IIP-12: Expansion of the IPOR Indices and the IPOR asset management

Summary

Indices

The IPOR protocol should add the following markets to the IPOR USDT Index, the IPOR USDC Index and the IPOR DAI Index:

• AAVE v3, Ethereum Mainnet
• Compound v3 USDC, Ethereum Mainnet

The phase-in period should be 2 weeks.

Asset Management

These markets should be added also to an asset management whitelist for the USDT, USDC and DAI pools.

The economics workgroup is empowered to adjust the active asset management strategy when it deems it appropriate. It is only allowed to use protocols that are on the whitelist. Any addition to the whitelist requires a snapshot vote.

The whitelist contains:

• AAVE v2 and v3, Ethereum Mainnet
• Compound v2 and v3 USDC, Ethereum Mainnet
• MakerDAO DAI Savings Rate, Ethereum Mainnet

Theme/Problem/Issue

Indices

As stated in the IPOR documentation, the indices must be able to adapt to market conditions and account for changes.

https://docs.ipor.io/ipor-index/what-is-the-ipor-index

Liquidity fragmentation is fundamentally a problem in DeFi. In particular, it can lead to increased interest rate volatility and thus also to greater fluctuations in the IPOR indices. Only AAVE v2 and Compound v2 are currently represented in these. However, AAVE v3 and Compound v3 now account for a significant share of the entire lending market on Ethereum Mainnet.

Asset Management

As stated in the IPOR documentation, the asset management ensures that available funds are put to work at the lowest possible risk yet earning interest.

https://docs.ipor.io/automated-market-maker/asset-management

Interest rates on AAVE v2 and Compound v2 have historically sometimes been lower than AAVE v3 or Compound v3. The IPOR asset management was not able to benefit from this yet because it was not allowed to deposit assets into these protocols, although they are now considered to be as secure as AAVE v2 and Compound v2.

Since the active strategy of asset management in it's current state cannot include a large number of protocols at the same time, a whitelist of protocols is required.

Solution

Add AAVE v3 and Compound v3 USDC on Ethereum Mainnet to the IPOR indices and the asset management whitelist.

As stated in the IPOR documentation,

"when adding a new market to the index, the new rate mustn't cause a sudden jump in the rate. To smooth the process of onboarding new platforms, IPOR oracle will be increasing their weight block over block in a span of the DAO-appointed phase-in period linearly from 0% to 100% of its standard weight as determined by the liquidity in a given protocol."

https://docs.ipor.io/interest-rate-derivatives/index-calculation#listing

KPIs

To help measure the success of this IIP we will monitor the following:

• Volatility of the IPOR Indices
• Yield generated from asset management

Timeline/Steps

1. Present the proposal to the community: The proposal will be presented to the IPOR community for feedback and discussion for at least 1 week
2. Vote: After this period a Snapshot vote will be held as soon as the snapshot space has been set up
3. Implementation: as soon as the roadmap of the contracted developers allows it
4. Monitor and evaluate the changes: After the changes have been implemented, it will be important to monitor their impact on IPOR. This will involve tracking the KPIs mentioned earlier and making any necessary adjustments based on the results.

Discussion

Why not include Morpho as well?

• Morpho Compound v2 Optimizer only has ~$32M TVL and there are moves to deprecate Compound v2: https://www.comp.xyz/t/gauntlet-compound-v2-deprecation-strategy/4596
• Morpho AAVE v2 Optimizer has only ~$26M in P2P matched TVL and it is expected that the significance of AAVE v2 and Morpho AAVE v2 Optimizer will tend to decrease in the future.
• Morpho AAVE v3 Optimizer is irrelevant for stablecoins and is only used for wstETH/WETH looping.

Why not include Spark Protocol as well?

Spark currently has $200M DAI TVL making it a significant market. It should therefore be a candidate for inclusion in the IPOR DAI Index. However, interest rates are not determined by supply and demand, but depend on the DAI Savings Rate (DSR). This is set by the MakerDAO governance and can therefore increase or decrease significantly. How the IPOR DAI Index should react to such changes in the DSR requires further discussion. Frontrunning must be prevented. An integration into asset management is not required, since the DSR has already been directly integrated.

Pros/Cons

Indices

Pros

• reflection of a larger share of the total lending market in the indices -> lower spikes in the IPOR indices -> better spread pricing -> more swaps -> higher pool utilization -> higher protocol revenue
• higher cost of economic attacks

Cons

• maybe slightly higher volatility of the indices

Asset Management

Pros

• more flexibility
• maybe higher APR for liquidity providers
• more options for risk management

Cons

• slightly increased risk due to larger number of smart contracts involved

Resources

Technical

• Development tools
• Testing and deployment infrastructure

Financial

• Development budget

Skills/Budget

Skills:

• Solidity and smart contract development skills
• Familiarity with DeFi protocols and concepts such as lending and borrowing and IRS
• Experience with Ethereum and IPOR
• Marketing and communication skills to promote the new updates for retaining existing users and attracting new ones

Budget:

• Development costs for implementing the updates
• Security auditing costs (if required)
• Marketing and promotion costs
• Ongoing maintenance and updates
• As we will likely be utilizing IPOR Labs to implement this proposal, we would require their assessment on the work to be carried out relating to time, budget and capabilities.

Cost Estimation

The IPOR Labs team has already signaled that they will bear the cost of implementing this proposal.

Commitment

Transparency: The team will have a commitment to being transparent about the development and implementation of the proposal. This will include providing regular updates on the progress of the changes and sharing any relevant data or information with the community.

Community engagement: The team will actively engage with the IPOR community throughout the development and implementation of the proposal. This will include soliciting feedback from the community and incorporating their suggestions and concerns into the proposal.

Responsiveness: The team will be responsive to any questions or concerns raised by the IPOR community about the proposal. This will include providing timely and accurate responses to any inquiries from the community.

Accountability: The team will be accountable for the impact of the proposal on IPOR and its community. This will include tracking the KPIs mentioned earlier and making any necessary adjustments based on the results.