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7、 to see for yourself a sample of theefforts of Smartkarma and the Insight Providers publishing on our platform.If you want more such Insights delivered to you in real time on your desktopor mobile,visit .2Cover Photo by Alesia KozikTable of Contents 1.DeFi Options Protocols Series(#1):The New Robhin

8、hood Of DeFi?4 By Alec Tseung2.Crypto Lending Sector SeriesBy Rose Choy24 3Ethereum|CryptoDeFi Options ProtocolsSeries(#1):The NewRobhinhood Of DeFi?By Alec Tseung|01 May 2022EXECUTIVE SUMMARYOptions offer an additional source of yield that could be much moresustainable in the long run for investors

9、 in DeFi.The current ecosystem of DeFi options protocols is divided into twomain layers-the marketplace layer and the structured product layer.Opyn,Ribbon Finance,and Dopex are the three protocols we think willhave an exciting year ahead.DETAILWhat is Original?This DeFi Options Protocols series will

10、 have a total of four pieces,publishedevery three months,for the next twelve months.This first piece aims to introduce how options trading currently works in thedecentralized finance(DeFi)space and equip you with a good,foundationalunderstanding of it.We would start by looking at the current ecosyst

11、em ofDeFi options protocols.We will then delve into the three popular protocolsthat we think will have an exciting year ahead Opyn,Ribbon Finance,andDopex.With this first piece,we hope to set the scene for our future discussions inthe following pieces,where we will provide development updates on the

12、sethree protocols over the coming year.Besides development updates,we willalso probe into a broader topic/issue related to DeFi options protocols.For example,in the next piece,we will further compare DeFi optionsprotocols with some of the option-focused,centralized crypto exchanges(e.g.,Deribit,FTX,

13、etc.)to see if DeFi is actually leading CeFi(centralizedfinance),in terms of innovation and popularity,with regards to cryptooptions trading.We will seek to understand the reason behind suchdevelopment and divergence.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung4In another

14、 piece,we will look at the challenges and difficulties institutionalinvestors could face when using DeFi options protocols and what could bedone to promote further institutional participation and adoption.Lastly,in our final piece,we will conclude this Original series by reflectingon how these three

15、 protocols fare over the course of the year.We would alsoshare our thoughts and views on some future development trends in thisspace based on the observations we will have seen in the coming year.Conclusion(Series#1)Opyn,Ribbon Finance,and Dopex are the three DeFi optionsprotocols we believe will ha

16、ve an exciting year ahead.Opyn,withSQUEETHs new features(no expiry,no strikes,pure Gamma),opensup many new ways for users to play the market more efficiently andearn yields.With Theta Vaults that automate strategies for users,Ribbon Financehas given many regular investors,who have no prior knowledge

17、 orexperience in options trading,access to strategies that professionaland institutional investors have long used in TradFi.This is exactlythe core thesis that has fueled DeFis growth.Further capitalizing on this,Dopex innovatively relies on its dual-token model to minimize option writers tail risk

18、and offer optionbuyers arbitrage opportunities.BackgroundWhen one looks at the development of decentralized finance(DeFi)in thepast few years,it is not difficult to see how DeFi has been undergoingdifferent iterations/breakthroughs with a view to catching up withcentralized finance(CeFi)and disrupti

19、ng the role institutions in traditionalfinance(TradFi)play.In 2020,the lending/borrowing protocols,similar to the money markets inTradFi,caught most of the limelight.In 2021,the hype surroundeddecentralized exchanges(DEXes)and automated market makers(AMMs).And starting from the second half of 2021,t

20、he new buzz has beenoptions protocols.As we have seen in TradFi,the vibrancy of any financial market dependssignificantly on the derivative markets,which can be a few times moresizable than the spot market itself.It only seems natural for DeFi to grow itsderivatives and options protocols as well.The

21、 total value locked(TVL)in Opyn,being one of the very first optionprotocols in DeFi,has skyrocketed since the summer of 2021.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung5Opyns Historical TVL(USD m)Source:DeFi Llama;As of 30th April,2020TVL of the overall DeFi options prot

22、ocols has also grown by 4x during thesame period.DeFi Options Protocols Total Historical TVL(USD m)Source:Stelareum;As of 30th April,2020Many protocols in this space target to automate trading strategies forusers who usually have limited knowledge and experience in trading optionsbefore.DeFi option

23、protocols aim to make options trading easy and giveregular investors access to trading strategies that professional andinstitutional investors have long used.From this perspective,this is actually quite reminiscent of RobinhoodMarkets(HOOD US),which makes options trading accessible and gives retaili

24、nvestors much more power than they used to have.Why Options Really Matter in DeFi?Besides the need to have vibrant options markets from the perspective ofTradFi,such as hedging,leveraging,etc.,the growth and development ofDeFi options protocols also offer an additional source of yield for investorst

25、hat could be much more sustainable in the long term.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung6As highlighted in Julian Kohs article,founder of Ribbon Finance,themajority of the yield in DeFi today is actually coming from the“valueof equity growing”.What this means is t

26、hat when one does yield farming,for example onCompound,he/she is essentially lending money to the protocol in return fora base yield(time value of money)and some free tokens(e.g.,COMP tokens)as incentives for using the protocol.The high yield that we see in DeFi today is mostly coming from the price

27、appreciation of the free tokens since DeFi is still at an early,hyper-growthstage.Using his words,this is akin to lending money to startups at the seedstage in return for equity.As the startups valuation skyrockets,the returnon the initial investment/loan is significant as well.Given this,the high y

28、ields that we commonly see today in DeFi are,to acertain extent,“artificial”and circular:yield farming to get free tokenswhich can then be used for more yield farming,and on and on.Thiswould not be sustainable in the long run since it is just a matter of time forthe growth to slow down,just like any

29、 startup.In options markets,sellers can earn a premium from the buyers in return forthe protection or the right they offer.Hence,DeFi options protocols couldbring another source of yield to DeFi participants(option sellers)for theprotection/right they sell.And instead of banking on certain tokens pr

30、ice appreciation,this yield fromselling options can be much more organic and sustainable.DeFi Options Protocols EcosystemBefore delving into the protocols to understand how they exactly work,letsfirst look at the current ecosystem in this space.The current ecosystem of DeFi option protocols can be l

31、argely divided intotwo main layers:1.Marketplace layerBase protocol on top of which users and other applications/protocolscan create options and trading strategiesFacilitate the writing and purchasing of options by ensuring andunderwriting liquidity,option pricing,volatility,etc.Currently,mainly two

32、 types of marketplace layers (A)orderbookmarketplace(e.g.,Opyn,PsyOptions,etc.)and(B)liquidity poolmarketplace(e.g.,Hegic,Dopex,etc.)2.Structured product layerThis is the layer/protocol built on top of the marketplace layer to utilizeits mechanism for providing liquidity,option pricing,etc.DeFi Opti

33、ons Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung7Vaults with(automated)trading strategies to help depositors/liquidity providers earn yields(passively)Usually,with cross-chain implementationMany marketplace layers have their own structured product layers aswell(e.g.,Dopex)DeFi Options

34、 Protocols EcosystemIn the next section,we picked three protocols(highlighted above)from eachof these categories,that we think will have an exciting year ahead andshould warrant our attention going forward,for deeper analysis andunderstanding.A.OpynOpyn is a base protocol for users and other DeFi ap

35、plications to createoptions/strategies on top of it.It has two versions:V1 and V2.V1One major challenge of developing an options market in a decentralizedmanner is the lack of liquidity.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung8This is because each option is a contract

36、 that could possibly have differentparameters,for example,different underlying crypto assets(e.g.,ETH,WBTC,SOL,etc.),strike prices,expiry dates,exercise styles(American vs.European),etc.Therefore,options uniqueness(or the non-fungiblenature)significantly reduces their liquidity.This constraint was e

37、ven more apparent at the beginning of DeFi optionsdevelopment when buying and selling options were executed in a P2Pmanner,instead of sourcing liquidity through other exchanges.This also meant option sellers and buyers could not easily unwind theirpositions before the expiry since there was no secon

38、dary market for them todo so.Opyn V1,using Convexity Protocol,was introduced at the beginning of 2020to see to this challenge.The protocols fundamental idea is to use ERC 20 tokens(i.e.,fungible),called oTokens,to“represent”option contracts when minted.These oTokens can be traded on any decentralize

39、d exchange that supportsERC 20 tokens(Uniswap for V1 oTokens;V2 oTokens currently on 0 x).Theyare fungible within each option series.Option series are options that havethe same set of parameters.Thanks to this,liquidity improves as users can buy options simply by owningoTokens sourced from decentral

