Sebastian Sinclair

Embattled crypto market-making firm Auros Global has reached a resolution with its primary creditor to fully repay its debt following hardship brought about by FTX’s collapse last year.



The firm&#8217;s liquidity woes were one factor leading DeFi credit platform Maple Finance <a href="https://blockworks.co/news/maple-finance-bad-loans-immediate-defaults">to rethink how it will handle bad loans</a> going forward. 



M11 Credit, the credit solutions arm of blockchain investment company M11 Group, said in a <a href="https://medium.com/@M11PoolDelegate/update-on-auros-100-repayment-of-funds-to-m11-credit-pools-on-maple-expected-over-time-6ec7451f4dc6" target="_blank" rel="noreferrer noopener">statement</a> Wednesday, that Auros intends to make its liquidity providers on Maple Finance whole “over time.”



Around 55% of Auros’ debt pertaining to both the M11 Credit Permissioned USDC and M11 Credit wETH pools on Maple has been paid back, while a further 40% of the outstanding debt has been reissued for a maximum of nine months.



Roughly 5% of the outstanding debt has been reissued for a maximum of 90 days at 0% interest as a short-term facility, the statement reads.



“The above outcome is the result of months of productive discussions with Auros,” M11 said. “The M11 Credit team were in constant communication and negotiations with Auros and other creditors as they worked to strengthen their balance sheet.”



Auros missed two of its loan repayments to M11 on Nov. 10 due to funds being trapped on FTX’s platform, which sapped liquidity and forced the company into provisional liquidation.&nbsp;



The &#8220;<a href="https://twitter.com/Auros_global/status/1605227442838175745" target="_blank" rel="noreferrer noopener">light touch</a>&#8221; liquidation, implemented on Nov. 24, allowed the firm to restructure its debt under the supervision of a court-approved advisory firm.



In a bid to shield the interest of all liquidity providers in the affected M11 Credit Pools, M11 took measures a month later to preemptively impair all of Auros’ loans and reduce the market maker’s exposure to Maple.



The credit solutions arm also said it was “unfortunate” the same outcome had not been reached with defunct digital asset trading firm Orthogonal Trading, which also entered into provision liquidation following November’s market woes.&nbsp;



M11 Credit is currently engaged in the recovery of $36 million in unpaid debt on Maple from the trading firm. Auros and M11 did not immediately respond to requests for comment.



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Maple Finance’s M11 Pool Investors Can Expect Full Debt Repayment

John Lee Quigley

John Gilbert

<div id="highlights-block_48c2921c5c0807c63d03943f134a44e5" class="highlights">
 <ul>
 <li>Real-world assets (RWAs) are tangible assets or financial primitives with the potential to serve as collateral in the DeFi industry</li>
 <li>Real-world lending brings vast opportunities from emerging markets on-chain</li>
 </ul>
 
</div>



The<a href="https://defillama.com/" target="_blank" rel="noreferrer noopener"> $50 billion</a> decentralized finance industry has been at the forefront of financial innovation in the past few years. Decentralized finance — or DeFi — primitives such as stablecoins, swaps, lending, derivatives, insurance and prediction markets have been democratizing access to financial products. Nonetheless, DeFi returns have been hard hit by recent bearish conditions. Yields have hit rock bottom with investor participation also <a href="https://ambcrypto.com/defi-activity-on-ethereum-network-continues-to-drop-heres-why/" target="_blank" rel="noreferrer noopener">at an all-time low</a>.



The reasons for DeFi&#8217;s rapid decline in assets under management are not overly complex. Aside from the industry&#8217;s nascent nature, yields typically come from a recursive on-chain activity tied to crypto assets. Investors earn yield by providing liquidity to borrowers and traders on decentralized exchanges (DEXes) or overcollateralized lending platforms, and they are rewarded for doing so with inflationary tokens or one-time treasury boosts. These chains of activities generate yield in a bull run but quickly turn into a death spiral when asset prices crumble and on-chain activity drops.



The DeFi landscape has struggled to scale because the underlying yield generation mechanism only works when prices are going up. The unsustainable yield model is best reflected by the cumulative total value locked (TVL) in DeFi protocols dropping from nearly $180 billion to nearly $50 billion since the market peak.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/Lr6k4khk5TyhbDvRC2ignglNVAxB5dHLHSiiU8ILA6nFmjIvMkunuygizBgeLxUQ7X7eqV546E6hH5KGFSia1rDt6nQ2tWpsphQ63mYKttOpyJUgrZ5nik0k2Lj36EuFFpTZTlggH2A-5yqtzwP74tz8BC262Iim95WxHxXTmC4l6t33ZUMWO5x5Aw" alt=""/><figcaption class="wp-element-caption">Source: <a href="https://defillama.com/" target="_blank" rel="noreferrer noopener">DeFiLlama</a></figcaption></figure>



The pressing need for sustainable income in DeFi has ignited the growth of protocols that generate a yield from real-world assets (RWAs). While many protocols were created to tokenize RWAs, only a few integrated this technology to provide investors across DeFi and TradFi yields that tap into some of the world&#8217;s biggest financial credit markets.&nbsp;



For example, <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch’s lending protocol</a> uses RWAs in a way that demonstrates higher stability and growth. According to LoanScan, its USDC yields outperformed Aave and Compound over the past year.



