“Credit may be the most important part of the economy, and it may be the least understood.” — Ray Dalio, founder of Bridgewater Fund
Many of us have been told that debt is inherently bad. Student loans are bad debt, credit card debt is bad debt. However, this is not the case.
Like many financial instruments, when used responsibly, debt is an important tool that allows us to increase personal wealth and, in general, economic wealth. The volume of transactions in an economy is the sum of the volume of transactions within that market, i.e. money + credit in exchange for goods and services. If we were to remove credit from the above equation, it would greatly impede economic growth. Credit allows borrowers to bring forward their expenditures, and it is the expenditures that drive the economy.
The role of credit is equally important in the effort to create a fairer and better financial system. Looking back at the origins of DeFi, it is not surprising that protocols such as Maker, Aave and Compound were among the first use cases for lending, and they now form the backbone of the industry. However, the concept of under-collateralized lending in a developing financial system without trusted intermediaries is a much more difficult problem to solve. deFi users are anonymous accounts with no way of knowing their creditworthiness or credit score, which is what allows the over-collateralization model to flourish, with borrowers able to access liquidity from an aggregated pool of funds without having to provide recourse beyond collateral. Given the catalytic effect of these early pioneering money market protocols on DeFi, we began to imagine the transformative implications of an on-chain credit marketplace for DeFi’s growth from 0 to 1, where users do not need collateralized funds to access funding.
Maple is a decentralized corporate credit marketplace whose goal is to enable institutions to borrow on an under-collateralized basis. This allows users to access credit at a fixed interest rate so that they can reinvest in their business in a capital efficient manner. Whether it is a cryptocurrency miner looking to fund hardware, a market neutral fund seeking to borrow to deploy a basis trade, or a market maker seeking to increase liquidity in a trading pair, institutional corporate credit is a critical piece of the cryptocurrency puzzle. In this article, Ross Middleton of DeversiFi, the Ethernet DeFi platform, explains how Maple is solving a key challenge for the capital-intensive part of its business.
As Ross explains, DeversiFi aggregates liquidity into their L2 DEX in a trust-free manner through a market-making service, while funding a withdrawal pool that allows traders to immediately move from L2 to L1, which means they need to keep millions of dollars of tokens in various parts of the protocol, which would simply not be possible using conventional over-collateralized lending methods. So how does it work?
Through the design of the Maple protocol, there are three core stakeholders that are necessary to facilitate mortgage lending
- Liquidity Providers (LPs) deposit funds (USDC and MPL) into the liquidity pool in order to fund the loans and earn revenue. While LPs can claim the interest they earn at any time, they must wait for a withdrawal time before they can recover their principal. This withdrawal time is currently set at 180 days.
- Liquidity Pool Delegates (Pool Delegates) play a critical role in the realization of under-collateralized loans because they have the responsibility of managing each liquidity pool. Delegates are required to evaluate the creditworthiness of institutional borrowers and agree to the terms of the loan (amount, term, interest rate and collateralization rate). In order to align incentives, pool representatives must pledge native Maple tokens MPL and USDC at a 50/50 ratio to the liquidity pool. In the event of loan default, these tokens act as a shortfall reserve.
- Borrowers are established crypto-native institutions, including market makers and market neutral funds, which fund their required business activities under terms approved by the pool representative.
The Maple protocol is designed to provide another differentiated proto-language (generally a program segment consisting of several instructions to perform a specific function that cannot be interrupted during execution) for various crypto-native stakeholders to generate revenue. The first liquidity pool representative is Orthogonal Trading, a well-known digital asset fund, which on May 25 successfully disbursed $17 million in loans to borrowers including Alameda Research, Wintermute, Amber Group and Framework Labs. Under the terms agreed upon, the pool representative was able to supplement its core business by receiving one-tenth of the interest yield in its liquidity pool and half of the set-up fees paid by the borrowers. Currently, the liquidity pool representative receives a fee equal to about 1.5-2% of the outstanding loans.
This approach creates another stable, recurring source of revenue for the liquidity pool representative’s business. Long-term LPs are also able to generate sustainable capital gains in the current 10-12% APY (net of fees) range, with liquidity mining rewards based on MPL tokens. As seen in the infographic below, the lending rates determined through the algorithm offer a variety of returns for LPs and are therefore not suitable for certain investors. As cryptocurrency market participants expand beyond degraded capital alone, differentiated sets of risk profile returns will become increasingly important.
MPL Token Economics
The Maple token “MPL” is an ERC-20 governance token that enables holders to earn fee income, participate in protocol governance, and provide credit protection to the liquidity pool.
As the Maple protocol gradually decentralizes control, MPL holders will have oversight of protocol-level changes such as fee adjustments (including those accruing to the pool), pool expenses, and whitelisting of new pool representatives. By pledging MPLs, the holder can provide credit enhancement to the pool in the event of default, i.e. in the event of a collateral shortage, the agreement will liquidate the pledged tokens to repay the loan balance. In turn, in order to provide this credit enhancement, MPL tokens will be rewarded with a portion of the fee pre-determined by the pool’s representative. In addition to the pledge, all MPL holders accrue a loan establishment fee paid by the borrower and liquidity provider, subject to a governance vote.
The Market Landscape
Understanding the importance of institutional credit is necessary, according to data provided by Genesis Global Trading, a leading cryptocurrency broker, which provides a significant amount of loan business to the off-chain crypto world. It completed $20 billion in loan originations in the first quarter of 2021, a significant increase from $7.6 billion in the fourth quarter of 2020, and the outstanding loan balance increased 136.4% to $9 billion from $3.8 billion in the fourth quarter of 2020. Overall, this marked the company’s twelfth consecutive quarter of growth, bringing total revenue to $40 billion since the launch of its lending business in March 2018.
Back on the chain, TrueFi, Maple’s largest cryptocurrency-native direct competitor, has also attempted to address the lack of a mortgage market. While there are many nuances in the design choices between the two protocols, the biggest differences are in the way loans are evaluated and the fact that TrueFi uses different pools for different assets. maple uses the Pool Delegate model described above. This model enables Delegate to use different credit strategies in different pools and gives borrowers access to the pooled markets from which they can choose. And TrueFi itself has a credit and risk team to evaluate the loans.
In addition to the difference in loan evaluators, TrueFi is also working on a new credit model that, although still in the early stages of application, aims to give a credit rating score from 0 to 255 based on repayment history, and transaction history.
The in-chain creditworthiness and credit risk scores are an important part of the DeFi puzzle and are integral to continuing to unlock the power of credit in DeFi. In addition to the TrueFi solution, there are a number of protocols working to solve this fundamental and complex challenge. Arcx has announced the launch of Sapphire v3, a DeFi pass that allows cryptocurrency users to anonymously build and verify their reputation on-chain, generating a score from 0 to 1000 based on on-chain governance participation, yield farming activity, airdrop receipts, and more .
Spectral Finance is also building a credit scoring ecosystem they call the Multi-Asset Credit Risk Oracle “MACRO” score, which allows users to receive specific loan terms based on their various affordability factors. And X-Margin is experimenting with a zero-knowledge cross-trade credit score that allows the companies involved in the transaction to remain private.
Credit is critical to the growth of total economic wealth, and cryptocurrencies are no exception. On-chain mortgages are the next step in DeFi’s rapid rise up the growth curve, enabling cryptocurrency-native institutions to stay on-chain.
Despite being in the early stages, albeit still in the early stages, Maple Finance, TrueFi, and those working on credit risk scoring and on-chain reputation are unlocking a new wave of DeFi loans to many new and existing participants around the world.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/non-full-mortgage-institutional-loan-agreement-maple-finance/
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