For a better understanding of the “lever-like” nature of IPOR’s native power token, pwIPOR, the meme above sets the precedent.
As the banking crisis in the US continues to unfold, it’s natural to question why the DeFi money market isn’t soaring as it should, leaving us with flourishing portfolios akin to the verdant meadows of Greenland. Additionally, one might ponder why our phone screens aren’t overflowing with missed calls and endearing voice messages from our immaculately beautiful model girlfriends. Could it be that there is a missing piece to the puzzle in the grand scheme of things? And what could that be?
In our previous article, we introduced IPOR as that missing piece to the puzzle by leaning into Silicon Valley Bank’s collapse, defaulting US Banks, and the need for term structures and yield curve in the credit markets.
Enter a TL:DR
IPOR is setting the base for reaching stability and predictability in DeFi credit markets. With many markets and algorithmically-set interest rates, it gets harder and harder to know what is the true cost of capital. Unlike in TradFi, where there is a reference rate like the SOFR (and previously the LIBOR), DeFi was missing such a benchmark. IPOR solves this with the IPOR index, which is like a barometer that tells you the state of the most liquid DeFi money markets at any given time. It’s actually akin to a “heartbeat”, hence the IPOR’s tagline: “The heartbeat of DeFi”.
Simply put, thanks to IPOR, credit market participants can ascertain benchmark rates with term structures and even hedge against their exposure with interest rate swaps — shorting or longing a mid-market lending/borrowing rate.
The innovative spirit of Darren and Dimitar at IPOR goes beyond limits. They embody the unspoken principles of the DeFi world and continuously strive to push the boundaries of what’s possible. We recently welcomed them for an illuminating Twitter Space, which you can access here. In line with this ethos, IPOR has dedicated itself to creating not just one, but two public goods.
> Publishing benchmark interest rates for DeFi lending markets on-chain where anyone can access and use them
> The open-source Power Tokens liquidity mining mechanism
What are Power Tokens?
To understand the innovative design behind power tokens, it is worth starting by asking what their economic model is optimizing for. Unlike other “tokenomics” models, power tokens optimize for token distribution rather than price.
Power tokens are built on top of a modular codebase that makes it easy to integrate with new and existing protocols. As a public good, anyone can use this DeFi primitive to ensure the fair distribution of a DAO’s governance tokens with those participants who are most aligned with the long-term success of the protocol. In addition, they can be viewed as a “living” mechanism, flexible through a democratized process, able to tweak the behaviour of protocol participants like contributors, liquidity providers, and DAO participants.
The idea is that at each point in time in the life cycle of a DeFi protocol, the token design or structure should be as adaptable as a chameleon; dynamic, changing, and evolving to meet the consensually agreed demands of the protocol — the goal is to achieve economic sustainability beyond the creation of moats that ensure protocol owned liquidity and wide distribution of liquidity mining rewards (and thus – a decentralized token holder base)
Power tokens emerged as a response to the observation that many DeFi protocols were stubbornly adhering to tokenomics designs that were not tailored to their specific needs, resulting in a lack of flexibility and adaptability.
This can be evidenced by new protocols attempting to plug-and-play the ve tokenomics model of the most liquid DEX in DeFi, Curve.
To Dimitar, co-founder of IPOR and the “Petyr Baelish” of DeFi tokenomics, it is possible to tell a protocol motivated by money from those seeking sustainability and innovation just by looking at their tokenomics.
By providing developers with the ability to design their own modular systems that meet the protocol’s short-term and long-term goals, power tokens effectively solve the issue of copy-and-paste tokenomics designs.
IPOR’s Liquidity mining program: Enter Power tokens
In the scheme of things, our examination focuses on liquidity mining with respect to IPOR’s pwIPOR (Power IPOR) token; a staked representation of the underlying IPOR token.
DeFi protocols, both novel and traditional, have taken to liquidity mining (LM) as a means of enticing users and securing liquidity, and IPOR is among their ranks. In IPOR, just like in the case of other LM programs, LPs provide liquidity in exchange for LP tokens (ipTokens). The liquidity is then used to underwrite interest rate swaps.
Nonetheless, liquidity mining comes with problems such as dilution of token supply, protocol capture by mercenary liquidity providers, inflation, and weakening token price due to selling pressure from farmers.
Liquidity mining initiatives function as sweet magnets, drawing in ants (farmers) to extract the potential that lies within. In the case of IPOR, the potential is quite lucrative, as liquidity providers can deposit their funds into stablecoin pools (USDC, DAI, USDT) with no impermanent loss, stake the LP tokens, and receive two types of fees as compensation for their noble act:
> Protocol fees in the form of the asset supplied (AKA “real yield”)
> pwIPOR (Power IPOR) tokens that can be unstaked to $IPOR.
The dreamlike scenario of mercenary farmers, also known as locusts as accurately described by Tapioca, comes crashing down due to the realities of power tokens. Specifically, the pwIPOR token serves as a position booster, enabling LPs to enhance their performance regardless of their deposit size. In addition, pwIPOR tokens are not transferable and can be unstaked to $IPOR in two ways: immediately with a 50% fee, or after a cooldown period of 14 days.
