An Interesting Implementation of a Governance Token

Aligning Incentives Leads to a Healthy Demand Profile for Ipor, a Decentralized Marketplace That Serves as the Credit Hub of Defi

What is IPOR?

The IPOR protocol is an interest rate and interest rate derivatives protocol. It is comprised of; 

• The IPOR benchmark index, a mid-market rate for on-chain credit

• Interest Rate Derivatives (IRD) products, currently taking the form of Interest Rate Swaps

If you’re already confused by all these TraFi-esque terms such as interest rate derivatives, swaps and indexes, have no fear, a comprehensive intro is here:

Introduction

What You Need To Know About IPOR

Credit and the Cost of Capital

Credit and the cost of capital play a crucial role in driving economic growth. When individuals or entities have surplus capital, they can lend it out (accredit) to borrowers in exchange for interest. This interest rate represents the cost of capital and influences the flow of capital within the economy. There are two types of interest rates: variable (floating) and fixed. Lenders aim to maximize their yield by charging higher interest rates, while borrowers seek lower rates. Fixed income serves as a middle ground, allowing both parties to minimise risk. 

Benchmark Index

Benchmark indices play a vital role in enabling fixed-income investments by providing a reference rate for determining interest payments on various assets. Traditional finance (Tradfi) relied on benchmarks like LIBOR and SOFR. Prior to IPOR, decentralized finance (DeFi) lacked a benchmark rate of its own, making IPOR a significant development in this regard.

Why it’s important

The introduction of a benchmark rate like IPOR in DeFi holds significant importance for several reasons. Firstly, it brings transparency to the industry, allowing participants to have a clear view of the prevailing rates. This transparency empowers individuals, including the average person, to assess whether they are being quoted at a fair and competitive rate, enabling them to make informed decisions about their investments. Moreover, having a benchmark rate promotes rate standardisation, providing a standardised reference point for determining the cost of capital. This, in turn, enhances market efficiency and facilitates more informed decision-making processes.

IPOR Index

The IPOR Index, short for Inter-Protocol Overblock Rate, serves as a benchmark interest rate specifically designed for decentralized finance (DeFi). By examining the interest rates within the DeFi credit market, particularly in money markets such as AAVE and Compound, IPOR sources and aggregates the rates on a block-by-block basis, presenting them as an index. It's important to note that IPOR reflects the market and the cost of capital rather than setting it, providing valuable insights into the prevailing interest rate environment in DeFi.

Interest Rate Derivatives (IRD)

Interest rate derivatives play a crucial role in enabling the evolution of decentralized finance (DeFi) credit markets into a robust fixed-income market. By utilizing a benchmark index as a reference, interest rate derivatives offer essential risk management tools that institutions require. To facilitate the flow of liquidity from traditional finance to the decentralized financial landscape, it is imperative for future financial markets to provide these risk management instruments. Interest rate derivatives provide stability by allowing fixed-income players to lock in borrowing rates, offering predictability and the ability to forecast income or credit costs over a desired time horizon.

What are Interest Rate Swaps (IRS)

Interest rate swaps are a type of IRD offered by IPOR and serve as the pioneering instrument that references the IPOR benchmark. These swaps are essential for risk management purposes. IPOR's unique contribution lies in its ability to complement existing spot lending platforms like AAVE and Compound by enabling users to fix their loans at a lower rate compared to current fixed-rate products. 

The rates derived from the IPOR index can be referenced by fixed-term lending markets to forecast future yield conditions, thus facilitating the creation of a DeFi yield curve.

$IPOR Tokenomics

Below we can see the token flow diagram for IPOR. This showcases how the system works, where the relevant sinks and faucets are and how value flows through/around the protocol.

A zoomable version of this diagram can be seen here.

If you’re interested in the condensed, need-to-know tokenomics information for IPOR, check out the report on Tokenomics Hub.