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/Hu4YeoG0dEwYiGtnhGnUexlIQzxmZ0jPyma5tn292MDW49xVYAtrEsWluSHCbon4_zOCBWo0-o-utQscaUlC8ZaLgYRl9hLHZTf8o3aRZ5v5j8dTF2c7M3xByccei8litPIPS_YoLbCPYUQTp57BYFi0PUB-KONbWADHqdvLd1w49m77KJYHw2jAbA" alt=""/></figure>



And when comparing Goldfinch’s revenue model to Aave’s, it is clear that the source of yield is fundamentally different:



<figure class="wp-block-image"><img decoding="async" src="https://lh3.googleusercontent.com/JbdbXQ__zsjxDW2OIXhnKBadIBZzcGbOlmP9upOJ8Y7WEgGeVFeZRyKcQPNEviPYtCtrO2GnjGkBhK1VoSOzDrgM4m-eJb22jkmnvrT6xQzgGkjazt8sOR0Iy4_Fu2neuVfNNLwekSt5-NsWZJmmkCNgCWX2fhx9ESiW5TM8ODwStFiHVcixAEoQuA" alt=""/></figure>



To understand how this strategy is a fundamental shift in DeFi, we need to explain the evolution of RWAs.



<h3 class="wp-block-heading">What are real-world assets (RWAs)?</h3>



Real-world assets are tangible assets or financial primitives with the potential to serve as collateral in the DeFi industry. Here are the most popular examples of RWAs:



<ul>
<li>Cash</li>



<li>Metal (gold, silver, etc.)</li>



<li>Real estate&nbsp;</li>



<li>Corporate debt</li>



<li>Insurance&nbsp;</li>



<li>Salaries and invoices</li>



<li>Consumer goods</li>



<li>Credit notes</li>



<li>Royalties, etc.&nbsp;</li>
</ul>



RWAs compose the majority of global financial value. For instance, the fixed income debt market is worth an <a href="https://www.sifma.org/resources/research/fact-book/" target="_blank" rel="noreferrer noopener">estimated $127 trillion</a>, the total value of global real estate is <a href="https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate.html" target="_blank" rel="noreferrer noopener">approximately $362 trillion</a>, and gold has an <a href="https://companiesmarketcap.com/gold/marketcap/" target="_blank" rel="noreferrer noopener">$11 trillion market capitalization</a>.&nbsp;



RWAs already underpin lending and yield generation activities in the traditional finance world. However, they&#8217;re relatively untapped in DeFi. Unlocking the considerable value attached to RWAs, and to the off-chain financial system in general, is the key to sustainable yield DeFi models without the vast volatility that has historically been associated with the relatively nascent DeFi world.



<h3 class="wp-block-heading">How are real-world assets used in DeFi?&nbsp;&nbsp;</h3>



The term &#8220;real-world assets&#8221; emerged in recent years to differentiate cryptocurrencies from traditional financial holdings. Unlike cryptocurrencies that only exist in digital form, RWAs are usually tangible and tied to real-world organizations.&nbsp;



However, blockchain technology has unlocked the possibility of bridging real-world assets to DeFi. Developers typically use smart contracts to create a token representing an RWA while providing an off-chain guarantee that the issued token is always redeemable for the underlying asset.



<h3 class="wp-block-heading">Stablecoins</h3>



Stablecoins are a perfect example of successful real-world asset use in DeFi, with three of the top seven crypto tokens by market capitalization being stablecoins (a combined $136 billion). Issuing companies such as Circle maintain an audited reserve of USD assets and mint USDC tokens for use across DeFi protocols.



<h3 class="wp-block-heading">Synthetic tokens</h3>



Synthetic tokens represent another use case involving the bridging of RWAs to DeFi. Synthetic tokens allow on-chain trading of derivatives linked to currencies, stocks and commodities. Leading synthetic token trading platform Synthetix had <a href="https://defillama.com/protocol/synthetix" target="_blank" rel="noreferrer noopener">$3 billion worth of assets</a> locked in its protocol at the peak of the 2021 bull run.



<h3 class="wp-block-heading">Lending protocols</h3>



Another exciting adoption of RWA in DeFi involves lending protocols. Unlike primitive lending protocols that rely on crypto-native borrowing, RWA-focused DeFi platforms service borrowers with real-world businesses. This model offers relatively stable returns insulated from crypto volatility.