40、ized exchanges.This also allows users tounwind their positions much more easily by trading away their oTokens ondecentralized exchanges.Using the example of writing/selling a call option,the mechanism,on ahigh-level basis,works as follows:1.Users,who want to sell call options,deposit the underlying

41、asset(e.g.,ETH)as collateral in vaults(smart contracts)2.Vaults mint oTokens for users who deposit the collateral3.Users,who receive oTokens from the vaults,can then sell them ondecentralized exchanges to collect option premium4.Users who want to buy options can purchase these oTokens ondecentralize

42、d exchanges by paying the option premiumHence,those selling oTokens are option sellers(short),while those buyingoTokens are option buyers(long).Anyone who wants to close/unwind their position can do so easily on theexchange.For example,an option buyer can sell their oTokens on theexchange to close t

43、he position without having to hold them till expiry,orwithout having to sell them to the particular option writer they buy from inthe first place.If the call option is exercised,the oTokens will be burnt.The call optionbuyer will receive the underlying asset(deposited by the option seller in thevaul

44、t as collateral)and pay the strike price.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung9In Opyn V1,options are American style and physically settled.V2Opyn V2,using Gamma Protocol,was launched in December 2020 and aimedto improve a few issues that existed in V1.Some key fea

45、tures and majorimprovements are highlighted as follows:1.More capital efficientIn V1,to sell/write a call option,since the user has an obligation to transferthe underlying asset to the buyer upon the exercise of the option,he/shewould have to post the underlying asset as collateral(i.e.,100%collater

46、alized)so that the counterparty risk is minimal.On the other hand,to sell/write a put option,since the user has anobligation to buy the underlying asset at the strike price upon the exercise ofthe option,he/she would also have to post crypto assets with a value not lessthan the strike price as colla

47、teral.The 100%collateralization has made V1not very capital efficient.In V2,partial collateralization(i.e.,margin)is possible where less thanone underlying asset can be posted as collateral for writing calls.For writingputs,less than the strike price can be posted as collateral.This frees upexcess c

48、apital for users and enables them to write more options with thesame amount of collateral.One major reason why partial collateralization is possible in V2 is thatoptions are all European style(no early exercise)and cash-settled.Users no longer have to pay the strike price or transfer the underlying

49、assetwhen the option is exercised.Since it is cash-settled,only the differencebetween the settlement price and the strike price matters.As such,optionsellers no longer need to keep the full underlying asset/strike price ascollateral.Users can choose how much collateralization%they would like to post

50、when writing the options.A minimum size is required for partiallycollateralized option positions to ensure the systems safety.There is a liquidation price for partially collateralized options.When theprice of the underlying asset reaches the liquidation price,and if noadditional collateral is posted

51、,the liquidation process will begin.Forinstance,for a call option seller,the higher the collateralization%,the morepotential loss he could bear,and so the higher his liquidation price will be.Suppose a short call position is 100%collateralized with the full underlyingasset,in that case,the position

52、will NOT be liquidated regardless of theprice,i.e.,the liquidation price is at infinity.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung102.Auto-exercise upon expiry for options that are in-the-moneyUsers do not need to take any action at expiry since Opyn V2 would auto-exerc

53、ise in-the-money options.Proceeds for long and short option holders are calculated and can beredeemed at any point after the proceeds have been finalized with asettlement price.3.Earn yields on collateralGamma Protocol allows users to deposit yielding assets(instead of just ETH)as collateral and ear

54、n yields on them.4.Flash mintingUsers could flash mint oTokens without first depositing the collateral.This is possible because the collateralization%of a vault is only checked atthe end of a transaction.Users need to burn these tokens prior to the end ofthe transaction.Flash minting oTokens could a

55、llow users to profit from potential arbitrageopportunities between DEXes without depositing any collateral.Thanks tothis,the order of transactions would not matter that much.For example,users can sell options first and then deposit collateral later.They could even use the proceeds from the sale of t

56、he flash minted oTokensto fully collateralize a position that is initially partially collateralized.SQUEETHAt the beginning of this year,Opyn launched an innovative instrumentcalled SQUEETH.This is also one of the major reasons why we think Opynwill have an exciting year ahead.SQUEETH,which stands f

57、or Squared ETH,is a new financial derivativecontract invented by Opyn.It is the first power perpetual instrument(i.e.,ittracks the value of an underlying asset to the power of n)that tracks theprice of ETH to the power of 2(instead of ETH).So,if ETH is trading at$3,000,ETH squared is$9,000,000;if ET

58、H is$4,000,ETH squared is$16,000,000;and so on.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung11ETH vs.Squared ETH Pay-offSource:https:/ relationship between the value of SQUEETH and the underlying asset(ETH)is not linear.Due to its convexity,if we long SQUEETH,we will gain

59、more when theprice of ETH increases than we lose when the price of ETH drops,asfollows:SQUEETHs Convexity IllustrationSource:https:/ understand SQUEETHs convexity better,we would look at the optionGreeks.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung12Option GreeksDelta is

60、the first derivative of the option price with respect to the price of theunderlying asset.It calculates how much the options price will change withone dollar change in the underlying asset.Since SQUEETH ETH squared,its Delta(i.e.,the first derivative)2ETH.Gamma is the first derivative of Delta.It ca

61、lculates how much the optionsDelta will change with one dollar change in the underlying asset.So,SQUEETHs Gamma is the first derivative of 2ETH,i.e.,a constant 2.Key featuresSQUEETH is a perpetual contract(similar to perpetual swaps)that does notexpire and has no strike prices(similar to always hold

62、ing at-the-moneycall options when we long SQUEETH).As its Gamma is approximately a constant 2,a buyer(long SQUEETH)willalways have pure Gamma/convexity exposure.SQUEETH allows users tohedge against anything with a curved(non-linear)payoff(e.g.,any kind ofETH/USD options).For example,suppose we long

63、ETH/USD call options,to be both Delta andGamma neutral,we simply need to sell an amount of SQUEETH with thesame Gamma as the options such that the overall Gamma reaches 0,andthen buy ETH futures to hedge against the Delta from the call options andthe SQUEETH.SQUEETH also helps solve the liquidity is

64、sue.This is because it has no expiry date or strike price.As such,liquidity isconcentrated into one single instrument and not fragmented across differentinstruments with various expiry dates and strikes,as in the case of(non-perpetual)options.Long SQUEETH gives us unlimited upside but protected down

65、side,and sothere is no liquidation.Although there is no liquidation when we long SQUEETH,our payoff is stillleveraged since it is based on ETH squared rather than just ETH.Therefore,longing SQUEETH actually gives us leveraged exposure to ETH withoutliquidation risks.Liquidation risks exist when we s

66、hort SQUEETH.Funding rate&oSQTHFor something that could allow us to gain more than we lose,there has to bea price we need to pay to get that.In options,we need to pay a premium such that we could have unlimitedupside and limited downside.The same goes for SQUEETH.DeFi Options Protocols Series(#1):Th

67、e New Robhinhood Of DeFi?Alec Tseung13Those who long SQUEETH will need to pay a funding premium(interestrate paid daily since there is no expiry)to those who short SQUEETH inorder to compensate for their unfavorable position.To make things simple,instead of really paying the rate every day,the value

68、 of SQUEETH is adjustedto reflect this.Therefore,the value of SQUEETH does not exactly equate to ETH squaredbut instead tracks it.The difference is attributed to the funding a buyerneeds to pay over time.If we long SQUEETH for a longer period of time,the difference will be higheras there is more fun

69、ding we need to pay to the other side.oSQTH is ERC 20 token minted for selling SQUEETH(similar to oTokens foroptions).If we want to long SQUEETH,we could buy and hold oSQTH.If we want toshort SQUEETH,we could mint oSQTH by posting collateral and selling thetokens in the exchange.Why SQUEETH is impor

70、tant?SQUEETHs pure convexity has opened up many new ways for users andtraders to play the market.The first automated SQUEETH trading strategylaunched by the Opyn team is the so-called“crab strategy”.Two morestrategies(ETH bull yield and ETH bear yield strategies)are expected to belaunched later this

71、 year.Since the focus of this Original is not on trading strategies,we would not gointo the details here.But,on a high-level basis,these strategies revolvearound longing ETH and shorting SQUEETH(hence,yield generation).Youcould refer to this article for more details.The crab strategy is basically ak

