DeFi
Why these $2.5 billion crypto lenders are trying to get unsecured loans again – DL News
- Cicada Markets and TrueFi launch unsecured loans on Arbitrum.
- This niche has led to some of the largest and costliest bankruptcies in recent years.
- There is little to no standardization in how crypto companies are evaluated for underwriting.
TrueFi, a lending protocol, is partnering with risk managers Cicada Markets to bring what has been a cornerstone of traditional finance – borrowing more with less – to crypto.
Undercollateralized lending is a tough business, marred by catastrophic bankruptcies in recent years.
The multibillion-dollar collapse of centralized lenders Celsius, BlockFi, and Genesis has had ripples across the industry, defining the crypto winter of 2022 and 2023. Decentralized lenders have also had their share of carnage.
Recent attempts at unsecured lending on DeFi protocols like Goldfinch resulted in defaults worth millions of dollars.
Despite previous catastrophic failures, TrueFi and Cicada are trying again.
After all, this is a huge opportunity.
A 2023 report of Allied Market Research predicts that the global unsecured commercial loan market across all sectors will reach $12.5 trillion by 2031.
“A lot of the negative stigma comes from a lack of education on the topic,” said Ryan Rodenbaugh, CEO and co-founder of Wallfacer Labs, a major contributor to the TrueFi protocol. DL News.
Join the community to receive our latest stories and updates
Sure, loans exist in the crypto industry, but the majority of loans require borrowers to provide more collateral than they can borrow. In the permissionless world of DeFi, this is the only way to minimize the risk of your counterparty running away with the money.
For unsecured loans, the only guarantee of repayment is the reliability and track record of the borrower.
It all depends on a company’s ability to accurately assess risk. In this case, that means TrueFi and Cicada.
“Since loans are issued based on on-chain and off-chain balance sheets, there needs to be a centralized underwriter who needs to analyze all this data and issue an opinion,” said Ashwath Balakrishnan, director at Delphi Creative. DL News.
Take things slowly
Both companies will provide lines of credit to crypto-native trading firms, a demographic notoriously unable to take out loans from traditional banks that cannot bear the risk.
But for an industry with a disastrous history of undersecured lending, attracting businesses is a challenge. When DL News When asked how they were going to differentiate themselves from previous disasters, Rodenbaugh responded by slowing things down.
“Underwriting for risk management and slow growth works well,” he said, referring to the process by which entities calculate and assume the financial risk of loans.
The new platform is not their first foray into lending. TrueFi already runs a small, unsecured network loan market on Ethereum worth almost $24 million.
Cicada also took out unsecured loans from DeFi lender Maple Finance, a company not without its failures.
Lenders on Maple suffered a major blow in December 2022 when borrower Orthogonal Trading by default on eight loans totaling $36 million.
A few months ago, crypto hedge fund Invictus Capital and crypto investment firm Blockwater Technologies failed to repay loans on TrueFi totaling $4.4 million.
But Rodenbaugh said the TrueFi platform, which has lent $1.7 billion over its lifetime across more than 150 loans, has a default rate of less than 1%. Similarly, Cicada Markets, which has underwritten more than $850 million in loans since 2021, has a default rate of 1.2%.
“Both protocols suffered losses, as you would expect for any form of credit, but neither of our protocols suffered the catastrophic losses seen by companies like BlockFi, Genesis, Celsius, etc.,” a Rodenbaugh said.
Default rates for TrueFi and Cicada are comparable to traditional financial markets. According to the Federal Reserve Bank of St. Louis, the average delinquency rate on business loans across all commercial banks was 1.13% in the first quarter of 2024.
“The lack of standardization means there is no way to confirm with certainty that the data is legitimate.”
—Ashwath Balakrishnan, Head of Delphi Creative
Sefton Kincaid, founder of Cicada Markets, said DL News The low default rates are because both companies were very selective about who they lent to and followed a strict due diligence process.
He said the two men reviewed potential borrowers’ performance histories over several trading cycles before agreeing to underwrite loans.
Yet that might not be enough. Compared to traditional markets, there is little to no standardization in how crypto companies are valued for underwriting.
“The lack of standardization means there is no way to definitively confirm that the data is legitimate,” Balakrishnan said. DL News. “As a lender, you need to be sure that the underwriter is doing their job properly. »
Deployment on Arbitrum
The pair built their new lending marketplace on Ethereum’s layer 2 Arbitrum.
Rodenbaugh said TrueFi and Cicada chose Arbitrum over other blockchains because it is Ethereum’s layer 2 with the most deposits and also the most advanced in terms of decentralization.
The network’s foundation also agreed to provide a token ARB grant to encourage interest, but it has not publicly disclosed the amount of the grant.
The question now is whether TrueFi and Cicada can attract enough quality borrowers.
Cicada’s Kincaid said his company has identified more than 20 borrowers – mostly commercial companies – seeking to take out lines of credit worth more than $300 million at an interest rate of 13 to 15 %.
If the two men courted all of these borrowers, that would make the new protocol the the fourth largest Real-world asset DeFi protocol as tracked by DefiLlama.
Tim Craig and Liam Kelly are DeFi correspondents at DL News. Do you have any advice? Send them by email to tim@dlnews.com And liam@dlnews.com.