<h3 class="wp-block-heading">How lending protocols leverage RWA to generate actual yield</h3>



The DeFi lending business model provides the most cost-effective way to pool and distribute capital between a vast group of lenders and borrowers. It cuts out intermediaries and automates money movement while offering users relative anonymity.&nbsp;



However, the focus on serving crypto-native investors creates significant limitations. The pool of capital in DeFi is underutilized, especially during bear markets. The funds are also inaccessible to the world’s biggest borrowers — real-world businesses with no crypto assets to post as collateral.



Lending protocols such as <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch</a> address these limitations by building a robust model for making DeFi capital accessible to businesses with real-world economic activity. These audited firms with millions of dollars tied in RWAs enter into a legally binding agreement to obtain loans issued with these assets as collateral. The DeFi protocol generates yield from interest paid on issued loans, along with yield enhancements from the treasury, which collects platform fees, and additional token incentives.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/i-mvdX85T4s3KuNV6bNoWSE_H5Cf2zRbrQn1FypeSYtLz1eUpWxUQEQnLXa3MWtTJ0HVVkHNzf2R60BDWAjTvfo4itfkrVfqDfweHnDMtovlJFsfD3eSIwCL4qCCGOII7lVy9lHQYbCLpdxuUKhfMyK9EitKstqsTFbAie2PmVqAiphpmRDYXmhDuQ" alt=""/><figcaption class="wp-element-caption">Active loans on Goldfinch | Source: <a href="https://dune.com/queries/15148/83023" target="_blank" rel="noreferrer noopener">Goldfinch dashboard on Dune</a></figcaption></figure>



Most importantly, Goldfinch&#8217;s yield is insulated from crypto volatility as borrowers deploy funds in real-world ventures. With the average borrower pool loan term on Goldfinch lasting 3-4 years with a set interest rate, the protocol’s interest-sourced USDC yields remain stable despite volatility in the crypto markets. There is also sustainable capital demand, ensuring the lenders get the best rates for deposited assets. Let’s take a closer look at how this works under the hood.



<h3 class="wp-block-heading">How Goldfinch works</h3>



Goldfinch is pioneering an efficient DeFi lending model that supplies on-chain financing to offline businesses. These borrowers propose debt capital raises to the Goldfinch protocol. Once approved, they enter a legally binding agreement to post off-chain assets as collateral for the loan.&nbsp;



Goldfinch operates with a novel “trust through consensus” mechanism which allows borrowers to show creditworthiness based on the collective assessment of other participants, combining the trust of its tiered deposit model for investors, robust due diligence documentation, and a credit specialist community to verify that a borrower is creditworthy.&nbsp;



A common misconception is that approved borrowers can immediately access a pre-funded pool. In reality, a borrower proposes the terms it wants for its loan to the protocol, and the protocol&#8217;s participants actively choose whether or not to fund that specific deal.&nbsp;



First, borrowers propose the loan amount and terms they are seeking in the form of a borrower pool smart contract and provide due diligence information to the community of investors. There are two ways to invest: as a backer or as a senior pool liquidity provider. Backers actively evaluate individual borrower pools, and choose whether or not to invest USDC into a specific deal. Backers are incentivized to effectively evaluate loan terms by providing first-loss capital.&nbsp;



When backers invest, the protocol’s senior pool automatically allocates funds to the pool according to the protocol’s governance-set leverage model. Currently, that means the senior pool automatically supplies USDC at a 4:1 ratio to the USDC actively supplied by backers. While their investment is automatically diversified across the protocol’s loans, senior pool liquidity providers are protected by supplying second-loss capital, and 20% of the senior pool’s interest is reallocated to backers to reward their work evaluating pools.&nbsp;



So, while a borrower could be qualified to participate on the platform based on their proven track record of business success, history of repayments, or real-world assets to provide as collateral, their proposed loan could still not be funded if they are proposing terms that no backers deem a worthy investment.



This month, Goldfinch also announced the launch of a novel <a href="http://goldfinch.finance/membership" target="_blank" rel="noreferrer noopener">Membership Vault system</a>. They stated that it is designed to enhance protocol participation and is the first step of a broader tokenomics redesign. The membership offers an opportunity to further align and incentivize Goldfinch investors’ interest in the long-term success of the protocol. And secondly, it rewards the global community of Goldfinch participants who continue to contribute to Goldfinch’s growth and resilience.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Goldfinch taps into blockchain’s immutability to incentivize borrowers to repay their loans. Borrowers must maintain a reputable on-chain credit history to qualify for future loans. Blockchain smart contracts also provide automated settlements, delivering superior efficiency to TradFi lending.