Ecosystem Participants

Liquidity Providers (LPs) 

Liquidity Providers (LPs) play a vital role in the IPOR ecosystem by supplying assets (currently only USDC, USDT or DAI, ETH coming soon) to the Liquidity Pool (known as Joseph) that underwrite Interest Rate Swaps taken out by borrowers and lenders. The motivation for an LP to provide assets is to earn a return on their capital.

In exchange, they earn multiple fees

• Opening swap fee
  Fee charged to the trader when opening an interest rate swap. This equates to 1% of the trader's collateral amount and is denominated in said collateral type.
  
  E.g.
  Trader deposits 1000 USDC, 10 USDC would be charged as an opening fee and distributed to all LPs pro-rata.
  

• Liquidity withdrawal fee
  Fee charged to liquidity provider when exiting the pool. This equates to 0.5% of withdrawal amount and is denominated in the same asset.
  
  E.g.
  LP decides to withdraw 10,000 USDC, 50 USDC would be charged as a withdrawal fee and distributed to all LPs pro-rata.
   

• Money market yield
  Idle capital gets deployed to money market (currently AAVE & Compound) to earn a base yield (more on this later). A percentage of said yield is distributed to all LPs pro rata.
  

• Liquidity Mining
  LPs receive pwIPOR tokens through the liquidity mining program. 

Furthermore, LPs also bear the risk of inverse PnL; when traders win, LPs lose.

Money Market Borrower & Lender

Note that these can be considered Traders

A money market lender is a user who has lent out capital via another protocol such as AAVE or Compound and as such is receiving an interest rate on their capital. On the other side of this we have the borrower, who has taken out a loan and as such is paying interest on their borrowed capital. The interest received/paid can either be a fixed or floating (variable) rate. 

The motivation for a money market lender is to hedge against low-interest-rate income and thus minimise risk of poor capital allocation. Essentially they’re looking to short the interest rate (known as Receive fixed, Pay Floating) since if it goes down they will earn less from their underlying money market position but earn from the swap.  

If they’ve lent out capital at a variable interest rate they don’t want said rate to decrease, so they look to exchange this variable interest rate income for a fixed rate income rate. 

On the other hand, the motivation for a money market borrower is to hedge against high-interest rate payments and thus minimise risk. Essentially they’re looking to long the interest rate (known as Pay fixed, Receive Floating) since if it goes up they will lose on their underlying money market position but earn from the swap.

If they’ve taken a variable interest loan they don’t want their interest rate to increase, so they look to exchange this variable interest rate for a fixed interest rate. 

Both parties can achieve this via an Interest Rate Swap. 

To do this, they deposit the necessary collateral into the Liquidity Pool and pay the required fees (as detailed above in the Liquidity Provider section), plus some additional fees that are not directed to LPs and finally a liquidation deposit which is to be returned upon contract maturity. This collateral is locked until contract maturity (currently only 28-day swap contracts are available) or the protocol closes the contract.

During this 28-day period, the IPOR Index will vary in reference to the rates locked in by borrowers and lenders and will be accounted for by the PnL of the particular swap. 

The pool is exposed to a number of swaps which in aggregate is called Sum Of All Payoffs (SOAP) which is essentially the net outcome of all swaps (you can think of it as a sort of global state of the LP).

For borrowers, if the floating rate exceeds the fixed rate, the pool (LPs) pays the borrower; if the floating rate falls below the fixed rate, the borrower pays the pool (LPs) from their collateral. 

For lenders, if the floating rate exceeds the fixed rate, the lender pays the pool (LPs), if the floating rate falls below the fixed rate, the pool (LPs) pays the lender.

Speculator

Note that these can also be considered Traders

A speculator is akin to the above description of a borrower/lender but they have not taken out a loan via another protocol, they’re simply opening an interest rate swap contract by depositing collateral to take a directional bet on interest rates, essentially going long or short. They earn from the same profit on the derivative as borrowers/lenders but since they have not engaged in taking/depositing collateral on another protocol they are not hedged in any way.

These players can also be thought of as arbitrageurs; users looking to capitalise on interest rate market inefficiencies by leveraging the IPOR index to identify and exploit these disparities. Remember, the IPOR index serves as a reflection of the cost of capital in DeFi, allowing users to identify and capitalise at varying rates, even among stablecoins like USDC, USDT, and DAI. 

