DEX Innovation - with Darren Camas CEO IPOR Labs

Wed May 31 2023

Summary

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.

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.

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.

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.

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%.

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.

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.