All Things Digital Assets
DEX Innovation - with Darren Camas CEO IPOR Labs
Wed May 31 2023
- The podcast is about innovation in the decentralized crypto space.
- The guest is Darren Camus, CEO of iPore, a decentralized derivative exchange.
- Decentralized exchanges (DEXs) are peer-to-peer marketplaces for trading digital assets facilitated through smart contracts and are non-custodial.
- DEXs have gained popularity due to more tokens being listed quickly, anonymity and privacy, and less security risks for traders.
- Uniswap dominates the DEX market with other DEXs like Pancapes, Walk, Dodo or Curve Finance also available.
- The content of the podcast is not investment advice.
- Decentralized exchanges offer anonymity and privacy without requiring KYC.
- Non-custodial feature reduces security risks for traders.
- There are two main types of decentralized exchanges: automated market makers and order book decentralized exchanges.
- Order book exchanges are similar to centralized exchanges, but not commonly used due to high costs on blockchain.
- Automated market makers use liquidity pools and a pricing equation to determine exchange rates between assets, making it cheap enough to run on chain.
- Anyone can be a market maker in automated market makers, making it more accessible than traditional finance market making.
- Automated market makers became popular due to the high gas fees associated with replicating an order book on chain.
- Text aggregators like One Inch do smart order routing by tapping into different order books to find the best prices.
Price Recovery and Capital Efficiency
- Smart order routing is being used to tap into different order books and find the best execution for trades.
- There are two routes of price recovery: constant function market maker mechanism and automated market makers relying on external market prices provided by oracles or other exchanges.
- The external price feed is critical for fixing and settling instruments, but it also poses an exogenous risk.
- Capital efficiency is a trade-off between constant function market makers and order book-based mechanisms. Triangular trade arbitrage often happens between base assets, centralized exchanges, perp's taxes, and spot taxes with AMM prices.
- Liquidity providers need to consider impermanent loss or divergent loss when using DEXs. Impermanent loss refers to the concave payoff between two assets.
Addressing Impermanent Loss
- Impermanent loss is a complex concept in which there is a concave payoff between two assets.
- Different ways of addressing impermanent loss include redesigning the curve of the AMM, using derivatives of a Uniswap V2 position, or creating an inverse payoff.
- There are various ways to hedge or reduce impermanent loss, such as using a balance or 80/20 pool.
- The user experience (UX) of decentralized finance (DeFi) has improved significantly over time, with tools like DEX tools and Into the Block's impermanent loss calculator being developed.
- Other challenges in DeFi include MEV and front running, and regulation may be a factor that keeps people from using decentralized exchanges.
Advantages of DEXs
- Many crypto speculators have not interacted with a blockchain and their digital assets are just an internal database entry on centralized exchanges like Binance or Coinbase.
- The speaker prefers using DEXs for trading because of the ease of use and lack of login requirements, despite potential high gas prices.
- DEXs are non-custodial exchanges where the smart contract is the custodian, changing the focus of trust from centralized exchanges with licensed regulated custodians.
- Specialized DEXs like Curve for stablecoins and dydx for margin trading offer better capital efficiency and specialization should continue in the future.
- iPOR is a specialized DEX that offers interest rates by creating a weighted benchmark rate from reading Ave and Compound interest rate contracts through a protocol to protocol call.
iPOR and Interest Rates
- Publishing to chain is a native oracle construct that is risk-free.
- I-POR is a benchmark interest rate and derivatives decks allow trading of the direction of I-POR.
- Lack of risk management around interest rate exposure and duration risk were related to collapses in the US banking system.
- Interest rate swaps are at the heart of I-POR, with one passive liquidity provider and an AMM pricing the risk for traders to take rates.
- Liquidity providers can earn yields around 5% per annum on UCC, die, and t-stables while sitting idle in pools that go out to money markets to yield.
- Fees earned from people trading against the pool contribute to LPs' earnings.
- The real yield includes stablecoin and unstablecoin yield, with liquidity mining yielding anywhere between 14% and 18%.
iPOR Labs and Future Plans
- I-POR Labs builds the protocol for liquidity mining and tokenomics.
- The goal is to create a self-sustaining ecosystem around the token level.
- The I-POR index provides a risk-free rate that serves as a historical record of the risk-free rate in the past and future, which can be used to structure deals and derivatives.
- The power token was launched in January and recently had two governance decisions made around it: changing the shape of the boosting curve and reducing emissions by 30% to stabilize liquidity mining.
- V2 will focus on building interest rate swaps into larger positions, such as fixed-rate borrows from deep liquidity pools in DeFi ecosystems at the best available rates on the market.
- They are considering deploying on both Ethereum and Arbitrum test nets after V2 construction goes through audit.
- Trading volume may go to Arbitrum while structured products may stay on Ethereum L1 due to underwriting liquid credit markets.
Future Developments and Regulatory Challenges
- Liquid ETH staking is one of the next big things in the DeFi space.
- iPort Labs has a study of e-staking rates and an entire framework called the iPort test framework for quant modeling and back testing against the actual blockchain system built with AMM.
- The iPOR derivatives framework is modular, and the next step is to study behavior, construct AMM, backtest it against data, and launch it in the wild.
- There will be a convergence between regulated and non-regulated DeFi platforms in the future, but it may take time due to aggressive regulatory actions in the US.
- The EU has a more open logical framework that needs to be relooked at for regulating DeFi platforms.
- Technological instruction can also be challenging from a regulatory perspective because it doesn't match traditional banking definitions.
- I-POR is looking to bring stability to the fixed income market in DeFi.
- Aave Arc, a permissioned pool of Aave, did not have much uptake.
- Waiting for regulatory clarity as an entrepreneur may hinder progress.
- Interstrate Derivatives are an institutional tool that requires protocol design and back-and-forth communication.
- Large institutions will likely enter DeFi through fixed income.
- It is difficult to give a timeline for this development.
- Blockchain technology offers alternative ways of doing KYC and chain analysis can be more precise than traditional threat-fire systems in identifying illicit behavior.
- Regulators need to be open to this new technology and understand its power.
- The interviewee is a veteran expert in DEXs and crypto exchanges and thinks I-POR has promising plans for V2.