Announcing Interest Protocol
GFX Labs is excited to announce that Interest Protocol (IP) will launch on the Ethereum blockchain on June 13th, 2022.
GFX developed IP with deep admiration for its forerunners: MakerDAO, Compound, Aave, and Ampleforth. It is the culmination of the GFX team’s collective experience in DeFi and represents a new paradigm for decentralized lending and stablecoins. Unlike its competition, IP did not start from scratch. IP is different because it accounts for later-stage protocol challenges at its inception.
What is Interest Protocol?
IP is the first fractional reserve banking protocol on the Ethereum blockchain that pays interest to all depositors. IP issues USDi, an over-collateralized and highly scalable stablecoin.
Users can mint 1 USDi by depositing 1 USDC into the protocol, and anyone can receive 1 USDC from the protocol by burning 1 USDi that they hold. In addition, users can deposit wETH, wBTC, or UNI into a multi-collateral vault and borrow USDi against that collateral.
Regardless of how they obtained USDi, all USDi holders automatically earn yield without having to stake — creating novel yield opportunities for gas-conscious users. Given the same amount of capital, IP can generate more loans with less liquidity risk than Compound or Aave because it utilizes fractional reserve banking while remaining over-collateralized.
What is fractional reserve banking?
A fractional reserve bank maintains a portion of its deposits in cash and uses the rest to generate loans. IP applies fractional reserve banking to DeFi by allowing users to deposit USDC into the protocol, issuing USDi to depositors and borrowers, and maintaining a reserve of USDC. Two types of assets back USDi: USDC, which is liquid, and over-collateralized loans, which generate revenue but are less liquid than USDC.
Therefore, USDi is an over-collateralized stablecoin. Fractional reserves maintain liquidity; collateralization ensures solvency. Undercollateralized stablecoins such as UST are insolvent by design; USDi, on the other hand, is designed to remain solvent even under adverse market conditions.
IP automatically manages its reserve ratio — USDC in the protocol’s reserve over the total supply of USDi — by employing a variable interest rate system. As the reserve ratio decreases, the borrow and deposit rates of USDi increase, and vice versa.
How do you use Interest Protocol?
Users interact with IP by lending or borrowing. Anyone who holds USDi is lending capital to IP and therefore receives interest. To borrow, users open a vault, deposit collateral assets inside their vault, and borrow USDi.
Unlike existing lending protocols, IP allows users to post governance tokens as collateral and still vote with them. At launch, UNI holders will be able to open a vault, deposit UNI as collateral, and not only borrow USDi, but delegate the votes to their preferred voting address.
What does Interest Protocol offer that others don’t?
IP has three significant advantages.
First, USDi is a scalable stablecoin. Users can exchange USDi with USDC at a 1:1 exchange rate because USDi is over-collateralized by a combination of USDC and borrowers’ collateral. Furthermore, USDi scales flexibly in response to demand because anyone can mint USDi by depositing USDC or borrowing against collateral.
Second, IP creates a capital-efficient lending market. Rather than lending out the USDC that users deposit, IP mints and lends out USDi against the USDC kept in reserve. Compared to protocols that directly lend out USDC, IP generates more loans — and thus greater yields for USDi holders — from the same amount of capital while incurring less liquidity risk.
As illustrated above, IP can utilize more of its capital at any given interest rate, and at any utilization rate, IP has a lower liquidity risk. Given the same amount of USDC and assuming a borrow rate of 3% at launch, IP can lend out 53% more than Compound while incurring 16% less liquidity risk.
Third, IP provides yield opportunities to gas-conscious users. Most yield opportunities require paying gas to stake and unstake, forcing users to choose between yield and liquidity. USDi, in contrast, generates yield and remains liquid: users simply hold USDi in their wallet and their balance grows.
How does the liquidation system work?
One of IP’s core features is its simple, efficient, and fair liquidation mechanism. When a borrower’s debt exceeds their borrowing power, anyone can liquidate the borrower up to their point of solvency. This protects borrowers from excessive liquidations, which is common in other lending protocols. It also ensures the safety of the protocol by facilitating quick liquidations, since a single liquidation transaction per collateral asset is enough to bring the borrower back to a healthy state.
How does the oracle infrastructure operate?
Any oracle infrastructure must limit points of failure. To that end, IP uses two oracles to determine the price of every asset supported. The primary oracle price is used if and only if it is within a reasonable deviation of the secondary oracle price. IP will initially use Chainlink as the primary oracle and Uniswap v3 as the secondary oracle — further reducing the low risk of an outlier Chainlink price by checking it against the Uniswap DEX market price.
GFX designed IP with composability in mind. Because Chainlink and Uniswap do not support all assets IP may wish to list in the future, we have made the oracle system adaptable to any asset’s needs. Any asset that IP supports can use a unique oracle combination without affecting the general infrastructure of the protocol.
How do I get involved?
Over the next two weeks, we will introduce the Interest Protocol Token (IPT) and announce the details of the IPT sale. We designed the IPT sale to achieve a decentralized community of motivated participants from day one. To learn more about IP, read the whitepaper, check out the website, or view the docs. To stay up to date, follow Interest Protocol on Twitter. To join the community, head over to our Discord and introduce yourself.
