Rejecting traditional finance, some firms now turn to DeFi for growth capital

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Despite the current market correction, the cryptocurrency and decentralized finance (DeFi) industry has seen exponential growth over the past year, and a number of crypto-native companies like Hong Kong-based Alameda Research and Amber Group are now turning to DeFi for capital to grow their business.

The total value locked in DeFi protocols on Ethereum — which hosts the vast majority of decentralized finance applications in the blockchain ecosystem — has grown over 70-fold from US$950 million last May to US$69 billion currently, according to DeFi Pulse data.

Maple Finance, a decentralized corporate debt marketplace built on the Ethereum blockchain, has launched one of the first lending pools to provide capital to institutional borrowers, which will allow them to borrow without the need to post over 100% of their debt as collateral, according to a company announcement.

Growth of crypto-native startups

Over the last 12 months, a number of crypto-native startups have seen very strong growth trajectories. These new companies have found a product-market fit, developed very strong reputations, are cash flow positive and are highly profitable, said Sidney Powell, CEO and co-founder of Maple Finance, in an interview with Forkast.News. But crypto startups are often not able to access capital from traditional finance, and borrowing from banks would lead to overcollateralization — which is not really conducive to growth, Powell added.

“The future of digital assets and decentralized finance rests on the industry’s ability to access efficient capital for corporate and institutional borrowers,” Powell said. “One of our main goals is to help crypto-native companies build sustainable businesses through access to on-chain growth capital.”

DeFi for enterprise

Institutional borrowers on the Maple platform will be able to borrow loans from pools of liquidity funded by the DeFi ecosystem, with each pool managed by a “pool delegate” or a trusted party who will approve the loan terms with borrowers, perform due diligence and liquidate collateral in the event of a default — akin to the role performed by traditional credit institutions. Maple’s inaugural lending pool will be managed by Orthogonal Trading, a multi-strategy digital asset trading firm.

Leading trading firms and market makers such as Hong Kong-based Alameda Research, Wintermute, Framework Ventures and Amber Group feature among Maple’s initial group of borrowers. Institutional lenders as liquidity providers on the network include Blockchain.com and Coinshares, Europe’s largest digital asset investment firm.

“On the borrowers’ side, we’re seeing a tremendous amount of demand come out of the Asian financial centers — we have a lot of borrowers coming out of Hong Kong and also out of Singapore,” Powell said.

Tiantian Kullander, co-founder of Amber Group, a Hong Kong-based crypto financial services firm that is in the initial group of borrowers, said: “Token-enabled credit underwriting is a relatively nascent but exciting space that we expect to see more growth in.”

Demand for DeFi borrowing and lending

Despite the volatility of cryptocurrencies, Powell says the credit risk faced by liquidity providers contributing to the first pool is minimal as the borrowers in the first pool take a predominantly market-neutral and arbitrage approach to trading. “They should never be exposed to a general uptrend or downtrend in the prices of broader crypto assets,” he said. “It really helps minimize the credit risk that liquidity providers would be taking in the first pool.”

Notwithstanding the current crypto price correction, Powell thinks investors and liquidity providers will continue to want to be involved in the lending market. “The type of capital that we’re looking for is definitely patient capital,” Powell said. “I don’t think we’ll have trouble filling up the liquidity in that pool, because people recognize the long-term vision of what we’re doing and they want to be part of that.”

Powell also believes the demand for borrowing will continue. “These funds are fundamentally market neutral, that disruption doesn’t actually impact their overall profitability. Instead, they’re actually able to capitalize on the disjointed liquidity to actually trade more profitably.”

With cryptocurrency and DeFi coming under greater regulator scrutiny, Powell says he’s “keeping an eye on the evolving guidance from regulators and taking a sensible and pragmatic approach so that we have the technical capabilities that we would need to meet that guidance.”

Maple Finance is backed by venture firms including Framework Ventures and Polychain Capital, and closed a US$1.4 million funding round in January.

What’s next

The Maple protocol has been deployed to mainnet, with liquidity funding first by whitelisted addresses taking place from May 19 to 21, before it is open to everyone. Loans will be deployed from May 25. Borrowers will deposit wrapped Bitcoin or ERC20 assets into a smart contract, which allows for the non-custodial and trustless management of the collateral.

The initial loans are capped at US$2 million. “That’s very strategic so that we manage risk and we allow the borrowers to build up their track record on the platform,” Powell said. “On their second loans and their third loans, we’ll start to go to larger amounts.”

Maple plans to introduce its second wave of borrowers in a month, with a US$50 million pipeline of curated loans scheduled for 2021. “We see it being able to scale into the hundreds of millions of dollars,” Powell said.

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