$pwIPOR Holder

A user who stakes the vanilla $IPOR token receives $pwIPOR. There are two types of holders here:

1. A user who is interested in governance.

2. An LP who is interested in boosting their rewards.

We will touch upon each of these functions later on, for now however it should be noted that in order to unstake $pwIPOR and receive the vanilla $IPOR once again, users either have to wait for a 14-day cool-off period to laps or choose to unstake immediately which incurs a 50% haircut. This amount is distributed back to $pwIPOR holders pro-rata.

E.g

A $pwIPOR holder decides to unstake 100 $pwIPOR immediately and incur the 50% haircut. They would receive 50 $pwIPOR and the rest would go back to current $pwIPOR holders.

Protocol Components

IPOR Index

The IPOR Index calculates a volume-weighted mid-market rate by averaging the borrowing and lending rates from protocols such as Aave and Compound, block by block (although due to Ethereum gas cost restraints it is not published on a per-block basis). Furthermore, new protocols can be added to the index through a governance vote utilizing the $pwIPOR token, which will be discussed in more detail later. As previously mentioned, the Index is a public good and can be referenced by anyone to structure debt instruments, deals, or derivatives.

IPOR DAO

The IPOR DAO will play a pivotal role in the gradual decentralization of IPOR. It oversees the governance of the index and AMM (covered later on). Furthermore, it handles the Liquidity Mining emissions.

AMM (Milton)

The bespoke AMM known as Milton is specifically designed for interest rates. The AMM receives liquidity from both liquidity providers (LPs) and users of interest rate swaps who deposit collateral to access fixed or floating rates. Currently, Milton operates with three liquidity pools: USDC, USDT, and DAI, with plans to include ETH in the near future.

Interest Rate Swaps (IRS)

IPOR protocol’s first product is a 28 day interest rate swap. It creates these contracts by referencing the IPOR Index and by using the liquidity & pricing mechanism from the bespoke AMM. However, in v2 which was recently announced, maturity will extend to 3 months and beyond.

Asset management (Stanley)

95% of idle AMM capital gets handed off to the Asset Management known as Stanley to be deployed in various money market strategies. These low-risk strategies are exclusively selected from those included in the IPOR index, which currently comprises AAVE and Compound. By optimizing the deployment of capital, Stanley maximizes the earning potential of these idle assets held within the system.

$IPOR Token

The $IPOR token serves as the native token of the protocol. Holders of $IPOR have the option to stake their tokens in exchange for $pwIPOR tokens. 

These $pwIPOR tokens can then be delegated to various modules independently. This means that token holders can actively participate in the governance via delegating to the governance module and/or receive boost on their yield via the liquidity mining module. It should be noted that, at the present time, these are the only two modules available but future modules could be added due to the flexibility of the power token architecture.

Value Creation

Value creation refers to how the protocol is creating value and for whom. Value is created when a problem gets solved. Read here to understand more about value creation.

IPOR Index

The IPOR Index is a public good that addresses a market gap in DeFi by providing a benchmark interest rate and enabling derivatives products to be built on top (i.e IPOR protocol’s own Interest Rate Swaps are the first product that references the index). For example, a new money market is looking to establish interest rates. They could offer the IPOR rate on their credit market, using a smart contract to smart contract call to the on-chain Index. The goal is for this to eventually lead to the possibility of a fixed income market. 

Currently, there is no prominent protocol in DeFi that fulfils this role. The absence of a benchmark rate hinders the onboarding of traditional fixed-income markets to DeFi. IPOR's solution, the IPOR Index, offers a benchmark interest rate that allows users to better understand and manage risk in the industry. It provides various opportunities for market participants, including hedging rate exposure, leveraging swaps for cost control, arbitraging interest rate disparities, capitalising on market inefficiencies, and speculating on rate changes. Moreover, IPOR acts as a conduit for institutional capital and fixed-income players to enter the DeFi space. Looking ahead, IPOR aims to expand its offerings by introducing an IPOR Index for ETH, longer maturity interest rate swaps, an enhanced request-for-quote AMM, and increased capital efficiency through higher utilisation of liquidity. These developments will pave the way for more complex debt products and greater flexibility in leveraging traders' collateral for increased fees and leveraged yield.