Goldfinch’s model is efficient for DeFi lenders and provides global access to capital for businesses. The two-sided marketplace gives DeFi lenders access to stable crypto yields backed by RWAs, while providing borrowers with faster, cheaper, and more efficient access to financing than traditional outlets can offer. It also unlocks lucrative lending opportunities in emerging markets that were initially only available to institutions and insiders.&nbsp;



<h2 class="wp-block-heading">Opportunities in emerging markets&nbsp;</h2>



Goldfinch&#8217;s approach to real-world lending brings vast opportunities from emerging markets on-chain. For instance, Africa is currently the world&#8217;s <a href="https://partechpartners.com/2021-africa-tech-venture-capital-report/" target="_blank" rel="noreferrer noopener">fastest-growing financial technology market</a> with an explosion in the adoption of internet-connected devices. Yet, African tech startups <a href="https://qz.com/africa/1861034/what-covid-19-is-doing-to-africas-tech-startups/" target="_blank" rel="noreferrer noopener">lack access to requisite capital</a> or pay extremely high interest rates to do so. They face international barriers, compete with government bonds, infrastructure,&nbsp;and&nbsp;wealthier enterprises.



DeFi lending allows these borrowers to access on-chain capital while using off-chain assets as collateral. In turn, lenders enjoy lucrative yields that are historically unavailable in developed markets.&nbsp;



There are more benefits. According to the <a href="https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report-april-2022#Chapter-3:-The-Rapid-Growth-of-Fintech:-Vulnerabilities-and-Challenges-for-Financial-Stability" target="_blank" rel="noreferrer noopener">IMF 2022 Global Financial Stability Report</a>, the IMF estimates DeFi could provide up to 12% in annual savings to emerging market businesses.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/dTvnOQilx4_cA4nvReWE7-jn3lhlGyj7KCpnDStTgv_rZ1Z5rz7P0KhYwg8jKfIYAa_lbq6nEUACeeXtypF5CzDVZmaAP-KwLhli5iX2rmNLt3FBZpjDDsdjO0z69h-PEWdAosetDPP_E2BpvLzDqjQmKhBZaQvc9uHg6AbfMTGFu6Id-nXEDrQFxg" alt=""/></figure>



Blockchain&#8217;s efficiency allows network participants to enjoy near-instant loan settlements, as opposed to the lengthy waiting times associated with moving funds through the traditional banking system. Furthermore, the entire system democratizes access as individuals can become business financers on Goldfinch, while businesses globally can tap into an exhaustive capital marketplace.&nbsp;



The adoption of RWAs within DeFi opens up the industry to the world&#8217;s largest debt markets. It also provides greater capital efficiency for lenders and unlocks a huge capital pool to borrowers in emerging markets. Over time, this approach will accelerate mainstream cryptocurrency adoption and provide a stepping stone for DeFi to reach its $100 trillion potential.



This content is sponsored by <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch</a>.



Disclaimer:&nbsp;Nothing in this sponsored article and site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockworks is not a fiduciary by virtue of any person’s use of or access to the site or content.



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What Are Real-world Assets? DeFi’s Newest Yield

Brian Nibley

<div id="highlights-block_63361de4aa556" class="highlights">
 <ul>
 <li>DeFi credit allows borrowers to use their existing real-world assets as collateral for DeFi loans</li>
 <li>The silver lining in the bursting of the initial DeFi bubble is that investors now understand that high yields aren’t necessarily the most attractive</li>
 </ul>
 
</div>



On-chain lending is evolving at lightning speed. It was first introduced as a protocol-first innovation — largely unreliant on the organizational oversight seen in institutional lending. It quickly evolved from a means for anonymous parties to lend and borrow at their own rates to fully automated and decentralized overcollateralized lending protocols such as Aave and Compound.&nbsp;&nbsp;&nbsp;



These DeFi lending protocols revolutionized credit by making it immediately accessible to anyone with a wallet address. But the biggest trade-off was capital inefficiency. The radical accessibility of lending protocols locked in more capital than it lent.&nbsp;



This problem in capital efficiency inspired others to approach this attempt at decentralized finance from a different angle. Instead of decentralizing the lending process they looked for new ways to extend credit into the DeFi ecosystem — in hopes of increasing efficiency and keeping the credit more accessible.



<h3 class="wp-block-heading">So what is DeFi credit?</h3>



DeFi credit imports trust from traditional credit check and underwriting mechanisms to allow borrowers to use their existing real-world assets as collateral for DeFi loans. For example, an investor could bring their real estate holdings on-chain and borrow against them, receiving a loan in the form of stablecoins.



This increases capital efficiency in two ways. First, it doesn’t necessitate overcollateralization on-chain, and second, it diversifies the capital. DeFi credit can provide a bridge between the world of DeFi and the world of real assets. By tokenizing assets and placing them on the blockchain, investors can leverage their assets to access all that DeFi has to offer without having to sell something and convert the proceeds to crypto.



<h3 class="wp-block-heading">A short history of DeFi</h3>



The first wave of DeFi created and fed a desire for yields that were far in excess of anything that could be sustained in the long term. Unrealistic expectations of risk/reward ratios that were incredibly skewed became the norm. Many chomped at the bit for great rewards while few understood the inevitable risks.



The silver lining in the bursting of the initial DeFi bubble is that investors now understand that high yields aren’t necessarily the most attractive. A balance between returns and sustainability could be considered most desirable.



