Decentralized finance (DeFi) lending has changed – especially after the collapse of major companies like Three Arrows Capital (3AC) last year – and managing risk is now key to the sector’s success, according to Sidney Powell, CEO of Maple Finance .
Powell, co-founder of DeFi lender Maple Finance, said Declutter at Messari Mainnet 2023 this week that the DeFi lending space has matured over the past year. Not that there was much choice. The implosion of crypto hedge fund 3AC in June 2022, and the contagion that has since spread across the market, has forced traders and lenders to reevaluate what is realistically possible.
“Lenders and lenders are now saying: ‘I’d rather take a fairly certain 8% [return], rather than a speculative 20%,” Powell said. “So we’re seeing a lot more emphasis on what the risk-adjusted return is, rather than what the absolute return is,” he added.
Yield in DeFi and traditional finance refers to the money made from an investment over time. In the experimental world of DeFi, investors can hold money and earn rewards.
Just over a year ago, cryptocurrency lenders were still promising borrowers astronomical returns on deposits, in some cases more than 20%. But those days are now over, largely due to the collapse of the Terra crypto project last May.
Terra in its heyday was a huge ecosystem with many apps that were largely focused algorithmic stablecoins. At one point it was perhaps the most talked about DeFi blockchain and the second largest after Ethereum; its own cryptocurrency, LUNA, was one of the largest digital assets by market capitalization in its prime.
Terra’s most popular app, Anchor, facilitated risky borrowing and borrowing and allowed crypto enthusiasts to deposit Terra’s UST stablecoin and sometimes earn more than 20% returns in the form of more UST.
But when the music finally stopped, Terra implodedtaking into account the hedge funds invested in the project.
Terra’s LUNA plummets 32% in one hour
Singapore-based cryptocurrency hedge fund 3AC was just one company hit hard by the chaos. The company promised big things to clients looking to invest in new digital asset projects. And to do that, it used cryptocurrency providers promises great returns.
After Terra’s explosion and the ones that followed dive in crypto prices, 3AC filed for bankruptcy– leaving many crypto lenders waiting for their money.
Now, Powell says, cryptocurrency lenders are much more sensitive to “counterparty risk management.”
“The lessons have been taken away [from the collapse of 3AC] its counterparty risk management, controlling contagion and siled the risk to the individual lenders that a lender faces,” he said.
He added that “seeing what happens to the money” is now necessary so that lenders can have control over it and a borrower cannot “put themselves into insolvency like 3AC did.”
Maple Finance wants to be the Shopify of Crypto Lending
Maple Finance is a credit marketplace that helps provide loans to institutions. It stands out in the DeFi space because it provides collateralized loans and “chains” them.
Following the collapse of the major cryptocurrency lenders, Maple launched a direct lending desk, Maple Direct, in June too much collateral loans.
Powell said it too Declutter At Mainnet, debt is a better asset to tokenize than equities.
He said this is because it is easier to monitor, while stocks are difficult to track on-chain, partly because of their “changing valuation” and the difficulty of tracking cash flows.