72、in to shorting at-the-money straddles(i.e.,selling both at-the-money calls and puts).This means the users arebetting the implied volatility to decrease,i.e.,shorting the volatility.Wecould long volatility by just reversing the crab strategy.In our opinion,the significance of SQUEETH,besides all thes

73、e new tradingstrategies,is that it allows users to trade volatility(in crypto assets)in adecentralized manner so much more easily and efficiently than before.This was possible before,but it required much more knowledge andexperience and could usually be done only on centralized exchanges(e.g.,onDeri

74、bit),given the liquidity concerns.Opyn is currently the most popular protocol with c.$330 million TVL.Itaccounts for almost half of the overall TVL of DeFi options protocols.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung14B.Ribbon FinanceRibbon is another protocol that we b

75、elieve will have an exciting year ahead.Although users can now write and create their own options and strategies inDeFi,it is not easy for a regular investor to do so without any priorknowledge of options at all.For example,to understand SQUEETH,we needto know what Delta and Gamma are.To make things

76、 even easier,Ribbon,a protocol built on Opyn,creates a set ofautomated option selling strategies for users.It has a very easy-to-followinterface for users to earn passive income through option selling strategies.Users just need to choose the vault and deposit their capital there.Thevaults will autom

77、ate everything for them.Currently,there are 11 vaults(called Theta Vaults)on Ribbon:Ribbon Theta VaultsName of thevaultUser deposits(tokens)Assets/Deposits collateralized for writing optionsProjectedAPYCovered callT-AAVE-CAAVEAAVE65.4%T-AVAX-CAVAXAVAX33.6%T-STETH-CETHstETHVault stakes ETH on Lido an

78、d gets stETH31.3%T-ETH-CETHETH22.7%T-WBTC-CWBTCWBTC19.7%T-APE-CAPEAPE19.0%T-SAVAX-CAVAXsAVAXVault stakes AVAX on BENQI and gets sAVAX15.9%T-SOL-CSOLSOL14.3%Put sellingT-YVUSDC-P-ETHUSDCyvUSDCVault stakes USDC on Yearns USDC yVault andgets yvUSDC18.3%T-USDC-P-AVAXUSDC.eUSDC.e16.0%T-USDC-P-ETHUSDCUSDC

79、N.A.(inactive)DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung15Source:Ribbon Finance;As of 28th April,2022The vaults use either covered call or put selling strategies to earn yields.We will use ETH covered call vault(T-ETH-C),and YVUSDC ETH put selling vault(T-YVUSDC-P-ETH)t

80、o illustrate the strategies and steps.1.ETH covered call vault(T-ETH-C)The goal of this vault is for users to earn yields from selling ETH call options.It runs a weekly automated ETH covered call strategy to earn yields which are reinvested back to the vault to have compounding returns for depositor

81、s.The flow is as follows:1.User deposits collateral(ETH)into this Ribbon vault2.Vault selects the optimal strike price and expiry date(using its ownalgorithm)and mints ETH(wrapped ETH,to be exact)call optionsAlgorithm selects a strike price that is high enough such that thecall options would expire

82、worthless given reasonable marketmovementsEvery Fri at 11am UTC,the vault mints European call options bydepositing the collateral in an Opyn vault(the expiry date is nextFri since it is a weekly vault)The vault receives oTokens which represent the call options3.The vault sells these oTokens(via auct

83、ion)If the call option expires out-of-the-money,oTokens held by the buyersexpire worthless.Collateral is returned from the Opyn vault back to theRibbon vault.In case the call option expires in-the-money,they will be exercised,andcash-settled.Options buyers will withdraw an amount equivalent to the d

84、ifferencebetween the settlement price and the strike price from the Opyn vault.Theremaining collateral will be returned to the Ribbon vault.Since it is selling call options,the strategy is ideal for flat,down,ormoderately rising market conditions.The best-case scenario is for ETH torise,but stay bel

85、ow the strike price each week,so the options expire out-of-the-money.In this case,depositors can earn the option premium(yield)without losing any collateral.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung16Processes of ETH Covered Call VaultSource:https:/ ETH put selling vau

86、lt(T-YVUSDC-P-ETH)The goal of this vault is for users to earn yields on USDC by selling ETH putoptions.It runs a weekly automated ETH put selling strategy to earn yields which arereinvested back to the vault to have compounding returns for depositors.The flow is as follows:1.User deposits collateral

87、(USDC)into this Ribbon vault2.The vault converts 100%of the USDC balance into yvUSDC(by depositingUSDC in the Yearn USDC yVault)in order to earn the yield generated by theYearn yVault3.Similarly,the vault selects the optimal strike price and expiry date(usingits own algorithm)and mints WETH put opti

88、onsAlgorithm selects a strike price that is low enough such that theput options would expire worthless with reasonable marketmovementsEvery Fri at 11am UTC,the vault mints European put options bydepositing the collateral(yvUSDC)in an Opyn vault(the expirydate is next Fri since it is a weekly vault)T

89、he vault receives oTokens which represent the put options4.The vault sells these oTokens(via auction)Depending on whether the options will expire in-the-money or out-of-the-money,the amount of(yvUSDC)collateral that will be returned to theRibbon vault is calculated similarly to the covered call exam

90、ple above.Since the put option will expire out-of-the money only if the strike price islower than the settlement price,this strategy is ideal for flat,up,ormoderately falling market conditions.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung17Processes of yvUSDC ETH Put Selli

91、ng VaultSource:https:/ Ribbons vaults are built on Opyn V2 protocol,all options areEuropean style.Ribbon Finance currently charges 2%management feesand 10%performance fees.The fees collected will be used to either buy back RBN(its governance token)from the market and distribute to the holders of veR

92、BN(vote-escrowed RBNtoken for participation in Ribbon DAOs governance),or convert tostablecoins and distribute to veRBN holders.The former can create a buyingpressure on RBN while the latter can create a reliable cash flow for theveRBN holders.Looking at the two examples above,it is not difficult to

93、 see why Ribbon hasgained so much popularity since its launch in 2021.Users basically just needto deposit the collateral and do nothing to earn the yields as Ribbons vaultsautomate everything for them.These strategies are nothing new and have long been used by professionaland institutional investors

94、 in traditional finance.Thanks to Ribbons vaults,any investor can now access these strategies regardless of his capital sizeor prior option knowledge and experience.Ribbon Finance is currently the 2nd largest protocol(slightly behind Opyn),in terms of TVL,with c.$300 million TVL.C.DopexDopex,which s

95、tands for Decentralized Option Exchange,can be seen as acombination of both Opyn and Ribbon Finance.It has both a marketplace layer that facilitates the buying and selling ofoptions,and a structured product layer,i.e.,smart contracts(vaults),whichhelp users passively trade options.Option PoolsUnlike

96、 Opyn,which leverages tokenized options(oTokens)to facilitate theoption buying and selling,Dopex uses liquidity pools(similar to Hedgic).DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung18Like the liquidity pools on decentralized exchanges,users,who deposit thebase or quote as

97、sets into an option pool,will be considered as liquidityproviders(LPs).The pool will then utilize the assets to sell options.Users who buy the options will pay/transfer the option premium to theoption pool,which then distributes the premium to the LPs at the end ofevery epoch.Instead of selling opti

98、ons directly to buyers(as in the case ofOpyn where writers will sell newly minted oToken to buyers),option sellersrely on option pools to do so on Dopex.Illustration of Dopexs Option PoolsThe amount of premium an LP is entitled to receive from the pool dependson his share of the pool holdings,i.e.,t

99、he amount of assets he depositsrelative to the total size of the pool.Besides receiving the option premium,LPs would also receive Dopexsgovernance token,DPX,as a reward for providing liquidity at the initialstage of the protocol.Since DPX can be farmed or staked,this offersadditional incentives to u

100、sers for providing liquidity there.What makes Dopex interesting,in our opinion,is that it also has a rebatemechanism by minting rebate tokens,rDPX.If the options sold by a pool expire in-the-money for the buyers,meaning aloss is incurred by the option pool,LPs will then receive the rebate tokens,rDP

101、X,which will be minted equivalent to 30%of all losses incurred by thepool.rDPX can also be farmed and staked,so it offers some compensationfor the LPs losses.Besides,there are other use cases on Dopex for rDPX to ensure that thetoken has a value(rDPX has no supply cap,unlike DPX).For example,rDPX co

102、uld be used as collateral to borrow funds to leverageoption positions on Dopex.It could also be used as collateral to mintsynthetic assets on Dopex(by making use of UMA protocol).So,from an LPs perspective,it will be much more attractive to provideliquidity on Dopex rather than using other platforms