The steps to LMs on IPOR with Power Tokens:
> Deposit liquidity to get LP tokens (ipTokens)
> Stake ipTokens
> Get pwIPOR
> Delegate pwIPOR to your LP positions to boost APR
Using the yield calculator in the IPOR DApp, let’s examine the APR difference between 3 users with LP positions in the ipUSDC pool.
User A: Stakes $10k ipUSDC (No power tokens):
User B stakes $9k ipUSDC (500 pwIPOR):
User C stakes $8k ipUSDC (1000 pwIPOR):
Despite having the most substantial deposit and pwIPOR tokens, User A yields the lowest APR, while User C, with a lower deposit but the highest pwIPOR, is producing the most substantial APR of all three, surpassing both User B and A.
While the above illustration is practical, the reason behind it is explained in the paragraphs below.
Creating a balance: Enter Power token dynamics
IPOR takes a unique approach to emission control with the pwIPOR token. The liquidity mining APR is dependent on two factors: The value of the liquidity deposit and the quantity of the pwIPOR users delegate to their deposited liquidity thereby levelling the playing field. The goal here is to create a balance between smart farmers, mercenary farmers or whales, and retail participants.
The smart farmer deftly navigates the markets to discover the ideal boost ratio, perpetually balancing the proportion between pwIPOR and liquidity. With nimble expertise, this farmer enters at opportune moments, making calculated moves to maximize profits and minimize risk. Their shrewd management of resources allows them to reap the rewards of their labor, ensuring a bountiful harvest time and time again, while mercenary farmers are usurpers who are familiar with one game strategy: capture as much emissions from the protocol with their size.
It’s easy to see the reason behind this approach to liquidity mining; the tendency for mercenary farmers to be interested in the long-term vision of the protocol is almost non-existent as they’re 100% profit-driven. On the other hand, the smart farmer seeks to take advantage of window opportunities where they could benefit, keeping them interested in governance and other aspects of protocol development. In hindsight, a balance between both will largely benefit the growth of the IPOR ecosystem.
Exit the power token dynamic and the flow for mercenary farmers goes:
> Deposit sizable USDC or DAI, or USDT
> accumulate IpTokens and pwIPOR
> Stake IPtokens to receive pwIPOR
> Delegate pwIPOR to receive more pwIPOR
> Unstake pwIPOR for IPOR
> Exit LP position
With the power token dynamic, the game changes — whales can still accumulate pwIPOR, but smaller LPs are able to get a better APR with pwIPOR boosting and grab a larger share of the 10,800 tokens per day emission (to be adjusted through IPOR DAO governance in late April). Also, to unstake pwIPOR, there’s a 14-day cool-down period, and immediate redemption can only happen with a 50% fee.
The adjustable logarithmic curve is the source of this remarkable flexibility. Its adaptability empowers protocols to tweak parameters as per their specific needs or the level of decentralization they have achieved. For instance, protocols can make the slope of the logarithmic curve steeper over time as the number of mercenary farmers grows. This incentivizes users who delegate their governance tokens to their liquidity positions, ultimately strengthening their positions.
If you’re a whale or mercenary liquidity provider breaking a sweat reading this article right now, be assured that even whales have a shot at playing the game. So, don’t worry about exerting too much effort, because the power token system is not designed to disadvantage any particular group of LPs. Instead, it promotes the adoption of gamified techniques to achieve optimal effectiveness.
APR, TVL, and Token price are interconnected (The lever)
(Image source: wtamu.edu)
As outlined in the preceding analysis, the increase in IPOR’s value will trigger a surge in the Total Value Locked (TVL) metric since farmers will favor depositing their funds to earn more pwIPOR rather than acquiring them at exorbitant rates from secondary markets. Conversely, a decline in IPOR’s price would entice users to take advantage of price drops and purchase the asset at reduced costs, subsequently staking and delegating it to augment their positions and acquire more pwIPOR.
Darren succinctly explains this dynamic in the few paragraphs below:
“pwIPOR rewards over the different pools are evenly distributed. This creates a dynamic where in case one pool has low TVL, it increases the attractiveness of liquidity mining in that particular pool and either LPs in other pools shift stables over, or new depositors bring the pool into balance. This is why you’ve seen a fairly steady distribution between USDC, USDT, and DAI. This balance could also be adjusted by the DAO, changing the rewards per pool. This would be a rewards contract change.
Price, TVL, and APR are all interconnected levers;
Rewards between pools are interconnected levers.
pwIPOR boosting and APR are interconnected levers; Push one down and another goes up and creates a market dynamic that can be advantageous to some players.
The only way to lose is to not play”.
- This article was written by Excel “Ollie” Oliva (with substantial contribution from the IPOR core team) — Ollie is a jolly good fellow exploring the wormhole of crypto and web3. He enjoys researching protocols and breaking down complex ideas into digestible chunks. Give the lad a follow on twitter or LinkedIn will ya?