Pantera Capital: The investment logic of DeFi products in my eyes
In the current Defi market, there are many familiar product names repeated every day . Was the Orange Book really open enough in the open finance? How to sort out the decentralization of mainstream DeFi projects? These products were sorted out according to the degree of decentralization. But for different users, it seems that there is still no indication of what kind of products users are suitable for.
Today's article will analyze six Defi products from the perspective of a key factor from a VC perspective. This includes both decentralized Defi products, which provide very good liquidity for capital, and can reduce the impact of the huge volatility of the cryptocurrency, as well as a more central solution through mortgages ( The loan) realizes the preservation and appreciation of the encrypted assets, and opens up the channel between the cryptocurrency and the legal currency.
The following is the translation of the original:
At present, lending is one of the hottest innovations in the field of cryptocurrencies, and many companies are looking for new ways to integrate the infrastructure of traditional financial lending products with blockchain technology.
Some of the key factors to consider when analyzing companies offering lending services are: products, markets, interest rates/collateralization, decentralization, liquidity, ability to absorb financing, and the volume of products traded and the maximum value they provide.
The current six companies in the field are:
- Compound: High-efficiency, high-liquidity, low-margin loan
- Dharma: fixed rate, fixed time, highly secure microfinance
- BlockFi: a loan in the form of a legal currency secured by the user's cryptocurrency
- Nexo: A legal currency credit line secured by user cryptocurrency
- Maker: Stabilizing currency loans
- Nuo: Decentralized debt market for borrowing cryptocurrencies
Regulations are one of the biggest considerations when studying cryptocurrency lending innovation. Most of these companies use smart contracts, just as CFTC is regulated like any other financial contract.
In general, the lending market is huge, and there are many forward-looking innovation players.
1 Why is it a loan?
With the recent popularity of cryptocurrencies, more companies have begun to combine traditional financial products such as credit lines and loans in the cryptocurrency market.
Most of these new cryptocurrency-based financial products focus on lending – one of the hottest trends in cryptocurrency innovation today. Here are the six companies I have found that are forward-looking in this area. I want to explain what they are doing and why I think they are interesting.
2 Classification analysis of the company
Below, I will explain the differences between different companies through seven key factors, what are the market groups they are targeting, and how they will succeed in the long run.
1. Product. What products do they want to build? What is unique in the cryptocurrency lending market? What is the integration with most cryptocurrencies? Is it similar to the traditional financial products we are familiar with? What is the difference in some key aspects?
2. Market. Who is his customer? More focused on users who use cryptocurrencies for the first time, or a veteran in the field? Mainly serving the Dapps development team and the automatic cryptocurrency loan project, or is it more focused on individual users?
3. Interest rates and collateral. How safe is it that you can provide lending services to both borrowers and lenders? Will you have a profit during this period? What is the cost of capital you pay?
4. Degree of decentralization. Decentralization is a key element of blockchain technology – most traditional financial products use a centralized infrastructure to manage assets. What is the degree of decentralization of these companies? (You can refer to the Orange Book before: "Is open finance really open enough? How do you sort out the decentralization of mainstream DeFi projects?" How do they handle user assets and issue loans?
5. Liquidity. For any loan service, the most important thing is to measure how easy it is to get the money back. Will decentralization or blockchain agreements increase the liquidity of funds?
6. Financing and trading volume. What is the overall situation of the company?
7. Maximum value. The simple explanation is, after reading everything, what are the two things that can define the uniqueness of this company? What makes it stand out?
Product: Compound is essentially an algorithmic protocol that promotes peer-to-peer (P2P) lending on Ethereum without taking up too much user money. The basic form is to pool the funds invested by the lenders, then lend them to the borrower, and balance the supply and demand (balance sheet) through an algorithm so that the funds are not concentrated in a centralized deposit address, account or wallet. It also uses algorithms to set interest rates based on supply and demand conditions. Because Compound uses the form of P2P and algorithm, it is mainly for small margin loans, which is more efficient. It also has a fairly powerful technical component and API to automate access protocols. Compound's main profit tool is to obtain small profits through fees and API components.
Market: As mentioned earlier, the agreement primarily supports small margin loans, which is exactly the biggest demand for Dapps because it requires fast lending under high liquidity conditions. Dapps can easily access the Compound API to seamlessly and securely complete business.
