Economics of a Solver

Solvers in IRIS Protocol are profit-maximizing market makers. Their business model is active rate-risk management: sourcing the cheapest variable-rate funding across venues and capturing the margin between that cost and the fixed rate the borrower pays.

The Profit Equation

The fundamental solver profitability equation is:

Profit = (Fixed Rate - Avg Variable Rate) × Principal × Duration - Bond Capital Cost

When variable rates stay below the quoted fixed rate, the solver keeps the spread. When variable rates exceed the fixed rate, the deficit is covered by the solver's locked bond.

Risk Premiums

Sophisticated solvers employ quantitative frameworks to price this risk. When bidding in the RFQ auction, a solver's quote embodies three critical risk premiums:

1. Utilization Risk: The probability of variable-rate spikes based on the underlying venue's current liquidity utilization (e.g., Aave V3 Jump-Rate curves).
2. Duration Risk: The cumulative variance of interest rates over the specific time horizon of the loan. A 180-day loan carries fundamentally higher duration risk than a 7-day loan.
3. Basis Risk: The divergence between hedging instruments (if the solver operates cross-chain or off-chain hedges) and the actual on-chain venue rates.

By actively monitoring these factors and executing Spatial Arbitrage across venues to restructure debt, solvers can offer highly competitive fixed rates while maintaining a profitable expected value.