Since 2021, we have witnessed a period during which cryptocurrency and traditional economy players have started to work together instead of competing with each other. Interoperability and subsequently the integration of traditional financial organizations have replaced discussions about how competitive or alternative the innovative solutions offered by the cryptocurrency system can be to traditional financial products. Customers’ increasing demand for cryptocurrency-based products and the strengthening of lobbying efforts have triggered the integration process. As a result, many Wall Street giants began offering various services such as cryptocurrency custody and trading. Above all, young users and the turn of capital towards cryptocurrencies have played the biggest role in these companies taking the first step in this direction.
This step from traditional finance has not gone unaddressed by DeFi platforms. Since the legal issues posed by anonymity and decentralization are the biggest obstacle to traditional companies interacting directly with DeFi platforms, they have begun to offer a new solution, This solution was similar to the mechanism of DeFi platforms, which was exclusively reserved for users who fulfill legal obligations such as KYC-AML. In other words, it has resulted in the birth of new infrastructures lacking anonymity and using smart contracts while still operating on blockchain networks such as Ethereum. As a result, banking activities provided by DeFi platforms have begun to appeal to the traditional financial world, offering loans and funding options not just for the crypto economy but also for non-crypto markets.
A syndicated loan can be defined quite simply as several organizations joining together to provide a loan to a company, project, or government. The goal here is that lenders share the risk if the amount of credit requested is very high. In addition to these, apart from the current market conditions, syndicated loans can be seen as an alternative method for loan requests suitable for the specific conditions of the company, project, or government requesting the loan. A private loan can be issued through a bank if organizations are ready to lend in these unique circumstances.
Collecting credit from multiple lenders is very similar to DeFi mechanisms, isn’t it? Similarly, on DeFi platforms, by depositing money into a pool the demands of those who want to borrow are effectively met, and the revenue is shared. For this reason, DeFi platforms have created a syndicated loan platform exclusive for their corporate clients by using a similar system. Below is given a summary of Maple Finance, Aave Arc and tbDEX to illustrate the recent interesting developments in this area.
Maple Finance is a DeFi platform that operates on the Ethereum network with a DAO (Decentralized Autonomous Organization) structure. The MPL, the platform’s token, is used to vote on changes to the platform. However, Maple Finance is a platform that provides private loans to businesses. For this reason, the application of legal procedures such as KYC-AML prevents the companies that receive loans from going anonymous. This way, companies can borrow and lend as if they were getting a syndicated loan from the bank without worrying about the legal foundation of cryptocurrencies. The most interesting aspect of the Maple Finance platform is that you do not have to put up collateral to get a loan. Maple Finance, which is distinct from other DeFi providers in this regard, provides reputation-based loans to banks in a similar way.
Reputation-based lending may seem like a mechanism quite contrary to the Bitcoins principle of producing no unbacked value. Given that banks effectively print money by this way of creating additional borrowings, a mechanism that is quite contrary to one of the reasons for Bitcoin’s emergence in the first place. Unlike banks, however, Maple Finance does not create a completely similar system, as it does not keep deposits and multiply deposits by providing loans, but merely provides an intermediary infrastructure service via smart contracts that ensure that capital available in the market is delivered to companies that need it. So the nominal credit system does not contradict the policies that Bitcoin rejects. On the contrary, it assumes a critical role in bringing institutional investors into the crypto economy and channeling more capital into this area. Obtaining cryptocurrency collateral for the loan also aims to prevent a decrease in the collateral value due to the volatility of cryptocurrencies. Since Maple Finance issues the loan in USDC, such collateral is not required.
By filling out the form on the platform, the company wishing to take out a loan first indicates the amount of the loan requested, the interest it wishes to pay, the payment period, and whether it will provide a collateral. The credit request is then published on the platform after the firm information is entered. Those who wish to lend to the company, having seen the demand, pay money into the loan pool by transferring USDC to the platform. When the money in the pool reaches the requested amount, the company can start the loan process by taking the money out of the pool. However, if the money deposited in the pool is insufficient, the money in the pool is returned to the users, and the credit application is closed.