Interest Rate Swaps (IRS)

Interest rate swaps play a crucial role in providing stability for fixed-income participants, enabling them to effectively manage their interest rate risk. These derivatives offer the flexibility to convert fixed-rate debt into floating-rate and vice versa. By utilising interest rate derivatives, the ecosystem aims to converge current fixed interest rates across markets. 

Standardisation is vital as fragmented rates can lead to fragmented liquidity in derivatives, resulting in increased market risk and volatility. Harmonising interest rate swaps across different stablecoin pairs, such as DAI, USDC, and USDT, ensures liquidity is not dispersed, allowing for more efficient capital allocation.

Aggregated liquidity that underwrites multiple derivates is much more attractive over the alternative which would essentially be a fragmented, liquidity pool per instrument setup resulting in greater slippage and less capital efficiency for LPs.

pwTOKENS

The pwToken model is a new tokenomic primitive created by IPOR. It too is a public good and has its first implementation with IPOR itself.

Overall Goal

The overarching goal of IPOR is to bring standardisation to the industry by providing a benchmark instrument for pegging other financial instruments. It aims to enable the use of derivative instruments for arbitrage opportunities and to bring balance to the market. A crucial aspect is the establishment of a yield curve and a standardised index that indicates the expected interest rate for various loan durations. 

Currently, IPOR rates represent spot rates, reflecting the cost of capital today. However, future iterations will look to introduce rates for different time periods, such as the IPOR USDT 1-month rate, 3-month rate, 6-month rate, and so on. 

The yield curve signifies the cost of capital at different points in time. Given that the TradFi fixed income market is valued at ~$450 trillion, the importance of achieving these goals for the future of DeFi cannot be overstated.

Value Capture

Value capture refers to how the protocol is capturing the value it creates. Essentially, if value is being created then it has to flow somewhere (ideally to wherever the protocol deems most viable). Value capture can be broken down into (1) value accrual to the protocol and (2) value accrual to the token. Read here to understand more about value capture.

Value Accrual to Protocol

IPOR is currently constructed in such a way that the value captured at the protocol level benefits liquidity providers (LPs) rather than the protocol itself (i.e treasury inflow). Essentially, at this point in time all fees and revenue generated go back to LPs (there is however active proposals for treasury inflow and $pwIPOR distribution). Furthermore, as public goods, the IPOR Index and pwToken model do not directly benefit IPOR value accrual.

While the IPOR Index, derivatives instruments and pwToken model are highly valuable, mass adoption of these has no direct effect on value accrual since they’re public goods and as such there is no inflow to the protocol's treasury. 

It should be noted that an indirect form of value accrual to the protocol here is the mindshare it will garner if these public goods become industry standard. The same way that Curve is known for the veToken model.

Value Accrual to Token

The pwToken system enables users to engage with various modules offered by the protocol, such as governance and liquidity mining. To participate, users need to stake their IPOR tokens, which allows them to receive pwIPOR tokens. These pwIPOR tokens can then be delegated to the desired modules within the protocol.

The staking of IPOR removes it from supply and thus has a positive impact on price. The extent to which users will stake is directly related to the usecase of the staked token, $pwIPOR. We will touch upon these points in the Demand Driver section.

Business Model

It's important to understand the business model of the protocol since it ties into how value is flowing in the system and is relevant to the sustainability of the protocol.

Revenue comes from:

• Fee that is taken from borrower/lender to open a swap

• Fee from other LPs withdrawing liquidity (0,5% withdrawal fee)

• Net PnL: net outcome of swap

• Percentage of money market fee since 95% of idle collateral in AMM is deployed and generates yield

Revenue is denominated in:

• USDC, USDT, DAI on all fees and yield

Revenue goes to:

• LPs: who earn all fees and liquidity mining incentives ($pwIPOR)

• SOAP: if traders win LPs lose, if traders lose LPs win.