103、.Volume PoolsWe also find it interesting how Dopex incentivizes option buyers bycreating volume pools.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung19So far,we have discussed all the benefits and advantages of providingliquidity/writing options on Dopex(getting DPX rewards

104、and rDPX rebates).But it takes two to tango,and all these would not mean much if no one isactually buying options there.To incentivize users and option professionals to buy options on Dopex,theprotocol creates volume pools.Volume pools allow users to deposit funds prior to the epoch and use thesefun

105、ds from the(volume)pool to purchase options at a 5%discount(fromany option/liquidity pools on Dopex).Thanks to the discount,these volume pools create an instant arbitrageopportunity for professional options traders,i.e.,they could purchaseoptions at a discount on Dopex and immediately arbitrage them

106、 againstother exchanges for a quick profit.Volume pool depositors would also be rewarded with DPX at the initial stageof the protocol as additional incentives.Illustration of Dopexs Volume PoolsSingle Staking Option VaultsDopex currently also offers a few Single Staking Option Vaults(SSOV)at thestru

107、ctured product layer for users.Users will just have to lock their assets into the vault and select the strikeprices they want to sell the options at.Prior to the beginning of a new epoch,a list of strike prices will be given to users.SSOV Strike Price SelectionSource:DopexDeFi Options Protocols Seri

108、es(#1):The New Robhinhood Of DeFi?Alec Tseung20The contract will then deposit the users tokens into a single staking pool forfarming rewards and earn yields from selling options.To a certain extent,Dopex SSOVs are similar to Ribbons Theta Vaults,but offer more flexibilitysince users can choose a few

109、 strike prices before each epoch.The protocol currently offers SSOVs on Arbitrum,Binance Smart Chain,andAvalanche.The following table shows a select list of these SSOVs(the tokensusers need to deposit into each vault,the base APY calculated from DPXrewards distribution,TVL,and whether the vault is w

110、riting calls or puts):Deposit assets/tokensFarm APYTVL(USD m)Write calls/putsArbitrumETH11%26.0CallsDPX23%25.1CallsrDPX20%4.3CallsrDPX7%0.2PutsGMX7%0.1PutsDPX7%0.1PutsBinance Smart ChainBNB1%0.02CallsAvalancheAVAX3%0.1CallsSource:Dopex;As of 28th April,2020All options on Dopex are European style and

111、 auto-exercised upon expiry.Dopex collects fees(0.01%-0.03%of the underlying asset)for optionpurchase,option swap,and option exercise.Most of the fees collected will be distributed back to LPs(70%).Someremaining parts will be used for governance staking(15%)and burning rDPX(5%).Everything we highlig

112、hted above also explains how Dopex tries to achieve itsstated goals of maximizing liquidity,minimizing losses for option writers,and maximizing gains for option buyers,all in a passive manner for liquiditycontributing participants.1.Maximizing liquidity:additional incentives for option pool andvolum

113、e pool participants through DPX rewards2.Minimizing losses for option writers:loss-sharing through rDPXtoken rebates3.Maximizing gains for option buyers:volume pool discount purchaseand DPX rewards for option buyers4.Passive manner for liquidity contributing participants:with thehelp of SSOVEven tho

114、ugh Dopex was only launched at the end of last year,it currentlyhas c.$65 million TVL and is the 4th most popular protocol.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung21Opyn vs.Ribbon Finance vs.DopexThe following table summarizes the key differences between these threepr

115、otocols and the main reasons why we think they will have an exciting yearahead:Protocol TypeLiquidityOption styleKey productsReason why we thinkit will have an excitingyearOpynMarketplaceOrderbookEuropeanGammaprotocolSQUEETHSQUEETH isthe first powerperpetualinstrumentOffers newways for usersto play

116、themarket in DeFi,e.g.,shortingvolatility,muchmore easilyRibbonFinanceStructuredproductN.A.(usingOpyn)EuropeanThetavaultsAutomatedoption tradingstrategies forinvestors toenhance yieldpassivelyDemocratizesoption tradingstrategies forregularinvestorsDopexMarketplaceStructuredproductLiquiditypoolEurope

117、anSSOVOptionpoolsVolumepoolsDual-tokenmodel thatminimizes tailrisk for optionwritersProvidesincentives foroption buyersMore flexibilityon strike priceselection thanTheta VaultsDeFi Options Protocols Series#2Now that we have gone through how options buying/selling works in DeFi,we will compare these

118、protocols with the major centralized crypto optionsexchanges in the next piece.We will seek to understand if the centralizedexchanges are losing their game to these young DeFi options protocols.DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung22Disclosure&CertificationI/We hav

119、e no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,mate

120、rial information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We ha

121、ve signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Alec Tseung(30 Apr 2022)DeFi Options Protocols Series(#1):The New Robhinhood Of DeFi?Alec Tseung23Clearpool|CryptoCrypto Lending SectorSeriesBy Rose Choy|07 Jul 2022EXECUTIVE SUMMARYIn May a

122、nd June,the market witnessed Luna/USTs collapse,theliquidation of Three Arrows Capital(a large crypto fund),andinsolvencies of major centralized crypto lending firms.Excessive leverage,poor risk management and lending practices in thelending sector exacerbated the market sell-off amidst a global mac

123、rorisk-off.How will the lending sector emerge from the rubble?We discuss the crypto lending landscape,deep dive into DeFi protocolsAave and Clearpool,share insights from some institutional borrowersand come up with key lessons learned for the future.DETAILWhats Original?TLDRWhen you combine ignoranc

124、e and leverage,you see some pretty interestingresults according to Warren Buffett.We recently saw what happens whenyou combine greed,ignorance and leverage in the crypto market.The resultsare spectacular.In the crypto lending space,the two main types of lenders,Centralized Finance lenders(CeFi Lende

125、rs)and Decentralized Financelenders(DeFi Lenders)have been growing at breakneck pace since 2021.However,this finally came to a halt as a rapid succession of events occurredin May-June this year:the Luna/UST crash,the Three Arrows Capitalliquidation and the collapse of some large,centralized lenders.

126、The cryptomarket by the end of June had lost a staggering$2 trillion of its value fromNovember 2021.There are several key lessons to be learned.Firstly,there isa greater need for transparency on lending platforms,whether it is a CeFi orDeFi platform;secondly,it is important to understand the creditw

127、orthinessof the borrower which will call for better disclosure and audits and thirdly,there should be more credit differentiation between different borrowers.Inthis Original we will look at the current crypto lending landscape,analyzethe Cefi and DeFi lending markets through the lens of the recent 3

128、AC fiasco,Crypto Lending Sector SeriesRose Choy24and deep dive into two DeFi protocols Aave and Clearpool.In the finalsection,we will share some insights from institutional borrowers about howthe market will evolve going forward.Part 1:Background-Crypto Lending LandscapeThe crypto lending sector has

129、 been in the limelight since Celsius Networkpaused withdrawals on its platform on June 13.There has been a series ofevents that clearly show the contagion in the crypto market.By June 14,Three Arrows Capital(3AC),one of the larger crypto hedge funds wasrumored to be insolvent and subsequently ordere

130、d to liquidate on June 29.Several other centralized crypto lenders were discovered to beundercapitalized or facing insolvency,including Babel,Voyager,BlockFi andVauld.Voyager just filed for bankruptcy while Celsius will likely follow suit.BlockFi has been offered a$400 million subordinated loan by F

131、TX and up to$250 million buyout while shareholders get wiped out.By the end of June,the decentralized lending market has shrunk from around$250 bn to$74.8bn.Source:https:/ across multiple DeFi blockchains from Nov 2018 to June 26,2022Lets take a step back and figure out how the crypto market got its

132、elf in thismess and what the current environment is in the crypto lending landscape.CeFi lending platforms are similar to traditional bank lending,but withoutthe regulation.Crypto lenders offer yields on deposits to attract depositors,such as stablecoin deposits,by lending them on interest.Typically

133、,borrowers use the credit for carry trades or cash and basis trades.Moreaggressive borrowers bet on the market and use margin financing.Crypto Lending Sector SeriesRose Choy25The crypto market really started to take off in 2021,when a cocktail of easymoney and leverage led to a rapid expansion in th

134、e crypto lending space.Total assets backed by Decentralized Finance projects increased to$253billion at the peak at the end of 2021,from$600 million at the start of 2020before falling in the last few months.(Source:FT,June 14,2022“Why cryptolenders are central to the digital asset market”).Crypto le

