Hello again folks, if you’ve read my previous articles on stacking stables, you’ll know that I spend a lot of time trying to find the highest and easiest yields off of stablecoins, and in the same vein, this article will dissect some of the best institutional/VC stablecoin lending strategies that provide some of the highest rewards out there, while at the same time outlining some of their additional risks.
So unlike retail-friendly lending protocols such as Liquity or Aave, there is a specialized subset of protocols where retailers like you or me can lend captial out to institutions or venture capital firms. The skeptic will immediately think of failed VC firms such as 3AC, and rightfully so, I think it’s prudent and wise to make sure whatever lending platform you’re looking at properly vets whatever institution they’re wanting to lend money to.
What makes Institutional/VC lending protocols unique are that they normally offer significantly higher returns for lenders, whether it be through secured and/or unsecured loans. This tradeoff is technically supposed to be offset by the fact that institutions/VCs are more highly vetted than an average anon retail borrower (I’ll go into detail later that there’s still risks, even with VC’s).
Like applying for a loan from a TradFi bank, the borrower needs to negotiate a plan as well as sort through financials and specifics about how the loan might repayed and/or how it may be secured. For example, take a look at Maple Finance’s application process:
From the graphic above, you can see that the loans aren’t necessarily smart-contract based and require specific negotiations for how the loan is structured. And as I’ll get into the next section, just like a remortgaging of your home, many of these platforms can help borrowers restructure their loans if needed.
If there is a default on a loan, essentially this means that the borrowing entity is not able to make a re-payment on the loan. The whole notion of institutionalized borrowing/lending via crypto is relatively new, but institutions not being able to pay back loans in general is not. In the TradFi world, if there’s a default on a loan then lenders may be able get compensated through different means such as control over some of the business’ assets. In the worst case, the borrowing company may have to file for bankruptcy.
With crypto lending, the regulations and even bankruptcy proceedings are are bit more opaque. And as we’re seeing through the Celsius/Voyager/3AC fallout, there’s been a great deal of more uncertainty about whether or not cryptocurrencies should be considered as securities, and how fiduciary responsibility is calculated in bankruptcy court proceedings. To complicate matters even further, depegs of stablecoins or market volatility can occur with blue chips that can fundamentally change the terms of borrowing and lending.
Once again, loan defaulting is NOT a unique issue to crypto and as cryptocurrencies are not as tightly regulated, it will be interesting to see how defaults on cryptocurrency loans will be treated in the future. The most recent example of this would be Blockwater Technologies defaulting on a $3.4 million dollar crypto loan with TrueFi.
As I was originally planning on having TrueFi’s $BUSD pool as part of this list, let this serve as an important reminder that VC’s can default on their loans just as regular retail can.
In the case with the Blockwater Default, it appears that the writing may have been on the wall as early as August, when TrueFi announced that there were negotiations to possible ammendments to the repayment plan:
After it was announced in early October that Blockwater would ultimately default on its loan, TrueFi announced that it was going to slash 10% of its $TRU in order to negate lender losses:
Although this action may have temporarily given a crash to the $TRU token, it seems for the most part that slashing efforts were ultimately successful, as the price for $TRU appears to have at least semi-recovered:
Now that we covered perhaps what the worst-case of what can happen is, starting with TrueFi, let’s now take a look at what different institutional lending protocols there are and lucrative (or risky) they may be.
As I mentioned before, despite the default by Blockwater, the TrueFi protocol seems to be humming along fine and appears pretty well managed. Loans are essentially voted upon and approved by $TRU stakers, and then funds are moved through the following process:
The loans themselves can vary greatly, with some being collateralized or uncollateralized. Generally if a loan on TrueFi is uncollateralized, the interests rates are higher to reflect higher returns on greater risk. If you’re interested in reading more about their loan safeguard measures, I recommend that you read an in-depth article they published back in April. As I said before, the loan rates for each borrower on TrueFi can differ significantly, but with no lock-up period, over all the lending rates are advertised as follows:
Coming in at 14.29% APY, TrueFi has some of the highest rates of return alongside some pretty decent liquidity.
