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SEC Chairman Gary Gensler continues to talk about crypto regulations and Genesis tells clients that the path forward may be longer than anticipated.
Today, we take a look at Frax Finance’s liquid staking solution while our Research team dives into the uncollateralized lending space in DeFi.
This is the Delphi Daily. Let’s dive in.
Undercollateralized money markets like Maple Finance, Clearpool, and TrueFi serve the speculation use case by funding market makers and hedge funds with accessible leverage.
Unlike banks, they use on-chain holdings as a means of gauging an entity’s balance sheet health and ability to repay. Their impact on providing the market with more liquidity is evident, but projects operating in this space haven’t really found the right model yet.
Effectively, lenders are giving out unsecured loans to market makers and hedge funds considered to be of “high stature.” It’s no riskless endeavor.
Not repaying their loans is akin to burning their entire reputation in crypto. Barring insolvency and a legitimate inability to repay funds, it’s unlikely for a fund to willingly burn their reputation for a few million dollars.
However, given the frequent occurrence of tail events in crypto, the actual risk for lenders is likely higher than the perceived risk. If we compare overcollateralized money markets like Aave to unsecured money markets like Maple Finance, there are certain types of risks that are heightened in the latter.
Default risk is the most obvious, given the unsecured nature of these loans. Counterparty and concentration risk are a close second. For example, Maple’s design is one in which a pool delegate decides who to loan lender capital to.
If too much is given out to one party, lenders in that pool are exposed to greater counterparty risk. This is all the more important in the case of Clearpool, where each pool is exposed to a single borrower and therefore has higher concentration risk.
The core customers of unsecured money markets are market makers. They need efficient access to spot leverage to fulfill their role. It’s unlikely that traditional banks are going to give Wintermute, Folkvang, or GSR a large loan to market make crypto assets.
But even if they did, it would be a time-consuming process marred by the bureaucracy that banks are infamous for. While the evaluation process differs for each protocol, on-chain undercollateralized loans are usually issued based on an on-chain balance sheet.
Contrarian Predictions
as the year comes to an end
give me your most contrarian thesis, idea, or prediction for 2023
– GCR (@GCRClassic) Dec 7, 2022
Delphi’s 2023 DeFi Year Ahead Report Launch
Our 2023 DeFi Year Ahead report has just been released to our PRO members. It covers:
- The State of DeFi
- Themes for the Future
- What Surprised Us
- Futuristic Ideas The Year Ahead for Defi, out now!
– Delphi Digital (@Delphi_Digital) Dec 7, 2022