The Rise of Crypto Lending 2.0

Quantstamp Announcements
June 6, 2021

Crypto lending 2.0 is in development.

The birth of DeFi and DeFi lending began with Maker. In December 2017, Maker became the first protocol to offer KYC-free loans to strangers over the internet by requiring them to overcollateralize their loans --  for every Dai borrowed, users were required to submit over 1 dollar worth of ETH as collateral. DeFi lending has grown a lot since then: currently, there are over 14 billion USD worth of outstanding loans made by Aave, Maker, and Compound.

While they are very innovative and successful, the current versions of DeFi lending do have certain limitations. Currently, the vast majority of these loans are used as leverage to speculate on ETH or other digital assets. Borrowers also must constantly monitor their collateralization levels in order to avoid liquidation, which can happen quickly as the value of assets fluctuate. From May 18-19, the crypto market tanked which according to The DeFiant, triggered 700 million USD worth of liquidations. In addition, the KYC free nature of these liquidity pools makes exchanges and other digital asset custodians hesitant to integrate these lending protocols into their platforms.

The next iteration of lending, pioneered by protocols like Teller Finance, Maple Finance, and Alkemi Network are incorporating offchain information in order to offer undercollateralized loans and compliant lending products that take advantage of the transparency, global access to liquidity, and enhanced settlement enabled by blockchain technology.

Teller Finance

Teller Finance is developing lending markets that seek to offer unsecured loans to users by interacting with centralized financial data to evaluate a user's credit risk.  

How does it work?

The protocol is intended to function in the following way. When a user requests a loan, validator nodes will acquire offchain financial data which may include banking transactions, credit reports, and income verification. This data is then run through an open-source algorithm that determines a “score" based on these factors, along with an interest rate. Multiple validator nodes will run the same algorithms using the same financial information in order to cross check each other's work and ensure that the resulting credit and interest rate calculation was performed correctly. That information is then submitted to smart contracts on Ethereum in order to execute the loan.

Currently, Teller has partnered with Plaid to help gather offchain information.

Interacting with the offchain world

When someone defaults on a loan, the idea is that this will trigger the same real-world consequences as a normal loan. Defaults will affect real-world credit and can result in borrowers being contacted by third party collection agencies. Interacting with the offchain worlds means compliance will be key. Teller intends to follow GDPR compliance.

Follow Teller Finance on Twitter to keep up with their latest developments.

Alkemi Network

Alkemi Network is bridging CeFi to DeFi. Their first product, Alkemi Earn, is live on mainnet and aims to let exchanges and custodians offer compliant digital asset lending and borrowing to their customers directly from their existing websites. This product caters to established financial institutions seeking to gain exposure to DeFi via a trusted-counterparty environment.

Alkemi Earn has similar functionality to Compound, with a few core differentiators:

  1. It unlocks institutional capital for on-chain deployment
  2. provides a 'trusted-counterparty' liquidity pool
  3. provides institution-grade risk management and control features

The governance token for the Alkemi Network is expected to launch at the end of Q2 and the Alkemi team plans to launch Alkemi Earn integrations with existing CeFi partners in Q3. The Alkemi team also plans to release permissionless lending pools in the near future.

Follow Alkemi Network on Twitter to keep up with their latest developments.

Maple Finance

Maple Finance is a lending protocol that aims to allow crypto funds, market makers, exchanges, and miners to borrow funds.

How are loans provided to institutional borrowers?

When a crypto institution needs funding, they will coordinate through a Pool Delegate.

Pool Delegates are one of the most active roles in Maple Finance. Pool Delegates are responsible for negotiating loan terms with these corporate borrowers, selecting reputable borrowers that are unlikely to default on their loans, and managing their own liquidity pool.

Before a Pool Delegate can offer a loan, they first need a pool of funds to draw from. Pool Delegates need to attract this funding from liquidity providers (LPs). Each Pool Delegate manages their own liquidity pool and attracts liquidity providers through their Pool Delegate Profile, where they disclose their background, lending strategy, and target yield to potential liquidity providers.