Interest rates and collateral: According to different currencies, Compound can provide 6-13% interest on loans, which is quite high for decentralized loan agreements. And the collateral for all loans is 1.5 times the value of the loan, which is equivalent to adding a layer of security measures and increasing investor confidence.
Decentralization: Compound is currently one of the most decentralized lending platforms because it uses an algorithm to balance lending institutions' inward investments and foreign loans to borrowers. 100% decentralization is impossible. In any case, they have to resolve the difference between the supply and demand of lenders. Therefore, they need to use their own cryptocurrency to supplement this gap, but also need some users to mortgage their assets. .
Liquidity: Compound provides a fairly high level of liquidity for lending through its balanced algorithmic protocol. In terms of borrowers, its liquidity is 100%, that is, it can borrow money immediately, which is one of the reasons why it is so popular in Dapp. From a lender's point of view, it is quite easy to recover the loan, because the agreement always revolves around the assets to help balance.
Financing and trading volume: Compound has raised $8.2 million from well-known investment institutions such as Bain Capital Ventures, a16z and Polychain. It is worth noting that it is also supported by Coinbase Ventures.
And it is reported that in the latest version, Compound has achieved interoperability with multiple partners' applications: (1, users can quickly view their Compound balance in Coinbase wallet; (2, Opyn will connect Compound and Uniswap To facilitate the margin trading.
From this point of view, the influence of the Compound platform should not be underestimated. As of May, the value of the assets on the Compound agreement is close to $40 million.
Maximum value: The most prominent value of Compound is that it is a highly liquid, fast lending tool that can provide great value for Dapps that need fast and efficient microfinance.
Product: Like Compound, Dharma offers a P2P cryptocurrency lending solution that combines both lending and lending. Dharma differs in that it provides borrowers with a fixed-rate, fixed-time lending program that makes them more structured and stable. It also has a fairly powerful technology component that supports many Dapp integrations and supports fast, reliable loans through agreements. Like Compound, Dharma charges a small fee for the loan and charges the developer for the cost of the API component.
Market: Dharma provides borrowers with fixed-rate, fixed-term loans and supports small margin loans. This is convenient for first-time users who are exposed to cryptocurrency lending mechanisms and Dapp developers who need fast, secure microfinance.
Interest rates and collateral: Dharma's interest rate is quite competitive, and the lender's return rate is 2-13%, depending on the type of currency being lent. Dharma's algorithm sets interest rates based on changing supply and demand conditions in the agreement. Similarly, Dharma also requires 1.5 times the mortgage for all loans, which helps to maintain part of the security of the loan.
Decentralization: Dharma is a peer-to-peer unmanaged smart contract platform.
Liquidity: Dharma's liquidity is higher and more stable; it provides a 90-day loan, which means that lenders are unable to use their assets within 90 days, and borrowers can obtain loans within one or two days through the approval process. In general, liquidity is already high for such a centralized, established framework.
Financing and trading volume: Dharma has raised more than $7 million in funding from Coinbase Ventures, Polychain, Passport Capital and YC. Since its inception in 2018, Dharma has processed more than $6.4 million in cryptocurrency lending.
Maximum value: Dharma offers a reliable and secure fixed rate and fixed interest loan service that will appeal to Dapp developers and traditional lenders.
Products: Among all listed companies, BlockFi offers the most traditional lending products. Users can mortgage the cryptocurrency to obtain legal currency (the upper limit is determined by the amount of the mortgage) for daily financial transactions – such as mortgages, car purchases, etc. Essentially, its purpose is to provide a gap between the legal currency and the cryptocurrency loan field by providing a legal currency loan. BlockFi can also get a bigger profit from the loans it issues because it has a larger loan amount.
Market: BlockFi's products are aimed at users who want to get a French currency loan. They may have been hoarding cryptocurrencies, but they have not found the right investment targets at the same time and need to spend money on daily or other consumption. It's not specifically for Dapps or microfinance, but for those who are eager to get large traditional loans from traditional banks.
Interest rates and mortgages: BlockFi provides lenders with a 6.2% return, which is much higher than the return you get from any traditional savings account or traditional loan. It also requires a 1.5 times mortgage guarantee for all loans, and all assets require a certified agency guarantee.
Decentralization: Because it follows a very traditional model of financial loan products, it is very, very centralized, just like most traditional financial instruments. It hosts user assets and everything is backed up by sec and sec.
