Summary

The IPOR protocol shall introduce an index based on the Secured Overnight Financing Rate (SOFR) and a corresponding derivative.

The swaps will be denominated in $USDM (Mountain Protocol USD) or $wUSDM and underwritten by a $wUSDM pool that will be created on Arbitrum.

Motivation

Who makes this proposal? Why?

This proposal is made by IPOR Labs.

Having a SOFR index onchain is a key step for the DeFi industry growth by further connecting TradFi to DeFi via Real World Assets (RWA), with a shared-view of replicating and enhancing TradFi markets into the blockchain. USDM is the first permissionless and regulated yield-bearing stablecoin, backed by short-maturity Treasury bills. The USDM rewards rate has recently hovered close to the SOFR rate and can be expected to continue as such as the company (Mountain Protocol) is prioritizing growth. In that sense, USDM is a good on-chain proxy for developing instruments that follow the SOFR and therefore a suitable collateral for SOFR swaps.

Market Size

What size and structure does the SOFR market have? How has the size of the market developed over time?

Please see https://www.newyorkfed.org/markets/reference-rates/sofr

Interest Rates

What are the current and historical rates of this market?

(Interest) Rate Model

Which model determines the rates? Can the interest rate model be changed?

https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#tgcr_bgcr_sofr_calculation_methodology

Are rates governed or market driven? If governed: What does the governance structure look like?

Market driven.

Are there currently additional (token) incentives for market participants or are they planned? If yes, how do these affect rates?

No.

Trading

What swap volume is expected in the short, medium and long term? Which market participants (hedgers, speculators, arbitrageurs, etc.) contribute to what proportion of the swap volume? Is the natural demand more on the pay fixed side, the receive fixed side, or balanced?

We can naturally expect that the gap between the IPOR (USDC/USDT/DAI) indices and SOFR will be used by traders to take leveraged long/short positions on the index.

Due to the newness of this instrument and the entire RWA market, it is very difficult to forecast trading volume. It largely depends on external factors such as the growth of the entire RWA sector.

This proposal is initially only intended to explore the basic interest in a SOFR derivative. The exact design of the swaps requires further research and will be the subject of a separate proposal.

Integrations and products

Are there other protocols that could integrate this derivative? Can additional products be built with this derivative?

SOFR swaps are a key building block of TradFi. It is therefore quite likely that it will also be used as a building block for RWA products in DeFi.

Pool

How much TVL is expected? How big is the market cap of the asset (USDM)?

Given the current IPOR pool’s TVLs, we can expect a $1M-2M TVL in the USDM pool, although it is difficult to come up with a reliable estimate. USDM has a current market cap of ~$150M.

What return will liquidity providers expect? What is the market risk-adjusted return for this asset? Are there incentives for liquidity providers?

First of all, it should be noted that USDM is a yield bearing token. As a reference, this Curve pool currently yields at around 4% additional APR to the native USDM/sDAI APR. However, this pool is subsidized and extends the asset risk to sDAI as well.

Should part of the pwIPOR liquidity mining emissions be allocated to the new pool? (note: the recommendation about the amount will be made by the Economics Workgroup)

Yes. Market research among interested liquidity providers has shown that around 2% additional yield is expected. It is therefore proposed to size the pwIPOR emissions so that the kink rate is ~2%.

Are there any token incentives from third parties?

No.

Asset Management

$USDM is a rebasing token whose holders automatically receive rewards in the form of daily rebasing. There are currently no sources of additional yield on $USDM with single sided exposure. Asset management should therefore not be set up. However, asset management could be added at a later date.

Risks and Costs

Due to the character limit in Snapshot, please see here: https://docs.google.com/document/d/1UNRuAVPc1id5NT-8w7ZLiRaeRNsMLJBVrzeCYGYZR2M/edit?usp=sharing

What maintenance will be required? How much are the annual maintenance costs and who covers them? Who will subsidize the index publications costs in the bootstrapping phase?

These questions will be answered in the separate proposal mentioned above when the exact design of the swaps has been examined.

Technical Details

Which smart contracts and/or oracles should be used as input for the index and swap pricing with regard to market size and (interest) rates?

These questions will be answered in the separate proposal mentioned above when the exact design of the swaps has been examined.