135、nding in thecentralized finance(CeFi)lenders also rose rapidly in the same period.At thepeak of the market,Genesis,a CeFi lender,had$16.3 billion loansoutstanding.Celsius,had crossed the$25 billion assets threshold in October2021(https:/member.fintech.global/2021/10/13/crypto-financial-platform-cels

136、ius-network-hits-3bn-valuation-crypto/).BlockFi,had more than$15billion of assets under management in June 2021 when it was trying to raisecapital at a$5 billion valuation.These CeFi lenders sourced liquidity from users who deposit theirstablecoins or other crypto and return yields from various sour

137、ces usingthese deposits,including liquid staking.Depending on the lender,they caninvest deposits on leverage and have a mismatch of assets and liabilities.Celsius was found to have little or no collateral backing their loans whenthere were mass withdrawals.Even back in 2021,Celsius was found to have

138、investment portfolios of$19 billion of assets and only$1 billion of equityprior to their fundraising,a ratio of 19:1.The average assets to equity ratioof US banks was 9:1.In addition,Celsius simply used depositors funds to puton leveraged,and illiquid trades,operating like a hedge fund.Genesis Loans

139、 outstandingSource:Genesis Q1 Report 2022,https:/ Lending Sector SeriesRose Choy26What caused some of the CeFi lenders tobecome insolvent?Poor lending practices and risk management:The rapid growth ofdeposits from retail due to relatively higher rates offered in the cryptospace versus traditional ba

140、nking led to low borrowing standards.Thisincluded large counterparty exposures(Voyager),undercollateralized oruncollateralized loans(rampant in the industry,including Celsius),andmismatch in duration of assets and liabilities(Celsius,BlockFi).Utilized customer deposits to make risky trades:CeFi lend

141、ers alsoconducted carry trades without proper risk management,and some ofthem even employed leverage on these carry trades.For example,BlockFi was the second largest holder of GBTC,the grayscale BTC.Theyused BTC deposits from customers,and bought/created GBTC sharesand hoped to sell the shares on th

142、e market to profit from the premiumat a point in time.However due to the 6 month lock up period,theywere caught on the wrong side,and the premium became a discount.Celsius also locked up Ether by staking it on staked ETH which was notliquid and likely lost money on UST/LUNA in the Anchor protocolwhe

143、n they wanted to generate the yields for depositors.Lack of reserves for bad debt:Unlike regulated banks,CeFi lenderswere not required to hold any reserves for bad debt or NPL.CeFi lending practices-Voyager as exampleWe will use Voyager(VOYG on TSE)to illustrate CeFi lending practices thatmay be sim

144、ilar across many CeFi lenders,although not necessarily as poorlyrun.Voyager is a crypto asset broker with a platform offering execution,custody,and wallet services,as well crypto lending services.AlamedaResearch owned 7.723 million shares(around 11.56%)via aninvestment of$75 million made in November

145、 2021,which was laterreduced to 9.49%in June when they cancelled 2.29%of the shares.They announced on June 27 that they had$350 million USDC loan to3AC and 15,250 BTC loan to 3AC which the fund had been unable torepay.At the time of the 6/27 announcement,Voyager only had$137 millionof cash and crypt

146、o assets on their balance sheet.They signed a loanagreement with Alameda,giving them access to the$200 million ofcash revolver(subordinated)and 15,000 BTC revolver from Alamedauntil Dec 2024.They had drawn$75 million of the Alameda line.On July 1,Voyager finally gated customer withdrawals and suspen

147、dedall services.Finally on July 6,Voyager filed for Chapter 11 in New Yorkto seek a reorganization.They announced that they had over$110million cash plus owned crypto assets,$350 million cash held forCrypto Lending Sector SeriesRose Choy27customers.On their filing petition,the first and largest unse

148、cured claimwas Alamedas$75 million that was drawn,which effectively will seethem wiped out in the restructuring as a junior claim.Counterparty exposure uncheckedFrom a balance sheet perspective,we have some limited details(unaudited)that Voyager provided as of June 30,2022,which highlightsthe rapid

149、deterioration in the last month.USD MM6/30/20223/31/20226/30/2021Cash99.40193.93Cash held for customers355.73112.41162.85Crypto assets held685.373,433.142,286.40Crypto assets loaned(1)1,124.832,022.44393.56Crypto collateral received168.69227.340.00(1)Crypto assets loaned includes$350 MM of USDC and

150、15,250 BTC loaned to Three Arrows Capital.The Loan book was over$2 billion in March,and by June it had reducedto$1.1 billion of which$654 million approximately was loaned to 3AC,leaving$470 million of loans to other counterparties.On Dec 31,2021,they held$2.7 billion of crypto loans.Significant Borr

151、owing CounterpartiesUSD 000s30-Jun-2231-Mar-2231-Dec-21Alameda Research376,784728,1601,651,160Three Arrows654,195326,317369,633Genesis17,556295,115153,097Wintermute27,342252,267150,955Galaxy34,427141,228148,511Counterparty F0119,488141,922Tai Mo Shan Ltd13,77034,908Others751124,96187,471Total1,124,8

152、252,022,4442,702,749Source:Bankruptcy filing,company SEDAR filingsExposure to 3AC was about$654 million,about 58%of the total loansas of June 30.In March,the largest counterparty was about 36%of totalloans,while in Dec 2021,the concentration of loans in the largestcounterparty was even more staggeri

153、ng at 61%(it was to Alamedawhich was a shareholder).Crypto Lending Sector SeriesRose Choy28We find out from the bankruptcy filing that the loan to 3AC was madein March 2022 for 15,250 BTC and 350 MM USDC,which was calleableanytime by Voyager.3AC drew down the full size likely after March2022.Voyager

154、 only made a request to 3AC to repay$25 million by June24,2022.This was well after the rumors of 3AC being insolvent.Theythen requested 3AC to pay back the entire balance of the BTC and USDCloans by June 27,2022.Voyagers latest update however did not give out details on theLiabilities side of the ba

155、lance sheet.The latest March 2022 financialsshowed that Voyager had$5.7 billion of liabilities,versus$5.99 billionof assets.Assets by June 2022 have reduced to around$2.3 billion,butnobody has a good idea of how much liabilities the Company has.Itwould not be surprising if the Company has a large ne

156、gative equity.Leverage of the operations of the company was at 23x as of 3/31/22.It is easy to see how the company can become insolvent in this casegiven the very thin equity cushion,and$650 million of bad debt from3AC loans.Unprofitable and unsustainable business modelFrom a revenue and business mo

157、del perspective,Voyager was also veryweak.Income StatementUSD MM3 mos ended9 mos ended3/31/20223/31/20213/31/20223/31/2021Transaction Revenue33.3953.74163.4057.42Fees from crypto loaned31.036.7080.898.59Merchant services18.3548.15Staking revenue14.3642.79Other5.6313.87Total Revenues102.7460.44349.10

158、66.01Rewards paid to customers59.327.41182.018.95Marketing&Sales30.378.9482.0810.29Cost of merchant services17.9847.18Comp/share based payments17.757.7541.4911.21Others20.296.5064.4011.31Total operating expenses145.7030.59417.1741.75Income before other loss-42.9629.85-68.0724.26Net Loss-61.44-68.56-

159、87.77-81.54Crypto Lending Sector SeriesRose Choy29Voyagers operations are not profitable,as marketing expenses andrewards paid to customers(a real sustained cost)are high and no profitwas made in the past few years.Customer acquisition costs were high.Marketing and customer maintenance expenses for

160、9 months ended 3/31/22 were$264 million(market expenses and rewards paid tocustomers)and this was versus$163 million of transaction revenuesreceived.Funded accounts increased from 274,000 to 1.19 million from3/31/21 to 3/31/22.It was not a sustainable business as accountsacquired(mostly retail)were

161、likely to be fickle and attracted by the highrewards,while on a market downturn like the one we are facingcurrently,there is very little revenue generated from transaction fees.Voyager branched out to crypto lending in early 2021.Fees from cryptoloans seem relatively low.If we take the$31 million fi

162、gure for 3 monthsended 3/31/22,and the active loans outstanding average balancebetween Dec 31,2021 to March 31,2022-around$2.35 billion(averaging$2.7 billion balance in 12/31/21 and$2 billion in 3/31/22),then the fees collected on an annualized basis,is around$124 million,which is about 5.3%.At 5.3%

163、as a yield on the loans,given the high loanconcentration to single borrowers,some of which are uncollateralized,the fees collected are very low.Now lets go back to 3AC as the collapse of this fund is one of the triggers ofthe crypto CeFi lenders fallout.3AC borrowed capital from any crypto lendertha