Liquidity: Due to the size of the loan provided by the platform, its liquidity is relatively low compared to other cryptographic loan solutions. As a borrower, it takes a while to obtain loan approval, and as a lender, it takes a lot of formalities to invest money in this platform and withdraw funds.
Financing and trading volume: BlockFi's financing strength is very bright. Not only did it receive a certain amount of financing from ConsenSys, SoFi, Kenetic Capital, Galaxy Digital Ventures last year (the largest amount came from Galaxy Digital Ventures' $52.5 million investment), but also received investment from Coinbase Ventures and Able Partners in January this year. $4 million. As of April 2019, BlockFi handled a total of $53 million in cryptocurrency loans.
Maximum value: BlockFi offers a very incredible way to get a franchise currency to get a French currency loan and give you a relatively higher interest rate.
Product: Like BlockFi, Nexo is a more traditional new cryptocurrency lending tool. Its function is almost identical to that of a credit card, which allows those who hold cryptocurrencies to exchange their encrypted assets for a legal currency credit (current support is not limited to 45 legal tenders). Nexo's profit comes from the cryptocurrency and the line of credit interest earned by the user on the platform. The latter is simply a matter of interest paid by the user for paying overdrafts using the credit line.
Market: Nexo is one of the few credit line solutions collateralized by cryptocurrency, so it is in the blue ocean market and offers a barrier-free solution. It is usually not for Dapps or small amounts of money, but for larger loan needs.
Interest rates and mortgages: Nexo offers a 6.5% return on loan, which is much higher than the rate of return you get from a normal savings or checking account. Unlike traditional solutions that rely on cumbersome and slow procedures, Nexo's higher interest rates provide a huge incentive for people to open Nexo accounts and get credit lines through this platform.
Decentralization: Because Nexo is a very traditional financial product, it uses a centralized infrastructure. They are responsible for handling the investments of all users and using these investments to build their credit lines. One of the benefits of this model is that it has won a lot of institutional support for Nexo, including the US Securities and Exchange Commission and major banks. In addition, they provide $100 million in custodial insurance for each loan on the platform.
Liquidity: In terms of loans, Nexo provides relatively low liquidity because it requires long-term hosting of user assets in order to provide guarantees for credit lines and to generate sufficient profits. On the buyer side, unlike traditional credit line products, Nexo is extremely mobile and its entire product is focused on providing high liquidity quickly.
Financing and trading volume: Nexo has raised $52.5 million from Arrington XRP Capital and a number of private blockchain companies in Europe and Switzerland (Nexo is a Swiss company, so their funding is mainly from Switzerland).
Maximum value: Nexo provides users with a huge incentive to get a credit line guaranteeed by the encryption model. Its interest rate is not a joke, and it provides users with a very simple way to earn revenue from idle cryptocurrencies.
Product: Maker found that a large portion of the cryptocurrency lending market (usually the cryptocurrency market) is highly dependent on the price of various currencies, which makes it very unstable and reduces investor confidence. Maker tried to create a loan solution to balance this volatility, so they designed the stable currency Dai (1 Dai = $1). That is to lend Dai, use other forms of cryptocurrency as collateral. They hope to increase customer confidence by using the stablecoin model to increase customer confidence in cryptocurrency lending. Before paying the lender, Maker charged a small portion of the loan as a stable source of profit.
Market: The promotion of Maker is mainly aimed at small businesses that are interested in the field of cryptocurrency but whose market volatility is the bottleneck. Maker provides a very traditional lending model where users can invest in cryptocurrencies and mortgage them for Dai as usual, but this stable model greatly reduces the impact of cryptocurrency price volatility in the turbulent market. Users have increased their confidence.
Interest rates and mortgages: Maker's lending rate is always changing because it changes as the price of the cryptocurrency invested by the user fluctuates. However, all loans have up to 1.5 times the mortgage, which is equivalent to adding more security to the stable currency. Maker's mortgage structure is slightly different from fixed-rate bonds because Maker also has a cryptocurrency called MKR. The holder of MKR can determine when the interest rate between Dai and other cryptocurrencies is below the critical rate and when it is necessary to re-determine and restructure the mortgage. In essence, MKR is equivalent to setting up an expert committee to judge when prices are too volatile and how to maintain financial security by redesigning collateral.
Decentralization: Decentralization is high. Everything is balanced and determined by algorithms, and the company has little or no regulation of user assets.