In most cases, DeFi 1.0 yields were opaque, fluctuated wildly, and involved exposure to multiple forms of risk.



The source of yield needs to be the opposite of that: transparent and stable while exposing investors to the least amount of risk possible. Because digital assets cannot provide this stability alone, investors turned to the real world for a solution.



<h3 class="wp-block-heading">What are real-world assets?</h3>



A <a href="https://cms.blockworks.co/what-are-real-world-assets-defis-newest-yield/">real-world asset</a> is property that doesn&#8217;t naturally exist in the digital world. They can be any type of asset like real estate or gold, typically for the purpose of DeFi credit, they are receivables and other financial papers. These assets can be tokenized, creating a digital representation of the asset that can be used for transactions on the blockchain.



Decentralized finance tends to be circular. Investors use cryptoassets to take out loans in crypto or earn yield on their crypto in the form of crypto. While this has been a big step forward, the industry needs to be able to interact with assets in the real world before it can be integrated with traditional finance.



<h3 class="wp-block-heading">How DeFi 2.0 brings real-world asset lending on-chain&nbsp;</h3>



Fortunately, solutions to this end are being developed. Organizations such as <a href="https://credix.finance/" target="_blank" rel="noreferrer noopener">Credix</a> are working to bring real-world asset lending on-chain.



Here’s a brief overview of how the process works:



<ul><li>Credix partners with a credit financing boutique to structure a deal with a fintech company.</li><li>After all parties have agreed on the terms of the debt facility, the deal is created on the Credix marketplace.</li><li>Once the underwriters subscribe to and finance the junior tranche, the senior tranche is financed by the liquidity pool.</li><li>The deal is then registered at the local registry and issued and financed on-chain.</li><li>The fintech receives the financing in USDC, converts it into local currency and originates loans to the end client.</li><li>These loans are then provided as collateral to the Credix deal.&nbsp;</li></ul>



Solutions such as these offer access to crypto liquidity for fintech companies in emerging markets.



<h3 class="wp-block-heading">Can real-world assets offer a better source of yield?</h3>



Moving the lending process on-chain offers transparency to liquidity providers, as it enables them to evaluate portfolio performance and make more accurate risk assessments.&nbsp;



Real-world asset lending can offer yields from sources not tethered to crypto market volatility. This could provide a more stable and predictable source of yield while reducing the risk of credit market collapses and contagion.



For example, <a href="https://medium.com/credix/fintech-stories-tecredi-auto-financing-through-defi-w-credix-ca4997f3c505" target="_blank" rel="noreferrer noopener">Tecredi</a> is a fintech company that provides auto financing in Brazil. Credix helps them partially finance their vehicles on-chain, guaranteeing the use of proceeds and overcollateralizing loans. Rates are lower than the market average thanks to a network of resellers that could foot the bill in case of any default.



Given the difficulty of access to capital, the lack of capital, and the concentration of banks, credit is quite costly in emerging markets. The <a href="https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments" target="_blank" rel="noreferrer noopener">Bank of England</a> has noted that “cross-border payments lag domestic ones in terms of cost, speed, access and transparency.” The Tecredi example illustrates how on-chain credit can improve these transactions by every measure.&nbsp;



Borrowers who don’t have access to traditional lines of credit can find financing through on-chain credit. At the same time, investors benefit from increased transparency of the risks they undertake. And because crypto and DeFi break down the barriers between nation-states, international investors can now access these opportunities.



<h3 class="wp-block-heading">Will DeFi credit unlock a new boom in crypto lending?</h3>



As with many aspects of the crypto ecosystem, regulation remains a key issue. There are no clear laws on the books regarding how tokenized real-world assets and any related on-chain loans could be treated.&nbsp;



Regulators have expressed concerns about how young the industry is, how volatile related assets can be, and the potential for these products to operate in a non-compliant manner.&nbsp;



The best that can be done at present is to be as compliant as possible while being in a position to deal with future regulations as they arise. In some cases, <a href="https://www.oecd.org/daf/fin/financial-markets/Regulatory-Approaches-to-the-Tokenisation-of-Assets.pdf" target="_blank" rel="noreferrer noopener">regulators approach the issue</a> by applying existing financial regulations to tokenized assets or adapting existing rules to accommodate them.&nbsp;



Credix recently joined <a href="https://nextfintech.com.br/en/" target="_blank" rel="noreferrer noopener">Next</a>, a Fenasbac (innovation arm of the central bank of Brazil) accelerator to explore further legal innovation.



Credix uses a <a href="https://docs.credix.finance/" target="_blank" rel="noreferrer noopener">permissioned version</a> of Solana. This means that only accredited investors who pass KYC/KYB regulations can gain access to the Credix platform. Investors also then have their wallets and addresses whitelisted. This helps to ensure compliance in that 1) it’s clear and transparent who is participating in the system, and 2) should new regulations arise in the future, needed customer data will already be on file.



In addition, Credix works closely with local and global law firms to register all deals with local registries. The company also works closely with local regulators and central banks on these matters.