Token Utility

Token utility refers to how the token is being used within the project and by whom. Essentially the token’s use case. Read here to understand more about Token Utility.

$IPOR itself has little use outside of being an investment vehicle. However, its staked counterpart known as $pwIPOR plays a vital role in the protocol. Primarily in:

• Governance over the Index and AMM parameters –here its utility is that of a governance token 

• Directing liquidity mining emissions –here its utility is that of a bootstrapping token.

It should be noted that there could be future use cases which would have to be proposed through an open governance procedure.

$IPOR Demand Drivers

Demand for a token can from three sources, those being demand for the token due to its utility, demand due to a mechanism (i.e staking) and demand due to speculation. Essentially, demand drivers refer to who is buying/holding the token and why. Read here to understand more about Token Demand Drivers.

There are multiple parties who are likely to buy the token:

• Money markets

• Other blockchains other than Ethereum

• Asset issuers: stablecoin issuers, Liquid Staking Token (LSTs) issuers such as Lido & Rocket pool

• DAOs

• LPs

• Speculators/Users

In terms of value accrual to the $IPOR token, its increase in value is solely tied to the performance of IPOR derivatives products, specifically an increase in Interest Rate Swaps (IRS) leads to an increase in token value. The usage of the protocol or the IPOR index does not directly contribute to the value of the token as mentioned earlier.

Governance Module

In IPOR protocol, governance has three distinct areas of use;

1) Governance around the IPOR index
The index references multiple money markets, currently AAVE and Compound. Via governance new protocols can be included. Parties who are likely to be interested in this governance power include:

• Money markets:
  Idle AMM assets are handed off to the Asset Management system to then be deployed into the money markets that the IPOR index uses as input, any money market has an incentive to acquire governance power in order to be included in the index since it would mean that they would receive a portion of said assets and thus improve their liquidity.
  

• Asset issuers:
  Currently, there only exists IPOR indices for USDT, USDC and DAI. Any form of asset issuer such as the many stablecoin and LST issuers have an incentive to acquire governance power in order to get an indices created for their asset since it means that borrowing and lending would become more widespread for their asset.
  

• Other blockchains:
  The IPOR index is currently Ethereum native, but there is the possibility of it being launched for other chains in the future. Any chain looking to have an IPOR index launched on their chain natively has the incentive to acquire governance power.  

It should be noted that, in the case of money markets, token demand is likely only a consideration once the capital that can be directed there is of a sufficient size. Maybe once the liquidity that the Asset Management system directs to said money market is above a certain percentage of the money market’s TVL? It would be interesting to see an analysis on this. Another article at some point 👀

2) Governance around the derivatve instruments
Governance has the ability to adjust certain parameters regarding current interest rate swaps such as the fixed or floating swap rate. Furthermore, AMM parameters such as the amount of risk is the pool is able to take on via said swaps (pool liquidity is used to underwrite swaps). Parties who are likely to be interested in this governance power include:

• DAOs:
  Currently, 80% of pool liquidity can be to underwrite swaps, but there is the possibility of greater capital efficiency since in essence the pool is both long and short interest rates (fixed rate payer and fixed rate receiver), meaning that if balanced properly they cancel out, thus being able to tune the AMM accordingly can result in greater capital efficiency. Any DAO looking to leverage IPORs interest rate swaps has the incentive to acquire governance power.

Governance is normally a low-demand driver since users have a weak feedback loop to their underlying motivation and needs, thus resulting in voter apathy (which is a problem) and people not being very motivated by control over a protocol. However, in the case of IPOR, the parties involved have a stronger incentive to participate due to the reasons stated above.