Liquidity: Like most decentralized loan agreements, Maker offers a lot of liquidity. Both borrowers and lenders can easily extract and store encrypted funds.
Financing and trading volume: Maker is a very red project in the cryptocurrency venture capital industry. Most notably, Andreesen Horowitz recently invested $15 million in it and acquired 6% of Maker tokens. Currently, Dai's total market capitalization is about $55 million, which means it is quite active as a loan and trading tool.
Maximum value: Maker leverages its stable currency model to increase confidence in the cryptocurrency lending community. Ultimately, its greatest value will be that it provides more stability and market confidence in a market that is highly volatile and continues to rely on the symbolic price of cryptocurrencies.
Product: Nuo's features are very similar to Maker – it provides a cryptocurrency lending protocol that allows users to borrow another type of cryptocurrency. Unlike Maker, Nuo does not pay special attention to stability and reduce the impact of market volatility. Although Nuo uses Dai as one of its lending options, it offers a host of other, more traditional options to attract experienced cryptocurrency users. Nuo charges a small portion of the loan as a profit.
Market: Nuo positions the mass market. Essentially, anyone can do something with the cryptocurrency they hold, or anyone can borrow some cryptocurrency. At the same time, Nuo also supports large loans, so it is more user-oriented than Dapp developers.
Interest rates and collateral: In terms of loan interest rates, Nuo offers a competitive 2-14% interest rate depending on the currency. All loans require 1.5 times the mortgage, which is the standard for the cryptocurrency market.
Decentralization: Like most algorithm-driven lending tools, Nuo is quite decentralized. Instead of any hosting of user assets, they rely on their powerful lending agreements to ensure everything runs smoothly, retaining the decentralization familiar and fond of blockchain enthusiasts.
Liquidity: Similarly, Nuo's algorithmic agreement provides very high liquidity, borrowers can apply for funds, and lenders can withdraw or deposit assets without difficulty.
Financing and trading volume: Nuo raised $250,000 from large Asian cryptocurrency investors such as Amrish Rau and Jitendra Gupta; in addition, it was supported by ConsenSys and several other blockchain companies. Recently, Nuo's foreign exchange reserves in Asia have exceeded $2 million, making it the largest loan agreement in Asia.
Maximum value: Nuo provides a very versatile cryptocurrency lending facility that allows individuals to lend and borrow various forms of cryptocurrency quickly, efficiently, and securely. It also helps to advance the democratization of the Asian cryptocurrency lending market.
3 related to supervision and licensing issues
There has been a lot of controversy about how such products are regulated and licensed. Much of the discussion about regulation revolves around smart contracts about how to regulate this new technology mechanism.
The regulation of smart contracts varies from state to state, but the largest regulation is implemented by the Commodity Futures Trading Commission (CFTC). Commodity Futures Trading Commission basically treats smart contracts like other financial contracts, which means it is vulnerable to all laws applicable to traditional financial models (such as insurance, interest rate controls, etc.).
The conclusion from the above discussion is that the cryptocurrency lending market has great growth potential. Defi products such as Compound, Dharma, BlockFi, Nexo, Maker and Nuo cover a wide range of use cases – from small margin loans for Dapps to entire credit line solutions across the legal and cryptocurrency trading gap. There is still a huge space for innovation and profit margins, and we can expect more new products and solutions that will interact with cryptocurrency and legal currency.
The above is the full text of the translation. In fact, it can be seen that the focus of these programs is different.
But at the same time, it gives me the feeling that all the schemes are based on the premise that the user has held (tun) a certain amount of cryptocurrency , in the process if there are new users (users who have no cryptocurrency before) ) Come in, they need to go to the exchange to buy cryptocurrency and then lend it out. And the motivation I can think of to get them to do this is that the interest rates on Defi's lending products are very attractive, and users want to make money in this way.
But in fact, how to make this interest rate return attractive is higher than the opportunity cost of users' willingness to accept cryptocurrency education. How to make more "new users" come in should be the challenge and the opportunity of the cryptocurrency lending market. What you can see now is that through some interesting cooperation, such as the cooperation between coinbase and compound mentioned above, it is equivalent to turning these people into potential users of the lending platform when new users enter the market. Of course, this is another A topic.
Author: Paul Veradittakit, Partner at Pantera Capital
Translation: Jessie@Orange Book