Once there are clear regulatory standards in place, it could unlock a wave of institutional capital into DeFi credit services.



This could lead to a new “DeFi summer,” as the crypto yield ecosystem becomes fueled by real world sources of income.



This content is sponsored by <a href="https://credix.finance/" target="_blank" rel="noreferrer noopener">Credix</a>.



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What Is DeFi Credit? The Evolution of On-Chain Lending

Bessie Liu

<div id="highlights-block_6308dd97b6629" class="highlights">
 <ul>
 <li>In Compound III, collateral will remain the property of the supplier</li>
 <li>Users can borrow USDC using ETH, WBTC, LINK, UNI, and COMP as collateral</li>
 </ul>
 
</div>



DeFi developer Compound Labs has officially launched Compound III, a streamlined version of the protocol emphasizing security, efficiency and user experience.



The governance <a href="https://compound.finance/governance/proposals/116" target="_blank" rel="noreferrer noopener">proposal</a> to initialize Compound III was first submitted on August 18, 2022, and received overwhelmingly positive support from governance, receiving 100% approval.



“The most profound change was to move away from a pooled-risk model, where users can borrow any asset,” Robert Leshner founder of Compound Finance <a href="https://medium.com/compound-finance/compound-iii-is-live-a7983dee7e60" target="_blank" rel="noreferrer noopener">wrote</a> in a blog post.



&#8220;Safer risk management in crypto has been a thesis that is emerging as a result of opaque financial practices in CeFi,&#8221; Paul Veradittakit, General Partner at Pantera Capital, told Blockworks. 



<blockquote class="wp-block-quote">&#8220;Continued enhancement of DeFi risk practices will continue to demonstrate DeFi&#8217;s resilience in this bear market and in the next bull market,&#8221; Veradittakit said.</blockquote>



<h3 class="wp-block-heading">Building on past Compound versions</h3>



Compound was first launched in September 2018 and is an interest rate protocol which pioneered the on-chain borrowing and lending concept. Users can earn interest on deposited funds without a third party intervening. Borrowers can take out loans against their cryptoassets deposited with the protocol. 



The second version of Compound launched in May 2019, introducing liquid tokenized collateral in the form of cTokens to the protocol. It was also the turning point for the protocol to become community-governed via COMP, with a governance system that has been widely adopted by other protocols and DAOs.&nbsp;



In the first two versions of the protocol, with a pooled-risk model, one single bad asset could theoretically drain all assets from the protocol because collateral could be re-used. That’s why Compound has always limited the number of asset types it supports.



In the latest version, cTokens are no more, and collateral remains the property of the supplier, Leshner said.



“Compound III features a single borrowable asset. When you supply collateral, it remains your property. It can never be withdrawn by other users except during liquidation,” he said.



The latest version of Compound will allow its users to borrow USDC using ETH, WBTC, LINK, UNI, and COMP as collateral.



“While you won’t earn interest on collateral anymore, you’ll be able to borrow more; with less risk of liquidation and lower liquidation penalties; while spending less on gas,” Leshner said.



The new version launched with a Business Source License (BSL), which is meant to limit the ability of other teams to fork the protocol’s open-source code without governance approval. This scheme has been effective for Uniswap Labs which launched its V3 under the same license. Both Uniswap and Compound saw dozens of forks using their second iteration with more permissive licensing.



Jeremy Allaire, CEO of Circle, <a href="https://twitter.com/jerallaire/status/1563185488131149829" target="_blank" rel="noreferrer noopener">praised</a> Compound III on Twitter as “simpler, safer, more efficient, and provides one of the best possible platforms for USDC borrowing.”



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With Compound III Launch, DeFi Pioneer Emphasizes Security

<div id="highlights-block_62e15d2ec3d68" class="highlights">
 <ul>
 <li>Traditional invoice financing helps businesses borrow money from reputable insurers against money owed by customers</li>
 <li>This new partnership will allow invoices to be tokenized on the blockchain</li>
 </ul>
 
</div>



Decentralized lending protocol Polytrade is tapping a fresh source of liquidity: DeFi loans targeting startups and midsize businesses looking for lines of credit.



Polytrade’s latest counterparty, Teller protocol, ought to permit Polytrade to tokenize real-world invoices and bring those assets on-chain.&nbsp;



In traditional finance, invoice financing helps businesses borrow money from insurers via collateral owed by borrowers. Now, on Polytrade, invoices will be assigned to the platform at the loan maturation date and then tokenized.&nbsp;



“By utilizing Teller protocol, Polytrade [can] unlock an entirely new liquidity pool, offering a wider array of qualified lenders the chance to provide trade finance credit,” Piyush Gupta, founder of Polytrade, said in a statement.&nbsp;



Ryan Berkun, CEO of Teller, told Blockworks he wanted to build Teller because he felt that for DeFi (decentralized finance) to grow up and increase market share, “we needed to expand to some type of lending based financing or under-collateralized lending.”