Speaking of liquidity, a final factor to consider with TrueFi is their overall TVL. With a current $40.97 million TVL, TrueFi is more easily able to take $3 million dollar hits than much smaller lending protocols, and despite the Blockwater incident, their TVL has only grown over the last couple of months, indicating that there’s even more trust in the protocol itself:
For reference, Ribbon Lend (which I’ll get into next), only has 16.21 million in TVL.
Similar to TrueFi, with Ribbon Lend (part of Ribbon Finance) there are no lock-up periods for deposits meaning that you can withdraw your funds at any time. Ribbon Finance has a lot of cool vaults and features such as their principal protected R-Earn vault, but perhaps one of their most recent developments was their institutional lending protocol on Ethereum which currently they have two institutional borrowers offering suppliers the following rates:
Ribbon allows the investor to choose to which institution they want to lend their $USDC, and subsequent rewards are paid out in a split between supply APR and #RBN APR. Furthermore because more than one third of your rewards will be paid out in $RBN, it is important to take note of its price action, which overall in the past few months hasn’t been that bad:
In terms of risk mitigation for the loans themselves, Ribbon advertises an off-chain process for credit underwriting as well as built-in insurance for the depositors that is paid for by the borrower. If unused, the money set aside for insurance is converted to Ribbon’s protocol revenue.
Out of all the platforms I’m listing here today, Maple Finance has one of the lower yield rates yet also has the highest TVL. With more than $1.8 billion in loans issued and more than $300 million in deposits, it’s definitely the largest institutional lending machine that I’ve been able to find. Similar to Ribbon Lend, depositors on Maple can choose which entity they wish to loan to, all with varying rates:
With Maple, you’ll earn $USDC interest and $MPL lending rewards. And similar to Ribbon Lend, depositors on Maple need to be wary when earning any type of interest via altcoins, for if we zoom out far enough, you’ll notice that there has been some crazy price action on $MPL in the past few months:
Despite potential volatility in $MPL, a final note to consider is that Maple requires a 90-day lock-up period for depositors, meaning that although there might be increased stability with less funds going in-and-out, you won’t be able to immediately withdraw your funds.
The only one of the institutional lenders available on the Polygon network, Clearpool has a similar TVL to Ribbon Lend (approximately $16.94 million), and advertises no lock-ups periods, and no KYC-requirements for lenders. And similar to Maple Finance, depositors can pick and choose what lending pools they wish to enter and loans are unsecured, meaning that they are not collateralized.
In terms to risk mitigation, 5% of pool interest is allotted towards depositor insurance, where if unused at the end of the loan, goes back to protocol revenue. Additionally potential borrowers have to go through KYC and AML by Credora where they undergo a credit risk assessment prior to approval.
A final consideration about Clearpool is that like most other platforms, part of the return you get in interest is via their native altcoin, in this case $CPOOL:
One thing I noticed with the yields on Clearpool is that it appears that a bigger proportion of yields are generated in native $USDC, as opposed to $CPOOL. For instance in their Amber Group pool, you can see that nearly 80% of returns are paid out in stablecoins:
For reference, Ribbon Lend offers a slightly greater overall yield, but only 7% in stablecoins:
Therefore if your perogative is to stack more stables, Clearpool might be the better choice.
In general, I think that institutional lending is a pretty solid option to diversify your stablecoin/passive income strategy while at the same time offering #realyield. However at the same time it’s important to remember like with any lending protocol (even with TradFi), there’s always risks of defaults, especially on unsecured loans.
With all the market-scare around 3AC, I think that it’s also important to remind ourselves that we’re also in a bear market right now, and I would imagine that the world of institutional lending will probably become much more lucrative as we progress into our next bull cycle.
If there’s any other considerations or risks that you think I left out about institutional lending, I’d love to hear about it in the comments below. Otherwise, thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates.
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Cheers everyone!