If enough liquidity providers believe that the Pool Delegate is qualified and has a good strategy for attracting quality borrowers and making profit, liquidity providers deposit their funds into the Pool Delegate’s unique pool. Eventually, the Pool Delegate will receive enough funding to start offering loans to borrowers.

Skin in the Game, Aligning Incentives  

Managing liquidity pools is a big responsibility, which is why Pool Delegates have skin in the game. When a Pool Delegate creates a pool, they stake MPL tokens. The staked MPL tokens serve as a “reserve of first-loss capital in the Pool and to align the Delegate’s interests with Liquidity Providers.”

If a Pool Delegate does a good job at determining the credit worthiness of a borrower and the borrower pays off their loan as planned, then the Pool Delegate and liquidity providers receive a share of the interest payments. If the borrower defaults on the loan, Pool Delegates lose staked MPL tokens. Liquidity providers may lose a portion of their deposited funds as well if the Delegate’s staked MPL is not enough to cover the loan.

Another interesting aspect of this protocol is that liquidity providers have a high level of transparency in regards to how Pool Delegates use their funds. Onchain data provides a “proof of reserve” along with a definitive record of Pool Delegate performance.

Next Steps For Maple

Maple Finance launched mainnet mid-May, with the first liquidity pool managed by Orthogonal Trading. It provided loans to its first cohort of borrowers on May 25th. The second cohort of borrowers and second liquidity pool is planned to launch in late June to early July. Maple’s long term goal is to progressively decentralize the protocol.

Follow Maple on Twitter to keep up with their latest developments.

The Future of Finance

It is inevitable that blockchain-enabled finance and traditional finance continues to merge, and the results are likely to be very positive. As demonstrated by the recent GameStop / Robinhood debacle, much of the traditional finance world lacks transparency, which has led to suspicion and distrust of traditional finance institutions. By merging traditional and crypto finance, businesses and protocols governed by DAOs will have the option to provide a “proof-of-reserves'' to their users, and third parties will be able to monitor the details because they will have an objective view of the facts on the blockchain.

Blockchain technology has enabled a new level of trust and transparency for the world. Quantstamp looks forward to facilitating this trust and continuing to secure the assets in your digital nation.

Quantstamp Announcements
June 6, 2021

Crypto lending 2.0 is in development.

The birth of DeFi and DeFi lending began with Maker. In December 2017, Maker became the first protocol to offer KYC-free loans to strangers over the internet by requiring them to overcollateralize their loans --  for every Dai borrowed, users were required to submit over 1 dollar worth of ETH as collateral. DeFi lending has grown a lot since then: currently, there are over 14 billion USD worth of outstanding loans made by Aave, Maker, and Compound.

While they are very innovative and successful, the current versions of DeFi lending do have certain limitations. Currently, the vast majority of these loans are used as leverage to speculate on ETH or other digital assets. Borrowers also must constantly monitor their collateralization levels in order to avoid liquidation, which can happen quickly as the value of assets fluctuate. From May 18-19, the crypto market tanked which according to The DeFiant, triggered 700 million USD worth of liquidations. In addition, the KYC free nature of these liquidity pools makes exchanges and other digital asset custodians hesitant to integrate these lending protocols into their platforms.

The next iteration of lending, pioneered by protocols like Teller Finance, Maple Finance, and Alkemi Network are incorporating offchain information in order to offer undercollateralized loans and compliant lending products that take advantage of the transparency, global access to liquidity, and enhanced settlement enabled by blockchain technology.

Teller Finance

Teller Finance is developing lending markets that seek to offer unsecured loans to users by interacting with centralized financial data to evaluate a user's credit risk.  

How does it work?

The protocol is intended to function in the following way. When a user requests a loan, validator nodes will acquire offchain financial data which may include banking transactions, credit reports, and income verification. This data is then run through an open-source algorithm that determines a “score" based on these factors, along with an interest rate. Multiple validator nodes will run the same algorithms using the same financial information in order to cross check each other's work and ensure that the resulting credit and interest rate calculation was performed correctly. That information is then submitted to smart contracts on Ethereum in order to execute the loan.

Currently, Teller has partnered with Plaid to help gather offchain information.