Knowing that borrowers were on the hunt for access to more capital to grow operations, Berkun said he&nbsp; “wanted to create an infrastructure that would make it easy for businesses to launch their own lending book.”



“That is what Teller is today — a lending marketplace that enables fintech business owners [and] developers with easy infrastructure to source capital from DeFi,” he said.&nbsp;



Unlike many other DeFi lending protocols, Teller does not have an internally operated liquidity pool.



“Every borrower is different,” Berkun said. “They need different interest rates and different terms.”&nbsp;



Teller, as such, has a number of design parallels to non-fungible token (NFT) marketplace OpenSea — with loans standing in for digital collectibles. 



The protocol lets borrowers to bridge off-chain data to on-chain loan transactions. Businesses and individuals requesting assets will propose a loan request on the platform, and suppliers will commit to assets and loan requests of their choice.



The last step to seal the deal is agreeing to terms.



Berkun said Teller’s new partnership with Polytrade will help solve international financing trade problems.



“Polytrade is bringing legitimate invoicing from trade financing to the on-chain world, so they can source capital for these invoices,” he said. “They’ve been doing this since 2014 in the traditional finance world and have insurance built in on all of these invoices.”



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DeFi Lender Moves To Tokenize Real-world Loans On-chain

Jocelyn Yang

<div id="highlights-block_62b19d97ac78c" class="highlights">
 <ul>
 <li>USD Coin interest rates are lower than four-week Treasury bills amid the crisis</li>
 <li>Despite a bear market, analysts think going forward the rates of DeFi will come closer to being in-line with, if not above, traditional markets</li>
 </ul>
 
</div>



The DeFi space has seen a sharp drop off as the market continued to be battered following <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius</a>&#8216; liquidity crisis and the butterfly effect going on this week. The ability to generate low-risk yield in DeFi (decentralized finance) has fallen, followed by an outflow of liquidity, hitting stablecoins&#8217; interest rates in the lending market. 



USD Coin (USDC) interest rates on money market protocol <a href="https://app.aave.com/markets/" target="_blank" rel="noreferrer noopener">Aave</a> stand at 0.76% and on <a href="https://compound.finance/markets" target="_blank" rel="noreferrer noopener">Compound</a> at 0.24% as of Tuesday at 6:00 am ET — both lower than the latest 1.18% yield on <a href="https://ycharts.com/indicators/4_week_treasury_bill_rate#:~:text=4%20Week%20Treasury%20Bill%20Rate%20is%20at%201.16%25%2C%20compared%20to,long%20term%20average%20of%201.15%25." target="_blank" rel="noreferrer noopener">four-week Treasury bill</a> — reversing the scene from the bull market. 



“Some people called it a utopian virtuous cycle. Others just called it greed,” analyst Ben Giovo <a href="https://newsletter.banklesshq.com/p/is-defi-ded" target="_blank" rel="noreferrer noopener">wrote</a> in Bankless’ newsletter. “The thing is: reflexivity cuts both ways.”



On-chain activity fell as prices dropped, which made deploying capital in DeFi less attractive as returns are lower, he explained in the post. 



In May, the top four stablecoins market capitalization <a href="https://cms.blockworks.co/top-stablecoins-shed-7b-in-may-as-traders-redeem-tokens-en-masse/" target="_blank" rel="noreferrer noopener">fell by nearly $7 billion</a> as investors looked to redeem their tokens for cash. After all, why take the risk of holding stablecoins at all, if there’s nowhere to generate a safe yield in excess of the traditionally risk-free rate?



Yet, Giovo wasn’t overly concerned, arguing that “DeFi lenders are intersecting with meatspace businesses to get this jack out of its box.”



Dustin Teander, research analyst at Messari, agreed, thinking the lower deposit rates compared to traditional markets are due to a smaller serviceable market rather than a structural shortcoming of the protocols. 



“At its present state, the business of DeFi lending is largely limited to funding shorter-term, speculative trading leverage,” he told Blockworks. During a bull market, borrowers were willing to pay up for leverage. But now, <a href="https://cms.blockworks.co/crashing-prices-expose-bitcoin-mining-industrys-addiction-to-leverage/" target="_blank" rel="noreferrer noopener">deleveraging is de rigueur</a>.



<blockquote class="wp-block-quote">“As we have seen prices decline, the demand for leverage and borrowing has significantly pulled back, ultimately lowering deposit rates in the process.”</blockquote>



Teander believes that going forward, the rates of DeFi will “come closer to being in-line, if not above, traditional markets&#8221; along with the expansion of serviceable markets. He highlighted protocols have already built lending businesses that are more integrated with traditional markets, such as MakerDAO’s real-world asset lending and <a href="https://cms.blockworks.co/aave-arc-to-provide-30-financial-institutions-access-to-private-pools-of-defi-liquidity/" target="_blank" rel="noreferrer noopener">Aave’s Arc</a> protocol. 



