Unleashing Institutional Capital Efficiency through DeFi
As decentralized finance continues to develop, many hope it will become a more effective and transparent successor to the current banking system. For that to happen, DeFi must be able to attract institutional adoption by offering participants all the tools and options available in traditional finance with even more significant advantages. Clearpool sits at the forefront of this innovation. Existing DeFi mainstays such as Compound and Aave have experienced strong growth, but their over-collateralization model for lending and borrowing acts as a bottleneck for capital efficiency. Clearpool resolves this pain point by unlocking unsecured liquidity for institutional borrowers while granting lenders the ability to monitor, hedge, and manage their risk constantly. The project ensures systematic supply and demand stability through a simple yet effective interest rate curve mechanism. Furthermore, it requires borrowers to onboard through an in-depth KYC verification process which also helps to establish best practices for the entire DeFi sector moving forward.
Clearpool’s co-founder and CEO, Robert Alcorn, hails from a traditional finance background and has been passionate about blockchain since 2015. His wealth of experience in traditional capital and bond markets, specializing in liquidity management and collateral trading, serves as a strategic advantage for Clearpool. While working as a banker, Robert also built side projects such as a wealth management robo-advisor and a blockchain protocol called Vestor that tokenized ETFs. To create Clearpool, he teamed up with fellow co-founders Alessio Quaglini and Jakob Kronbichler. Alessio is a banker-turned-crypto entrepreneur like Robert, who founded Hex Trust – an institutional-grade digital asset custodian. The founders’ initial idea for Clearpool was catalyzed by analyzing the broader crypto landscape, primarily through their understanding of institutional participants. Robert recalls: “We knew that there was a growing demand for unsecured liquidity from crypto-native market makers. Crypto institutions were finding it difficult to get service from traditional financial institutions and had to put up 200-300% collateral on DeFi protocols which was highly inefficient for them. We wanted to reintroduce the concept of counterparty credit risk by leveraging blockchain and decentralization to make that more efficient for both borrowers and lenders.” Since Clearpool’s incubation in early 2021, the project team has now grown to 15 members. Its development team comprises highly experienced and accomplished engineers who have built various crypto projects since 2014 and regularly place high at Ethereum hackathons.
Pioneers of Uncollateralized Liquidity on the Blockchain
Clearpool gives institutions newfound opportunities in DeFi by creating a secure and efficient decentralized marketplace for uncollateralized capital. At its core, the project is made up of various single-borrower pools, each of which is explicitly tied to a verified, whitelisted institution. These pools are either permissioned – where lenders must first be approved by the borrower, or permissionless – where anybody can be a lender to the pool. The liquidity within a pool is available for the borrower to use, and each pool features its own interest rate curve. This curve determines the interest rate that the borrower pays out to lenders at all levels of liquidity and utilization, so it dynamically rebalances capital supply and demand based on how much liquidity is available and being used at any given time. Clearpool’s interface is intuitive and similar to Compound or Aave, except each liquidity pool represents a single borrower rather than a crypto asset.
By becoming a borrower on Clearpool, an institution can borrow liquidity without posting collateral. Not only does this vastly enhance capital efficiency compared to using the overcollaterization approach seen on most other DeFi protocols, it also means that the institution need not worry about liquidation risk because they are not required to post additional collateral during volatile market circumstances. The project’s simple and elegant approach to managing pools through an interest rate curve grants more convenience to the borrower. As Robert explains, “With the dynamic nature of the pools, you don’t have any set interest payment dates or principal repayment dates; you can effectively pay the interest and principal back whenever you want.” Institutional users can easily monitor and control their borrowing costs by understanding and executing strategies based on their pool’s dynamic rate curve. Because each pool is dedicated to just one borrower and all transactions are transparently on-chain, over time, the pool’s activity acts as an immutable track record for reputation building in DeFi. Another benefit that Clearpool offers is diversification of funding at a level that’s nearly impossible to achieve in traditional finance due to regulatory red tape. Borrowers in permissionless pools can obtain capital from any lender with an internet connection. Moving forward, this may become even more appealing as many crypto-native institutions have realized the risks of relying on just one or two large lenders during the 2022 crypto crash. Clearpool enables institutions to ride out volatile markets and improves speed and cost, as traditional bilateral lending agreements often require more money and time to set up.