Another component of the system are the tokens belonging to the pool. Users who lend money by depositing money into the pool receive MPT tokens in proportion to the amount of money they deposit into the pool. This token represents your balance in the pool and means that you share in the pool’s interest earnings. MPT tokens can be staked in a second pool called Liquidity Mining Contract. In addition to the interest income from the pool, MPL tokens can be earned when MPT tokens are staked in them. The platform’s MPL token prize, on the other hand, is not free. The MPT tokens in this pool serve as insurance, as they are collected and sold to compensate for the loss if the loan is not repaid. To put it another way, users must risk their money by investing it in insurance to earn the MPL token prize. The interest yield of the loan is divided 50%-50%. Half of the income goes into the platform’s treasury, while the other half goes to the users who have paid money into the pool.
The first company to receive a syndicated loan on Maple Finance was Alameda Research, a cryptocurrency trading service provider owned by FTX Exchange. With Alameda, the current system has been tested for the first time by a big player, which will presumably boost confidence in the existing mechanism. Alameda Research is not a traditional financial firm. On the contrary, it is a company that deals directly with cryptocurrencies. However, this example is very important because it shows that the credit mechanism based on reputation can work effectively for large companies. Based on the credit Alameda has received, other companies may possibly make a similar claim.
The companies that provide the $25 million loan are just as significant as the company that receives it. Three companies made loans to Alameda to form the loan amount and share the risk. These are the companies Coinshares, Abra, and Ascendex. It can be easily said that all three companies are reputable and leaders in the crypto economy. It is quite normal for this mechanism, which can be considered new, that both the lender and the field are cryptocurrency companies.
Sidney Powell, CEO of Maple Finance, said that companies spend a lot of time trying to make the Internet work their way. Instead, he made a very directional statement for institutional investors, in particular, saying that they see ETH as Internet money, seek the most appropriate solution for them on the Internet, and implement the Maple Finance platform for that purpose. In addition, Powell stated that no one wants to deposit $150 for a $100 loan, and the mechanism should be changed in that direction. Although it may be impossible to agree with Powell due to the volatility of cryptocurrencies totally, the arguments mentioned above are quite valuable in illustrating the institutions’ perspectives.
Maple Finance is not the only company that provides DeFi services to businesses. Aave, one of the largest DeFi platforms, had previously announced that it would set up a new platform called Aave Arc which would handle processes such as KYC-AML and only allow companies that meet regulatory requirements to operate. Fireblock was the first company accepted to this platform. The acceptance of Fireblock, a cryptocurrency company licensed by MSB (Money Service Business) in the U.S., to the platform was approved on November 18 after it was put to the vote on Aave. The necessary integrations were completed on November 23. It can be said that Aave is on a similar path, though not as fast as Maple Finance.
Jack Dorsey, CEO of Twitter and Square, has announced that he will create a DeFi platform connected to the Bitcoin network and announced that the platform’s name was to be tbDEX. The platform will offer reputation-based lending similar to Maple Finance. It was also announced that cryptocurrencies — fiat money and goods can be traded on the platform. In other words, the combination of cryptocurrencies and various markets of the traditional world on a single platform was designed.
Although DeFi was a sector that carried the crypto sector up between 2020–2021, after 2021, it has left its place to the NFTs. In the meantime, syndicated loans and NFT-guaranteed loan ideas came to the fore, which will allow the sector to regain popularity. Considering the above three platforms as examples, we can predict that the collateral terms of DeFi mechanisms will be stretched, and they will become popular again in 2022 by becoming preferred platforms for institutional investors. The sector’s maturation in this direction will create an important alternative for companies wishing to obtain credit. Above all, the fact that companies other than crypto companies can also receive loans may take the industry to a different point. The fact that El Salvador could not get a loan from the IMF and obtained the same amount by issuing a BTC-based bond shows that cryptocurrencies are an alternative to traditional institutions and have come a long way. The fact that this extends to country funding is highly encouraging for the future of crypto.
In ING Bank’s DeFi report last May, there were references to integrating the above-mentioned reputation-based credit system with DeFi platforms. The Bank’s praise for and constructive criticism of the existing DeFi mechanism provided an institutional perspective on how the industry should change. On May 27, we published a summary of this article. It will be beneficial to re-read our article to see the current transformation process’ signals. You can click here to access the article.
The above companies are included in this article only to illustrate the process. It is not intended for any advertising or advice. BV Crypto is not affiliated with the companies/platforms mentioned above.
Prepared by: Berkay Aybey
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