164、t they can in the market and used the borrowed money to put on largeleveraged trades.The trigger for 3ACs demise is likely the collapse of USTand LUNA in early May,where more than$40 billion was wiped out from themarket when LUNA hit a death spiral after UST,a stablecoin,de-pegged.3ACs trades includ

165、ed but were not limited to:1.Borrowing money to buy UST,then stake UST in Anchor to earn close to20%on leverage.3AC also invested in LUNA.Both LUNA and USTeffectively went to 0.2.GBTC arb trade owning over 5%of GBTC which was trading at adiscount to BTC.GBTC follows a 6-month lockup period before on

166、e isable to sell in the open market and trades at a discount of over 30%onBTC.When 3AC entered the trade,the GBTC was still trading at apremium to BTC.3.3AC also had a large amount of staked ETH which was not liquid andstaked ETH was trading at a ratio to ETH of as much as 0.8:1 recently.The only wa

167、y to exit the stETH was to sell in the stETH:ETH pool incurve,but that would also bring in a large loss.They also had many leveraged bets on BTC and other coins.When the broader crypto market fell,3AC was unable to sell their assetsand collateral which had fallen 40-60%to repay the margins on theloa

168、ns.The funds assets fell short of the liabilities.3AC founders thendisappeared to run from the debt.Crypto Lending Sector SeriesRose Choy30In addition,3AC managed the Treasuries from some protocols they hadrelationships with and co-mingled the funds into their own fund,anddid not repay these funds.T

169、he CeFi lenders all had 3AC as a counterparty and 3AC likely did notreveal their true positions to the lenders.The CeFi lenders withexposure appear to be:Celsius,Voyager,Babel,Genesis,and BlockFi.As a result,many of the CeFi lenders experienced what is effectively a bankrun,given the lenders themsel

170、ves have very levered balance sheets and athin equity cushion.Like the subprime crisis in 2008,when there was afreeze of lending between banks and financial institutions,the cryptolenders gated their customer funds,recalled any loans they have fromborrowers,and some eventually became insolvent.Durin

171、g the financial crisisin 2009,banks and financial institutions had to be rescued by the FederalReserve and subsequent years of financial regulation ensued.For the cryptospace,these defacto banks have no Central Bank to turn to,for some FTXhas come out to write checks for loans such as Voyager(which

172、filed forbankruptcy anways)and BlockFi.While others like Celsius,the negativeequity is likely too big(reportedly$2 billion)and that has been left forbankruptcy.As the lenders recall loans from all their counterparties,thiscreates waves of forced selling in the market.Centralized lenders-who will sur

173、vive?Most of the larger CeFi lenders have some exposure to 3AC,and only Nexohas come out to say that they have no exposure to 3AC and that it is businessas usual.However,due to many of these companies being private,we haveno way of knowing their loan exposures and lending practices except fromhow th

174、ey are perceived in the market.This calls for greater transparencyabout how the platforms lend and generate yield.The large exchanges also have always had centralized lending businesses aspart of their business.Binance,FTX,Bitfinex as some of the largerexchanges,offer margin loans.For example,FTX,no

175、w,given their liquidityposition,seems to be interested in expanding this side of their businessgiven that they provided liquidity to Voyager,and also offered BlockFi asubordinated loan and a buyout.BlockFi recently disclosed that FTX isoffering to buy BlockFi for a$400 million subordinated loan and

176、a valuationof up to$250 million.There are no details surrounding the actual valuation,and how much negative equity potentially BlockFi has.But increasing theloan size from$250 million to$400 million does not sound good,as itimplies that the bad debt on BlockFi books may be larger than suspected.Defi

177、 Lenders-coming out strong but market sizeis crushedWhat about decentralized finance lenders in crypto?Decentralized lending isrelatively transparent when compared to Cefi Lending.Borrowers andlenders can examine the liquidity pools total value locked(TVL)to examinethe liquidity and overall health.T

178、he main risks are using the oracle pricingCrypto Lending Sector SeriesRose Choy31and relying on smart contracts.During this 3AC debacle,Compound,Aaveand MakerDAO were also lenders to 3AC.However,due toovercollateralization of the loans and automatic liquidation when thecollateral price falls,the def

179、i systems worked well.In addition,many ofthese loans are transparent and anyone can see them if you have the walletaddress.Lending standards within each protocol are governed by the DAOthat is governing the protocol.(Whether this process is always mostefficient/smooth is another question and debate

180、for another paper).Part 2:AaveAave is a decentralized lending protocol that allows users to borrow and lendcrytpo and is effectively a system of lending pools with various digital assets.Originally named EthLend in 2017 and founded by Stanley Kulechov,it wasrenamed Aave in 2018(it means ghost in Fin

181、nish),when the founderchanged the protocol from peer-to-peer lending to peer to protocol lending.Aave provides money markets for different crypto currencies via lendingpools,with the biggest lending pools on the Ethereum network but they alsoexpanded to other chains like Avalanche,Fantom,Polygon and

182、 Harmony.The protocol is governed as a DAO(Decentralized AutonomousOrganization)and holders of the Aave token operate and govern theprotocol.How does Aave work?Aave has different liquidity pools,so for the Ethereum network,therewill be different crypto currency asset pools.Loans are obtained from ap

183、ool and interest rates depend on the supply and demand in the poolfor the asset.They have the latest V3 of the protocol with some newfeatures.When a depositor deposits in a liquidity pool(for example a DAI pool),he deposits$1 DAI and receives interest that is equal to the supply APY.The supply token

184、s are sent to a smart contract for borrowers to borrow.The depositor gets ATokens for their deposit of DAI.The borrowerreceives$1 worth of DAI after depositing the collateral.In the pool,theloans are overcollateralized.Crypto Lending Sector SeriesRose Choy32LiquidationsThe liquidation process will o

185、ccur when a loans health factor fallsbelow 1 if their collateral value drops such that the LTV(LTV is yourborrow/collateral)is no longer under the threshold.The Health Factoris calculated as follows:To avoid liquidation,the borrower can increase his health factor bydepositing more collateral assets

186、or just repay part of the loan.Aave uses the Chainlink Oracle to collect price feeds for assets on itsplatform.Lets take a look at the Aave website to see the current pools and ratesavailable:Source:https:/ 6,2022Crypto Lending Sector SeriesRose Choy33Going into Aave,we see that the DAI pool shows$1

187、38.96 million borrowedat a APY of 2.11%,versus a supply of$333.21 million.As a lender,you willonly get a APY of 0.82%APY,so bid ask is 0.82%/2.11%.The yields currentlyare very paltry,and of course you are better off putting your cash in 6 monthT-bills that are yielding 2.5%ish without any risk.Howev

188、er,there was a timewhen stablecoins like DAI and USDC did provide even up to 10%in 2021when real world interest rates was close to 0%.If you click into the details,itshows that maximum LTV is 77%,and liquidation threshold is 80%.Thisliquidation threshold is where the loan is considered undercollater

189、alized andsubject to liquidation for each collateral.When there is a liquidation,theliquidators repay up to 50%of the outstanding borrowed amount,and thenthey can buy the collateral at a discount and keep the liquidation penalty(inthis case-5%)as a bonus fee.Flash LoansFlash loans allow borrowers to

190、 borrow any available amount of assetswithout putting up collateral,if the borrowing is returned into theprotocol within the same blockchain transaction.The Aave Flash loanrelies on the fact that transactions on Ethereum can revert,whichnullifies all the previous commands if the borrowed amount is n

191、otrepaid(all or none command).The fee is 0.09%of the borrowedamount.This fee is split between depositors that provide the funds andthe integrators that facilitate the use of flash loans API.Aave V3 offers 2 options for Flash loans-flashLoan-where it allowsborrowers access to multiple reserves in a s

192、ingle Flashloan transaction.They can also open a variable or stable rate debt position at the end ofthe transaction.The Flashloan fee is waived for approvedflashborrowers.The second option is flashLoanSimple:this allowsborrowers access to one single reserve for the transaction.This methodis gas loan

193、 efficient.Why borrow a flash loan?It could be useful in arbitrage swappingcollateral and self-liquidation.Crypto Lending Sector SeriesRose Choy34An example of a flash loan for arbitrage:Borrow 100,000 DAI from Aave using FlashloanSwap 100,000 DAI from Uniswap to 101,010 USDC on Dex BSwap 101,010 US