The pwToken system helps to achieve this in some indirect manner since it deters voter apathy due to its design. In many cases a token serves dual purposes, say acting as an incentive token that must be locked yet at the same time as governance power, these utilities are baked into the token architecture itself meaning that users get both by force. If Alice is interested in the token as an incentive but doesn’t care for governance she will likely become apathetic towards governance and thus be misaligned. In the pwToken system, these functions can be separated, or delegated. Resulting in better alignment and thus a healthier voter group which in turn motivates new participants to be involved in governance. 

3) Governance over DAO token decisions
Governance has the ability to decide what happens with regard to DAO token management which encompasses a range of aspects, including liquidity mining use cases, distribution methods and parameters. Additionally, the DAO is responsible for making decisions regarding the operational fund, which includes protocol development and the allocation of liquidity owned by the protocol for exchanges. Furthermore, the DAO holds governance authority over the treasury, ensuring its management and appropriate utilization. Any party interested in the aforementioned parameters has the incentive to acquire governance power.

Liquidity Mining Module (LM)

It should be obvious by now that liquidity is important to IPOR. Being able to acquire and maintain liquidity is the name of the game in DeFi. IPOR understands this and thus has implemented the Liquidity Mining module. The goal is to bootstrap enough liquidity.

Via the pwToken system, $IPOR can be locked and delegated to different pools in the Liquidity Mining module. In doing so, users receive rewards in the form of $pwIPOR. Additionally there is a multiplier involved which takes into account the user’s staked ipToken balance (USDC, USDT or DAI) and their pwIPOR balance delegated to a particular asset, thus determining the proportion of rewards they will receive.

Interestingly, the rewards function follows a log curve. Meaning that there is an equilibrium point between the amount of ipToken balance and $pwIPOR balance.

This means that LPs have a direct incentive to acquire $IPOR and use it to boost their yield. The interesting result of the log based reward function is that it deters users to simply buy a bunch of $IPOR, stake & delegate it increase their multiplier since at some point along the curve it makes more sense to direct that capital to the liquidity pool (i.e deposit more ipTokens) since it will result in a better multiplier. Read here for latest on boost vs liquidity parameters.

This dynamic can be said to garner less direct demand for $IPOR itself but we need to recall here what IPOR is trying to achieve; liquidity. Having a high percentage of $IPOR staked at the expense of liquidity would go against their underlying goal. Furthermore, this feels like a much more healthy and fair system. Only time will tell. 

$pwIPOR Holders

Whenever a $pwIPOR holder wished to unstake and receive the underlying $IPOR they have two ways of doing so, either by (1) waiting for a 14 day cooldown period or by (2) unstaking immediately and thus undergoing a 50% haircut (known as diamond hand bonus for pwIPOR holders). 

Essentially, if you stake longer than your peers and choose to undergo the haircut, you benefit. This can act as a very weak form of $IPOR token demand since in essence, it’s a form of yield. As mentioned, this is close to negligible.

$IPOR Distribution & Unlocks

It’s important to understand how the supply is being split up into different allocations and how these allocations will be distributed (vested or emitted).

• 30.00% DAO Treasury
  Vesting is governed by DAO. In essence, the funds can be utilised to finance any project, whether suggested from within the organization or externally, as long as it aligns with IPOR's vision and is deemed beneficial.
  

• 25.00% Liquidity Mining
  LM incentives do not follow a status emission schedule but rather are adjusted dynamically by the DAO. The latest information on the current state of LM emissions can be seen here.
  

• 12.76% DAO Operations
  This allocation is used:
  
  (1) As operational funds for various marketing initiatives, including trading competitions, Citizen tasks like video timestamping and flagging quotable content, and collaborations with external marketing firms.
  
  (2) To support protocol operations, such as payments for services like IPORIAN basic income (IBI), DAO collaborations, and special projects.
  
  (3) In Protocol Owned Liquidity (PoL), visible here.
  

• 20.00% Core Team
  Linear vesting over 3 years with no cliff.
  

• 11.85% Investors
  Linear vesting over 3 years with no cliff.

Feedback Loops

A tokenomics analysis is focused on how value flows through the system and how it interacts with different users/components of the protocol. Feedback loops are relevant since they may be positive or negative and thus have an outcome on the underlying value capture (be it on the protocol or token level).

