Introduction to iGain Interest Rate Synth
The Solution for Decentralized Lending Fluctuations.
iGain is an option-like trading platform in which the price settlement approach will depend on the DeFi investment target (indices, impermanent loss, interest rates, etc.). It is based on a dual-token system, where users can buy Long and Short tokens, as “calls” and “puts” on future changes of those investment targets.
In this iGain ecosystem, we can create a variety of financial derivatives by merely changing price settlement mechanisms based on the investment target.
Previously, we had launched “iGain - Impermanent Gain” for liquidity providers (LPs) to hedge against future Impermanent Loss (IL) changes (which affects a sizeable number of liquidity providers) with limited premiums. In iGain Impermanent Gain, we take trading pairs' ILs as investment targets for our options.
Read the Whitepaper for more details on the iGain ecosystem and its mechanisms: https://hakkafinance.gitbook.io/igain/
Now, we are launching a new flagship product in the iGain Ecosystem: Interest Rate Synth (IRS).
Introducing: iGain - Interest Rate Synth
iGain- Interest Rate Synth (IRS) represents the second product in the iGain ecosystem. It is an interest rate derivative providing lenders and borrowers a platform to hedge against the risk of future changing interest rates. It empowers investors to lock future interest rates, by purchasing Long and Short tokens.
For example: Ben, as a lender, can secure future interests by purchasing Short tokens, while Wego, a borrower, can cap borrowing costs by buying Long tokens.
The entire system design does not involve a deposit of the principal into the smart contract. The capital efficiency can then be maximized, since the capital and liquidity available are all gathered into the trading market of the interest rate derivative.
How Does iGain IRS Work？
iGain IRS has Long and Short tokens to represent respectively “long” and “short” interest rates.
The price of Long tokens is settled by the following equation:
Long = Realized Borrowing Interest Rate * Leverage Level
While the Short token is priced at:
1 — Long
For example, let’s assume that a term on iGain will be expired in one year. If the accumulated borrowing interest rate reaches 6%, then, with 10x leverage, the settled price of Long token will become
0.06 × 10 = $0.6 while the Short token will be priced at
1 — 0.6 = $0.4.
Read the detailed settlement mechanism in our Whitepaper <Price Settlement>
Holding Long or Short tokens does not mean that the interest rate of the underlying lending protocol is converted from floating to fixed. Instead, it is achieving de facto fixed interests, by taking a position that gives a P&L opposite to interest rate fluctuation.
Let’s illustrate that with an example:
Assumption: a term in iGain will be expired in one year and the leverage level is 10x.
- borrows $10,000 from Aave
- and spends $400 buying 1,000 Long tokens with an average price of $0.4 at the beginning
…then he can realize a 4% fixed interest rate, regardless of the actual interest rate.
Here are some possible scenarios where we provide the calculation approaches for the final result.
Case #1: After one year, the interest rate on Aave jumps to 8%.
At that time, Jack’s borrowing interest on Aave is $800 while the settled price of a Long token is $0.8. Jack can redeem $800 with the net profit of $400.
Net PnL = -$800(Interests) + $400(Long Token) = -$400
By adding up the interest paid for Aave and the profits made from Long tokens, the final cost for borrowing equals to $400, which is 4% interest rate.
Case #2: After one year, the interest rate on Aave drops to 3%.
At that time, Jack’s borrowing interest on Aave is $300 while the settled price of a Long token is $0.3. Jack can redeem $300 with the net loss of $100.
Net PnL = (Interests)-$300 + (Long) -$100 = -$400
By adding up the interest paid for Aave and the hedge made from Long tokens, the final cost for borrowing will be $400, which is still 4% interest rate.
As stated above, we can conclude that whether the interest rate one year later is higher than 4% or not, the final net income or loss will be -4% if investors get enough Long tokens in advance. The ups and downs in two positions can be offset.
More examples on the Whitepaper: <Examples>
Why iGain IRS?
Fixed interest rate protocols, as the foundation of asset management, are springing up as the infrastructure of the decentralized financial services is reaching maturity. Each protocol has different mechanisms, but iGain IRS has at least 3 advantages compared to other competitors:
- Maximized capital efficiency
Existing fixed interest rate protocols require principals to get interest incomes, which dramatically reduces capital efficiency. In contrast, iGain greatly improves it by gathering all system capital and liquidity into a single interest derivative marketplace.
- Better equilibrium in one pool
iGain pool constitutes ERC-20-based Long and Short tokens, which can be transferred, used in 0x protocol, and traded in any AMM to satisfy investor needs. The dual-token design can serve both interest lenders and borrowers. Moreover, the competitive dynamics between both sides is supposed to reach equilibrium with the prediction of the future interest rate.
- Enabling short interest rate
Most of the fixed interest rate protocols can merely purchase yield tokens to “long” interest rate, and investors, therefore, fail to effectively “short” interest rate as the yield token is overpriced. As a consequence, the price becomes less sensitive to market change. In iGain, investors can directly buy Short token to “short” interest rate and gain profits as the interest rate drops.