From the lender’s perspective, Clearpool also presents a clear value proposition. In order to set up a pool, each borrower must first be reviewed and whitelisted by the protocol itself to meet capital and security standards. Lenders are able to know exactly where their money is going, a feature that Robert asserts is relatively unique within DeFi: “As a lender, you get to decide who you want to lend to. On some of the other protocols, you’re lending into a pool, and the liquidity from that pool gets loaned out to various different borrowers, and you don’t really have any control over that decision. That makes it difficult to manage your risk because you don’t really know who you’re lending to.” Lenders enjoy further flexibility because they can theoretically move their capital out of a pool at any time as long as the borrower’s utilization is not too high. Consequently, borrowers are disincentivized to hike up their pool’s utilization rate because the rate curve would make borrowing costs extremely high in such cases. In addition to earning a relatively high yield from the borrower for unsecured loans, lenders are also given rewards in the form of Clearpool’s native CPOOL token. These tokens can eventually be staked and used for on-chain governance, as token holders will be able to delegate their voting power to help secure the Clearpool economy.
By creating new value for both lenders and borrowers, Robert aims for his project to encourage meaningful institutional adoption within DeFi: “For smaller borrowers who have long-term positions in BTC or ETH and want to take a small stablecoin loan, then overcollateralized protocols are better for them. But ultimately, it’s not capital efficient for larger institutions, who rely on liquidity to execute their trading strategies.” Unsecured loans are perceived to be riskier by definition, but Clearpool implements several strategies to safeguard against borrower defaults. Currently, the protocol only uses USDC, which it deems to be the most reputable stable asset. Other assets may be added in the future, but only after a rigorous review of its on-chain liquidity and security. Clearpool currently partners with X-Margin to help assess the risk profile of interested borrowers. This is part of an institutional onboarding and KYC process, and Clearpool seeks to develop new verification methods and work with more partners to better underwrite the risk. Lastly, each pool’s dynamic interest rates and utilization ratios provide built-in protection. High volatility periods often cause lenders to take money out of pools, leading to higher utilization rates, and once that rate hits 95%, then borrowers can no longer remove liquidity. Should the utilization rate reach 99%, the borrower is provided a 5-day grace period to bring it back to 95% or less. Based on prior experience, Robert states: “This is usually plenty of time given that most borrowers look at this as a revolving credit facility. What you’ll find is that once a pool is at a high utilization rate, it can actually attract more liquidity because the yield is higher so more lenders are willing to enter. We’ve seen this play out during the Terra crash – pools attracted more liquidity from lenders, and borrowers actually didn’t need to do anything.”
We have high confidence in Clearpool’s future development because the project resolves a significant DeFi pain point and has already exhibited early success. Despite only having launched for three months, Clearpool has already reached the $100 million TVL milestone and accrued 1.4 million USDC in interest. It is currently live on Ethereum and plans to launch on Polygon to take advantage of lower fees and add more retail lenders. At the moment, the protocol features five permissionless pools and one permissioned pool, with around 84 liquidity providers. Clearpool has already been able to attract Jane Street, a top Wall Street prop trading firm, to open a permissioned pool. This demonstrates both the team’s ability to market their product even at this early stage and the inherent demand from institutions – some of which are not purely crypto-native.
Beyond existing activities, Mentha anticipates the platform’s plans to develop derivative products as a potential gamechanger. Since every pool is a single borrower pool, cpTokens can be created to represent the liquidity that an LP gives to the pool and the risk that LP takes. Not only can these cpTokens be redeemed, but they can also be traded as a derivative on the secondary market, mimicking the structure of the bond market with the cpTokens similar to credit default swaps. This would effectively allow Clearpool to tokenize credit and potentially build an immense secondary market. It’s an area that the project founding team is uniquely equipped to traverse due to their traditional finance expertise and one where Mentha can also provide insightful guidance. If Clearpool successfully implements its ambitious plans, it will likely become the preeminent gateway for institutional adoption into DeFi.
Disclosure: Mentha Partners may hold an economic interest or serve in an advisory role to the project. This article does not constitute financial, investment or legal advice but is for informational purposes only.