IPOR Index

As IPOR Index usage increases, increase in protocols referencing it, reinforcing index, resulting in a more efficient market. Note that this feedback loop has minimal value accrual to IPOR protocol as mentioned earlier.

Interest Rate Swaps

An increase in usage of IPOR’s Interest Rate Swaps results in increase in liquidity in AMM, thus greater earning power for LPs, leading to more LPs due to better yield and increase in usage of IPOR IRS

Governance

Moreover, an increase in AMM liquidity means more attractive governance power for money markets since 95% of idle capital is directed to them and thus an increase in token demand which results in more staked IPOR and finally a better price. Although not a feedback loop per se, it’s still noteworthy.

It should be noted that this depends on the amount of liquidity available in the AMM to be directed. Thus we can assume that this will be negligible until the amount of liquidity to be directed is of a comparable size to that of the money market.

Liquidity Mining Module Reward Function

The potential for better yield results in increased $pwIPOR demand (i.e users would have to acquire $IPOR and stake it to receive $pwIPOR) and an increase in liquidity pool deposits until equilibrium is reached which depends on the rewards function.

pwTOKEN Primitive

The more protocol’s that use the pwToken system the more flexibility they will have in creating sustainable systems and thus a better tokenomics landscape can be brought about. The only feedback that this has to IPOR protocol itself is in the mindshare that it may garner

.

Observations/Thoughts

Bootstrapping Token To Revenue Share Token

LP’s yield can be broken down into (1) opening fee, (2) liquidity withdrawal fee, (3) money market yield and (4) liquidity mining (LM) incentives. By delegating $pwIPOR LPs can boost their yield due to increased $pwIPOR rewards from the LM part of said yield, aka (4).

This makes sense in the early stages of IPOR's growth since the token is essentially acting as a liquidity bootstrapping mechanism. However these emissions will one day end, hopefully, IPOR will have found product market fit by then, but this in turn results in demand for $IPOR coming only from governance. A possible tweak that could be made (economic analysis should be applied to evaluate viability) is that of the boost component affecting not only LM incentives, i.e (4) –since, as mentioned, these will cease in the future, but the fees (1 through 3) that make up the rest of the yield earned by LPs. Essentially, delegating $pwIPOR could have a weighted effect on how much one earns from the aggregate yield generated by all LPs in the same asset. This would shift the utility from bootstrapping to revenue share at a later stage in the token’s life.

$pwIPOR Governance Power Fee Market

Currently, $pwIPOR holders can delegate their tokens to two available modules, those being (1) governance module which entitles them to voting power and (2) liquidity mining module which entitles them to boosted yield. These are mutually exclusive, meaning that users can delegate to both modules independently. However this brings up the question; If a user is not interested in the governance power that their $pwIPOR has and are simply focused on the liquidity mining module, would they sell their voting power to someone who is interested in using it? Thus a fee market for $pwIPOR could be born.

This could lead to a new avenue of token utility within the $pwIPOR system (it should be noted that this would have to be passed through the DAO via a governance vote).

Summary

IPOR is tackling a gap, that is certain. Their solution has solid ground in the DeFi landscape and it seems to be aligned with the parties that it aims at (LPs, money market participants, $pwIPOR holders and speculators). However, the goal of onboarding TradFi fixed income players is yet speculative.

IPOR protocol offers a rather enticing business model for LPs, it remains to be seen how much of the value it creates actually maps onto $IPOR. The efficacy of this depends on the underlying demand for governance over the IPOR Index and derivative instrument parameters, which in turn depends on the success of the IPOR Index and size of liquidity pool within the AMM. 

$IPOR is cemented within the protocol as a governance token and in the short to medium term as a liquidity bootstrapping token. It remains to be seen how efficient their bootstrapping will be in terms of liquidity acquisition,this depends on the strategy implemented by the IPOR DAO.

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If you’re interested in the condensed, need-to-know tokenomics information for IPOR including all the resources used for this article, check out the report on Tokenomics Hub.

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