194、DC on Dex A to 101,010 DAIRepay the Flashloan on Aave with 100,000 DAI,and make 1,010 DAIprofit minus 0.09%fee=90 DAI,so total profit=920The 920 of profit does not include potential transaction fees or priceslippage that could occur during the trade.Interest RatesAave offers two interest rates-varia

195、ble and stable.The stable interestrate is the average of the last 30 days of interest rates for the asset.For borrowers,the interest rate is dependent on the availability offunds.If the amount of funds decreases,the interest rate increases.Theborrow interest rate comes from the Utilization rate whic

196、h indicates theliquidity available in the pool.Borrowers can switch between variableand stable interest rates at any time.Aave Version 3Aave released its Version 3 in March 2022 with some new key featuresand functionalities,which includes1.Portal allows flow of liquidity between Aave markets across

197、differentnetworks.This effectively enables cross chain lending,since liquiditydemand can vary between different chains,the portal is a feature thatallows cross chain bridges to mint and burn atokens.For example youcan deposit in the Ethereum network,borrow from Polygon and repayon Avalanche.2.Effici

198、ency mode Allows users to extract highest borrowing power outof the collateral when supplied and borrowed asset are correlated inprice,for example stablecoins(USDC vs USDT),or staked ETH vs ETH.The LTV can be extremely high in some cases,as high as 98%.3.Isolation mode new assets can be listed as is

199、olated,so for examplenew collateral to be listed will be significantly easier to onboard ontothe platform.This helps with capital efficiency especially for newtokens,which can be used as collateral but with stripped down utility.ItCrypto Lending Sector SeriesRose Choy35will be a single source of col

200、lateral and not a bundle.This wasintroduced to compete with some newer protocols like Euler that allowsmore“exotic”assets.4.Risk management Aave governance has borrow and supply caps,byallowing the governance to configure the borrow caps and allow limithow much of a certain asset is supplied in the

201、protocol.Aave TokenomicsAs a DAO,a Decentralized Autonomous Organization,Aave is notbound by any regulations or corporate laws and they instead rely onconsensus protocols.This is done via governance tokens.Funds that areraised for the DAO are managed by the Treasury.The Aave token is used to govern

202、the Aave protocol.AAVE tokenholders can vote on the direction of Aave,how to manage the funds andeach token equals one vote.There are 16 million AAVE tokens.Aave is an ERC-20 token.(ERC-20 standard is a relatively simple formatfor ETH based tokens and are automatically usable with software andservic

203、es that support the ERC-20 standard including exchanges,software wallets).Users can also post AAVE tokens as collateral,with raised borrowinglimits,and those borrowing AAVE can have borrowing fees waived,andget a discount on fees if posted as collateral.AAVE holders has a Safety Module which protect

204、s the system fromrunning out of capital.AAVE holders lock tokens into a smart contractbased component called the Safety Module.If there is a shortfall event,part of the locked AAVE are auctioned off against the assets needed toprevent deficits.A shortfall event could include smart contract risks,liq

205、uidation risks or price oracle risk.However,holding the token is not the same as holding the equity of theprotocol.It is important to understand that the token is mainly used forgovernance and dictating the direction of the DAO.What revenues are going to the AAVE tokenholder?Origination fees-this is

206、 tiny,as the referral program only gives eachloan a 0.0000001%origination fee and even that fee is split(80%to buythe token to burn and 20%for referrers)this fee is very little per year.Flash loan fees-there is 0.09%collected from flash loans with 70%ofthis fee distributed as extra income for deposi

207、tors and 30%is split inthe same economics as the origination fee.Protocol reserve factor-This is the protocol fee for interest paid byborrowers.Crypto Lending Sector SeriesRose Choy36Year to date Fully diluted market capitalization versus revenueYear to date Revenue share breakdownSource:https:/ top

208、 chart shows market capitalization versus revenues(green bars arethe revenues)which has dropped quite a bit since DeFi volumes dropped.The bottom chart shows the protocol revenue versus total revenues.Although the charts may not capture all the revenues accurately,it doesshow the trend of revenues.S

209、ource:https:/ from Aavewatch v.2 shows updated as of July 4,2022 above,feesare just hovering at$300K on this day.There is no data for v.3 yet.Crypto Lending Sector SeriesRose Choy37Aave in a nutshellAave as a protocol has a lot of potential and continues to be innovative.Currently yields are low and

210、 unattractive as general market activity ishampered due to the deleveraging environment.Due to the difficultenvironment,many participants in the market have large holdings instable coins such as USDC and other stables which they are parking inafter getting out of their riskier positions(instead of c

211、hanging back tofiat).The supply pools have been flooded with these stables and yieldsare relatively low given high supply and lower demand to borrow.Whenthe macro environment improves eventually,and when the cryptomarket has worked out the credit issues,it is expected that Aave andother DefI protoco

212、ls will see a return to better yields.Aaves current revenue model ensures that revenues go to the usersrather than accruing to the tokenholders.Tokenholders are responsiblemainly for governance and keeping the protocol in check.The tokenomics is important in each protocol to understand where thereve

213、nues go and for most of the protocols,the benefits are shared to theusers,rather than to the tokenholders.Sadly,as great and innovative asAave is,the economics of the token does not allow tokenholders toshare in the success of the protocol.Part 3:ClearpoolClearpool is a decentralized Ethereum based

214、protocol catering toinstitutional unsecured borrowing in crypto assets.There are whitelistedborrowers that can created and launch single-borrower liquidity pools.Anyone can be a lender.Clearpool was launched May 3 this year and wasfunded with$25 million of USDC stablecoins.Currently,as of July 4,it

215、hasabout$92.2 million TVL and originated so far$168.3 million loans.Clearpool was cofounded by Robert Alcorn,Jakob Kronbichler and AlessionQuaglini.It is backed by venture funds Sequoia,Arrington XRP Capital andSino Global Capital.Robert Alcorn had a previous career as a repo traderbuilding up the A

216、sia sales and trading franchise at First Abu Dhabi Bank,aswell as deep market knowledge in the fixed income ALM and Money marketpreviously.How does it work?For borrowers there is an onboarding process that is quite similar to atraditional credit check in a traditional finance framework.Clearpoolempl

217、oys a partner X-margin to do KYC and AML.X-Margin also calculates the credit risk score after conducting a creditrisk assessment on the borrower.Borrowers must stake 500,000 CPOOL tokens,the native token,tobecome eligible to launch a pool.The amount of CPOOL stake requiredfor whitelisting is 1%of th

218、e average pool size of all the permissionlesspools currently.Crypto Lending Sector SeriesRose Choy38When borrowers have done their onboarding process,the liquidity poolcan be launched and seen on the EARN pageCredit evaluation is based on the following factors:X-Margin Credit Risk MonitorRisk Monito

219、ring600Credit RatingCredit EvaluationLeverage300AA850-1000portfolio leverage150portfolio equity150A700-850Market Risk300Span risk180BB550-700Directional risk60Gross risk60B400-550Due Diligence200Borrow History75C200-400Reputation75Compliance risk25D0-200Custody25Financials200Statement quality50Histo

220、rical return50Historical risk adjusted return50Maximum Drawdown50Total1000X-Margin uses a real time risk monitoring that is able to capture anycredit deterioration.For example,there was a borrower pool TPSCapital,which was associated with 3AC.This specific borrower pool wasimmediately closed down af

221、ter X-Margin downgraded the rating to a Brating and lenders received full repayments of loans including interest.There are also Permissioned Pool for borrowers who prefer to onboardlenders directly.This has a fixed duration,interest rate and CPOOLreward structure.Clearpool facilitated a permissioned

222、 pool betweenJane Street and BlockTower Capital,allowing Jane Street to assess up to$50 million of loans.Lenders simply choose the borrower pool to lend to and provide USDC(plus ETH for gas)in the via MetaMask and Wallet Connect.The lenderswill receive cpTokens specific to the pool.Lenders can withd

223、rawCrypto Lending Sector SeriesRose Choy39liquidity anytime subject to availability,which means that when thepool has a lower utilization rate-it will be easy to withdraw.Pools withhigher utilization rate will have higher interest rates and less liquidity.Interest RatesInterest rates are driven by s

224、upply and demand in the market.Thehigher the utilization rate in the pool,the higher the interest rate.Poolinterest is accrued on every block and added to the balance of theliquidity owed by the borrower,resulting in a higher utilization rate forthe borrower if all else equals.It is similar to the a