“Over time, this will open the door for DeFi deposit rates to decouple away from being purely driven by speculative trading demand and move to be more commerce-driven as seen in traditional markets,” he said.



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Is There a Silver Lining in DeFi Yield Inversion?

<div id="highlights-block_62ac9d8ecaed5" class="highlights">
 <ul>
 <li>Bank of International Settlements’ economists said current DeFi loans don’t finance real economy activities</li>
 <li>Total value locked in DeFi lending protocols reached $50 billion in early 2022, up from nearly zero at the end of 2020, according to BIS data</li>
 </ul>
 
</div>



The recent Terra LUNA collapse and <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius’ restrictions on withdrawals</a> have sparked fears of a crisis in crypto lending. Economists at the <a href="https://www.bis.org/publ/bisbull57.pdf" target="_blank" rel="noreferrer noopener">Bank of International Settlements</a> (BIS) said while on-chain collateral in DeFi lending overcomes asymmetric information, it doesn’t make the space immune from boom-bust episodes, compounded by liquidation spirals. 



Cryptocurrency lending platforms — where borrowers can deposit cryptoassets as collateral to secure a loan from the lenders — are critical to the DeFi (decentralized finance) ecosystem, according to the institution’s bulletin released this week. However, BIS economists found these platforms’ institutional features mostly “facilitate speculation in cryptoassets” rather than “real-economy lending.”&nbsp;



“Smart contracts assign each collateral type a haircut, or margin, that determines the minimum collateral borrowers must pledge to receive a loan of a given amount. The high price volatility of cryptoassets means that there is overcollateralization: the collateral required tends to be much higher than the loan size,” the bulletin read.&nbsp;



“As DeFi loans are disbursed in cryptoassets and secured by crypto collateral, they do not currently finance real economy activities,” it added.&nbsp;



Meanwhile, BIS economists believe that the need for collateral blocks the fundamental goal of DeFi: “democratizing finance.” Those not so asset-rich are often excluded when it comes to accessing financial services.&nbsp;



“Due to the anonymity of borrowers, overcollateralization is pervasive in DeFi lending,” the report read. “Reliance on collateral also limits access to credit to borrowers who are already asset-rich, negating financial inclusion benefits.”



As high returns attract investors, the total value locked in DeFi lending protocols reached $50 billion in early 2022, up from nearly zero at the end of 2020, according to BIS.&nbsp;



Now that trend has reversed — total value locked <a href="https://defillama.com/chains" target="_blank" rel="noreferrer noopener">has plummeted</a> along with asset prices.



<h3 class="wp-block-heading">Is it collateral or opaqueness that’s the problem?</h3>



It’s not surprising that a champion of central banks would dismiss the concept of decentralization. But Chase Devens, research analyst at Messari, argues centralization is largely responsible for the current mess, noting that it was poor risk-management mixed with a lack of understanding of asset and protocol functions — such as Terra and stETH — that left large centralized players such as Celsius searching for liquidity.&nbsp;



“The falling dominoes have been fueled by a lack of transparency as to how much leverage was built up within the system,” Devens said.



<blockquote class="wp-block-quote">“As we know, the state of DeFi is publicly verifiable and allows the health of the system to be assessed in real time. However, [over-the-counter] deals and off-chain leverage can build up beyond this ecosystem and trigger surprise liquidation cascades as they are unraveled.” </blockquote>



If DeFi lending wants to make it into the real-world economy, BIS economists suggested it must engage in “large-scale tokenisation of real-world assets” and rely less on crypto collateral. However, “developing its ability to gather information about borrowers,” would eventually lead the system to “gravitate towards greater centralization.”&nbsp;&nbsp;



“The similarities between DeFi and legacy intermediaries are increasing, which has two important implications,” the report read. “The first is that elements of DeFi, mainly smart contracts and composability, could find their way into traditional finance. The second implication is that, once more, decentralization proves to be an illusion.”&nbsp;



Devens agreed that large-scale tokenization has always been a goal for DeFi. Yet, he thought abandoning anonymity and relying on centralization might not be the best strategy over the long term because “centralized entities have proven to be opaque and create bottlenecks of their own,” he said, pointing once more at Celsius.&nbsp;



“Although the identities of the borrowers are (mostly) unknown, we know exactly what price levels will trigger liquidations from on-chain lending protocols such as Maker or Aave,” he said.&nbsp;



<blockquote class="wp-block-quote">“As zero-knowledge technology continues to improve in the coming years, identity and reputation-based lending systems will have room to flourish.”</blockquote>



Protocols such as MakerDAO are <a href="https://forum.makerdao.com/t/aggressive-growth-strategy/13958" target="_blank" rel="noreferrer noopener">specifically focusing</a> on onboarding real-world assets to expand the collateral base of DAI and, by extension, all of DeFi.



“The evolution of crypto will continue to play out for many years to come and ultimately result in an antifragile system that is anchored on decentralization at its core,” he added.



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defi lending