Interacting with the offchain world

When someone defaults on a loan, the idea is that this will trigger the same real-world consequences as a normal loan. Defaults will affect real-world credit and can result in borrowers being contacted by third party collection agencies. Interacting with the offchain worlds means compliance will be key. Teller intends to follow GDPR compliance.

Follow Teller Finance on Twitter to keep up with their latest developments.

Alkemi Network

Alkemi Network is bridging CeFi to DeFi. Their first product, Alkemi Earn, is live on mainnet and aims to let exchanges and custodians offer compliant digital asset lending and borrowing to their customers directly from their existing websites. This product caters to established financial institutions seeking to gain exposure to DeFi via a trusted-counterparty environment.

Alkemi Earn has similar functionality to Compound, with a few core differentiators:

  1. It unlocks institutional capital for on-chain deployment
  2. provides a 'trusted-counterparty' liquidity pool
  3. provides institution-grade risk management and control features

The governance token for the Alkemi Network is expected to launch at the end of Q2 and the Alkemi team plans to launch Alkemi Earn integrations with existing CeFi partners in Q3. The Alkemi team also plans to release permissionless lending pools in the near future.

Follow Alkemi Network on Twitter to keep up with their latest developments.

Maple Finance

Maple Finance is a lending protocol that aims to allow crypto funds, market makers, exchanges, and miners to borrow funds.

How are loans provided to institutional borrowers?

When a crypto institution needs funding, they will coordinate through a Pool Delegate.

Pool Delegates are one of the most active roles in Maple Finance. Pool Delegates are responsible for negotiating loan terms with these corporate borrowers, selecting reputable borrowers that are unlikely to default on their loans, and managing their own liquidity pool.

Before a Pool Delegate can offer a loan, they first need a pool of funds to draw from. Pool Delegates need to attract this funding from liquidity providers (LPs). Each Pool Delegate manages their own liquidity pool and attracts liquidity providers through their Pool Delegate Profile, where they disclose their background, lending strategy, and target yield to potential liquidity providers.

If enough liquidity providers believe that the Pool Delegate is qualified and has a good strategy for attracting quality borrowers and making profit, liquidity providers deposit their funds into the Pool Delegate’s unique pool. Eventually, the Pool Delegate will receive enough funding to start offering loans to borrowers.

Skin in the Game, Aligning Incentives  

Managing liquidity pools is a big responsibility, which is why Pool Delegates have skin in the game. When a Pool Delegate creates a pool, they stake MPL tokens. The staked MPL tokens serve as a “reserve of first-loss capital in the Pool and to align the Delegate’s interests with Liquidity Providers.”

If a Pool Delegate does a good job at determining the credit worthiness of a borrower and the borrower pays off their loan as planned, then the Pool Delegate and liquidity providers receive a share of the interest payments. If the borrower defaults on the loan, Pool Delegates lose staked MPL tokens. Liquidity providers may lose a portion of their deposited funds as well if the Delegate’s staked MPL is not enough to cover the loan.

Another interesting aspect of this protocol is that liquidity providers have a high level of transparency in regards to how Pool Delegates use their funds. Onchain data provides a “proof of reserve” along with a definitive record of Pool Delegate performance.

Next Steps For Maple

Maple Finance launched mainnet mid-May, with the first liquidity pool managed by Orthogonal Trading. It provided loans to its first cohort of borrowers on May 25th. The second cohort of borrowers and second liquidity pool is planned to launch in late June to early July. Maple’s long term goal is to progressively decentralize the protocol.

Follow Maple on Twitter to keep up with their latest developments.

The Future of Finance

It is inevitable that blockchain-enabled finance and traditional finance continues to merge, and the results are likely to be very positive. As demonstrated by the recent GameStop / Robinhood debacle, much of the traditional finance world lacks transparency, which has led to suspicion and distrust of traditional finance institutions. By merging traditional and crypto finance, businesses and protocols governed by DAOs will have the option to provide a “proof-of-reserves'' to their users, and third parties will be able to monitor the details because they will have an objective view of the facts on the blockchain.

Blockchain technology has enabled a new level of trust and transparency for the world. Quantstamp looks forward to facilitating this trust and continuing to secure the assets in your digital nation.

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