Summary
Crypto related investment funds continue to grow rapidly around the world. However, they do not have access to services such as credit that traditional institutions have today. As a result, the benefits of replacing central intermediaries with smart contracts are limited for lenders and borrowers and the unfortunate byproduct of this is an overall inefficient capital market. Therefore, access to such services will become vital for the growth of the decentralized finance (DeFi) ecosystem as it strengthens existing participants while attracting new ones into the space. One may argue that DeFi lending protocols today can offer capital for crypto investment funds. But at what cost? Unfortunately, over-collateralization and liquidation risks are top concerns resulting from the volatile nature of crypto-assets that are used as collateral. Therefore, we are left with an environment where counterparty risk is replaced by the concept of “collateral” and a capital market that is capital intensive.
Overview
Clearpool attempts to address some of these limitations by combining traditional capital markets concepts with the benefits of blockchain. Institutional borrowers would get access to unsecured liquidity without the risk of liquidation while lenders (institutional or individual) are rewarded for risk taking as a result of its dynamic platform. What is a dynamic platform? It is where the pool interest rates rise as risk increases and vice versa in an algorithmic fashion. The dynamic platform is a product of supply and demand ensuring the pool is always in a state of equilibrium with respect to interest rate and pool size. We’ll touch more on this below.
In order for institutional borrowers to access liquidity on the Clearpool protocol, they will need to be whitelisted by going through due diligence, KYC and AML procedures while staking some amount of $CPOOL tokens. The due diligence process will initially be conducted by the protocol team and their credit risk assessment partner (X-Margin). In the future, $CPOOL token holders may also monitor this process through on-chain governance. The credit assessment rating will generate a risk score that will ultimately translate to borrower’s capacity. Below is the point system that is used to assess borrowers overall risk score.
Source: https://docs.clearpool.finance/how-it-works/credit-risk-scoring
Once borrower’s credit has been assessed, a borrower specific liquidity pool is created with dynamic pool interest rates based on the pool utilization rate (liquidity used by borrower). The pool will be available for any lender in Web3 to participate. Supplying liquidity to any of the pool will generate an LP token (cpToken) representing the principle and interest it has accrued. The LP token is redeemable, transferable, and programmable allowing Clearpool to offer new opportunities such as tokenized credit and risk management abilities. When the borrower returns capital, the utilization rate will decrease along with the interest rate. This allows for liquidity providers to earn a higher interest rate for taking on higher risk. The dynamic process removes the requirement for regular scheduled interest payments and principal you’d see today in traditional markets. Also, similar to Aave Arc and its permissioned liquidity pool, Clearpool offers borrowers to onboard lenders directly through customizable permissioned pools. Recently, through its partnership with Jane Street and BlockTower Capital, a pool was funded with $25M of USDC with plans to scale up to $50M. Below is a snapshot of competitive rates lenders can expect from each borrower’s pool today.
Source: https://clearpool.finance/
Clearpool has implemented a rigid risk management process where safety measures have been put into place. If the borrower’s liquidity ratio went above 95% utilization the borrower will have 120 hours to normalize the utilization rate below 95% without the ability to remove liquidity. And should the utilization rate reach 99%, lenders and borrowers will not be able to withdraw at all. At this point, borrowers would be given 120 hours to return the utilization rate back to below 95%. In addition to utilization thresholds, each pool will also have insurance where a percentage of the pool’s interest would support liquidity providers in the event of a default through an auction process.
Clearpool liquidity providers will also have an opportunity to diversify their liquidity across multiple borrowers through thematic pools. Thematic pools algorithmically distribute liquidity to multiple borrowers and rebalances per governance approved mandate. Unlike an individual pool, liquidity providers to thematic pools will receive cpTokens representing blended risk exposure which may be interesting for those who seek to avoid concentrated risk from the borrower. Further, these pools may be proposed and launched through on-chain governance.
Tokenomics and Mechanism Design
$CPOOL is its native utility and governance token. The token allows for staking and voting for participants of the protocol and will allow the community to propose, vote and implement future changes once the governance framework is activated. The protocol will determine voting power on a 1:1 basis in proportion to individual token ownership. As mentioned earlier, the team is working to build out a governance framework that will be fully trustless and censorship resistant with 100% reliance on $CPOOL tokens and its holders. In the meantime, the core team members will be facilitating governance. Token staking will also be mandatory for borrowers to participate in the protocol, giving further utility to the native token. Clearpool is also working to introduce a native staking mechanism in Q3 that will bring additional utility to the $CPOOL token by allowing holders to participate in delegated staking model to secure the Clearpool economy and earn rewards. $CPOOL has an initial total supply of 1 billion $CPOOL tokens and has a deflationary supply through a burning mechanism. Below are details on how the tokens are allocated, along with its vesting schedule, across investors, team and treasury.
Source: https://docs.clearpool.finance
Macro View
As of today, the total value locked on the protocol is $97M and the total interest accrued is $1.2M. Also, total loans originated has recently surpassed 122M suggesting more participants are looking for undercollateralized liquidity. The team has consistently pushed out upgrades and continues to build to execute their roadmap. Having launched mainnet just a few months ago, Clearpool has made significant strides in becoming multi-chain by launching v2 of the protocol and establishing strong partnerships with digital asset infrastructure providers such as Qredo. Such partnership will continue to bring a community of institutional borrowers and lenders to Clearpool’s ecosystems through Metamask’s interface. The ability for cpTokens to represent tokenized credit will also be a powerful tool in offering risk management solutions for liquidity providers. The ability for the token to be traded on the secondary market and stripped into principal and yield components will provide additional liquidity and risk management opportunities for borrowers and lenders. More institutions are expected to join as crypto trading becomes a clear growth area as evidenced by Jane Street, a major Wall Street institution, entering into a borrowing transaction on Clearpool protocol.
Further Reading and Sources
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