now. Luna is a project that was attempting to build a non-collateralized algorithmic currency, which collapsed last week and brought dramatic losses to many investors. We would like to assure you that we were aware of the large risks associated with algorithmic stablecoins and this project in particular, hence we only had a small exposure to the Luna token.