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The Scoop

The crypto credit market needs regulation to mature

Sun Jun 18 2023

Maturation of the Crypto Credit Market and Clearpool's Role in Decentralized Lending

  • Clearpool plays a role in decentralized lending in the maturing crypto credit market.
  • Last year's credit blow up was due to a lack of basic risk management and transparency.
  • DeFi can address transparency issues by allowing users to see transactions and understand leverage and risk.
  • Permissionless pools have an interest rate curve that encourages borrowers to maintain around 85% utilization, leaving 15% liquidity for lenders to withdraw.
  • Borrowers repay during volatile times to bring utilization back down to optimal levels.
  • The rat mechanism worked well in the permissionless environment during FTX, with $150 million of loans autonomously unwound within two days of bankruptcy announcement.
  • In permissioned environments, lenders conduct their own credit risk assessment on borrowers before deciding how long they want to lend.

Demand for Borrowing in the DeFi Space

  • Clearpool has seen demand from trading firms for borrowing despite a decrease in demand post FTX.
  • The company launched three new borrowers in the Tariq co-system this year and has experienced a spike in liquidity provided.
  • While DeFi hasn't seen significant growth this year, it is heading in the right direction.
  • Concerns exist on the lending side due to losses from last year, but some institutions still have appetites and retail influence is returning.

Clearpool's Products and Functionality

  • Cordora assesses a company's financial statements and exchanges to determine a risk score for lending without collateral.
  • Credit spreads are introduced, with higher risk scores resulting in higher interest rates.
  • Clearpool's prime product roadmap includes a KYB process for institutions to borrow or lend, creating pools, and selecting participants.
  • Borrowers can collateralize loans on prime, with additional functionality planned based on feedback.
  • A secondary trading aspect may be introduced later based on feedback.
  • CP tokens represent liquidity provided to the pool and accrue interest while also representing the credit profile of the pool's borrower.
  • The secondary market for CP tokens works similarly to the secondary bond market, providing instant finality and allowing lenders to withdraw liquidity if needed.
  • Credit derivatives can be built on top of this system, providing more information for the market and allowing for key financial metrics to be gleaned from the bond market that are currently lacking in crypto.
  • Exchange traded pools will enable lenders to diversify their liquidity in a single transaction, similar to how exchange-traded funds are created and written.

Future Developments and Possibilities

  • Clearpool is designing a new product for real-world asset tokenization using an ETF model to increase liquidity.
  • The guest believes a decentralized DeFi repo market is possible, but a secondary market and tradable tokens are needed first.
  • The team is also considering credit derivatives like CDS to provide risk management capabilities for lenders.