225、lgorithmic model inAave to determine interest rates.The chart below is Clearpools current Permissionless Pools that are active:If you click into Amber Group loan pool,you will find the following details:The Pool size is around 2.65 million USDC and utilization rate is 84.6%with an APR of 8.07%.The X

226、-Margin has given Amber Group a rating of A,which is equal to700-850 score out of 1000The page also shows previous loans drawn by Amber,and their totalborrower capacity of 86 million USDC.Crypto Lending Sector SeriesRose Choy40If the utilization rate of the pool reaches 95%,the pool will enter High-

227、Util state and borrowers will not be able to remove any liquidity in thatstate.Lenders will still be able to provide and withdraw liquidity untilthe utilization rate reaches 99%.By the time the pool reaches 99%utilization rate,it will enter aprovisional default warning which results borrower and len

228、der notbeing able to withdraw liquidity.The borrower is then given a 120 hr(5day)grace period to return the utilization rate back to 95%.Default occurs when the borrower cannot return the utilization rateback after the grace period.An auction occurs for 7 days(168 hours)when a pool is in Default.Par

229、ticipants will be able to bid for the pools cpTokens,ie.The debt ofthat pool.Institutional or individual bidders must be whitelisted.Whitelistinginvolves KYC and declaring the UBO(ultimate beneficial owner)of thebid.The pool borrower cannot bid.Minimum bid must be higher than the insurance amount.Th

230、einsurance is present in each borrower pool,which is currently set at 5%.For every transaction on Clearpool,5%is routed to the insuranceaccount.Finally,following the auction,there will be a vote where all cpTokenholders can accept or reject the winning bid.If bid is accepted thewinner of the bid wil

231、l receive an NFT with the legal right to the poolsdebt,and each cpToken holder will be able to redeem their cpTokens ofthe proportionate share of the winning bid amount.If bid is rejected,each cpToken holder will be able to redeem the proportionate share ofthe pools insurance and also have the right

232、 to pursue the defaultedborrower individually.Crypto Lending Sector SeriesRose Choy41CPOOL tokenomicsCPOOL is the native token of Clearpool that governs the protocol.There is amaximum of 1 billion CPOOL in circulation.CPOOL has released a supply ofabout 82.6 million CPOOL tokens currently.3.33%of th

233、e tokens are due to seed round investors with 12 monthslinear vesting9%are due to private round investors with 3 months cliff and 12months linear vesting period.0.35%are due to public round investors with 50%unlocked and 50%after 6 month lockup period.15%of the tokens are due to the developer team w

234、ith 6 months cliff and24 months period.Remainder of the tokens are in Treasury:10.15%ecosystem,10%partnerships,20%rewards,15%liquidity and 17.17%for reserves.Pool revenue streams are generated from pool interest rates.A share ofthe revenue is used to buy back CPOOL in the open market.Given the small

235、 size of the protocol and loan sizes outstanding(2months into launch),we will need to observe how the loans andrevenues can grow first to see the potential of the token.How does Clearpool differ from other unsecuredinstitutional lending protocols?Maple Finance and TrueFi also compete in the unsecure

236、d lending spacein crypto.The key differences between Clearpool and the other two arehighlighted in the table below.Crypto Lending Sector SeriesRose Choy42Single borrower pool helps mitigate risks and exposure to unwantedcounterparties,especially in lieu of the recent 3AC blow up andnumerous other co

237、unterparty insolvencies.For example,for lenders,they can choose to have exposure to only one borrower rather than tomingle in a pool with some borrowers where the credit quality may bepoor.ClearpoolMapleTrueFiBorrower PoolsSingle BorrowerPoolMostly diversified borrower pools,Single Borrower Pool for

238、 AccreditInvestors onlyMostly diversifiedborrower pools with highconcentrationCapital lock-upNoneBorrowers 90/180 daysLenders:none*Subject to liquidityBorrowers 90/180 daysLenders:none*Subject to liquidityLoans originated/Inception$97 million/May2022$1.53 billion/May 2021$1.67 billion/Nov 2020Intere

239、st rates(currently seen onplatform)Dynamic/determined bysupply&demand4-11%Set by Pool Delegates6-10%Centralized model withcommunity vote9-10%IntermediariesNonePool DelegatesPortfolio managersTokenised CreditPlansNo PlansPlansAssets availablefor loansUSDCUSDC,WETHUSDC,USDT,TUSDFirst Loss CapitalInsur

240、ance PoolPool DelegatesPool DelegatesMaple has a portfolio manager/pool delegate which allows them to setthe interest rates and terms of the loans,while Clearpools rates aredetermined by the market.TrueFi is currently using a centralizedmodel,coupled with community vote to set interest rates.ForClea

241、rpool,the rate is dynamic,so if the utilization is higher,then therates are dynamically changed to a higher rate,while for the other twoprotocols,the rates are fixed.Crypto Lending Sector SeriesRose Choy43Capital lockup For borrowers,they have fixed terms of 90-180 days forMaple and TrueFi,while for

242、 Clearpool,borrowers do not have a fixedterm.For all 3 protocols,lenders can withdraw their liquidity anytime.However,there is a caveat for Maple and TrueFi which we will discusslater.We will look at a current Maple loan pool managed by OrthogonalTrading.Currently,there are 25 active loans outstandi

243、ng in the loanpool.Within the loan pool,there are a mixture of redemption days foreach of the active loans as each loan has been made at different datesand could be 90 or 180 days.Since one of the loans to Babel defaulted($10 million out of$244 million)on July 2,about 4%of the poolsassets,there will

244、 a loss in this pool.The first loss will be taken byOrthogonal and external Pool Cover providers.Additional losses likelywill be socialized.On the point of the lenders perspective in the pool,ordinarily,onecould have withdrawn their loan after first hearing of Babels woes inmid-late June.However,wit

245、hdrawals are only entertained if there isliquidity in the pool.What occurred was that the timing to be able towithdraw was opaque and likely very tight and there was no process toallow it to be done in an orderly manner.It was only possible whenmore cash flows into the pool and from loan repayments.

246、Source:https:/app.maple.finance/#/earn/pool/0 xfebd6f15df3b73dc4307b1d7e65d46413e710c27Loan maturation ladder of the Orthogonal pool in MapleCrypto Lending Sector SeriesRose Choy44Source:https:/ the maturity schedule provided by Orthogonal on their tradingupdate dated June 24 above,one could see tha

247、t there were two loans ofclose to$30 million maturity to be repaid within 10 days.Those whosubmitted withdrawals for their loans would be made whole the lossesfrom Babel bad debt would be socialized amongst the remaininglenders.From the Maple/Orthogonal example above,dynamic interest rates andhaving

248、 a utilization ratio for the pool that is employed in Clearpoolprovides clear advantages.1)This should help avoid a flawed loanwithdrawal mechanism in Maple whereby lenders can only withdrawwhen there is liquidity(usually they will exit after they learn that thereis no liquidity).2)As utilization ra

249、tio goes higher for the pool,theinterest rate increases,and the utilization cannot be higher than 95%without triggering notice of impending default.(Even when theutilization goes from 80%to 90%the rates become higher whichdiscourages further borrowing and encourages repayment).3)Highertransparency i

250、s provided with utilization ratio shown clearly,andchanges in borrowers health can be reflected more dynamically.Tokenised credit is something that is interesting to look out for,as itwill lead to a secondary market where the debt can be traded.Thisimproves liquidity as well as helps expand the mark

251、et size.However,the obstacles that need to be worked include incentives for secondarycredit trading and technology that works for tokenization of credit.Thissounds promising but we would likely need to wait to see thismaterialize.Crypto Lending Sector SeriesRose Choy45Clearpool in a nutshellIn summa

252、ry,the most important differentiators for Clearpool versusother lenders are 1)Single borrower pool and 2)Dynamic(Variable)interest rates 3)Transparency of its borrowers(real time monitoring byX-Margin)and transactions on blockchain.Clearpool has some of the features that enhance unsecured lending in

253、crypto and is off to a good start.Currently,there are 5 borrower poolsand it will be more interesting as more borrower pools are adopted.Conclusion:Where do we go from here?The current ongoing deleveraging in the crypto market due to the Luna and3AC contagion seems to be at its tail end.To get a bet

254、ter feel of the impact ofthe deleveraging and where the industry is going,I approached some of thebigger borrowers in the space.I took the opportunity to speak with twomajor institutional borrowers in the crypto space,Jeff Anderson fromFolkvang(one of the largest market makers)and Masahide Hoshi fro

255、mBastion Trading(a leading market-neutral proprietary fund).We spoke aboutthe short-term and long-term market impacts of the deleveraging on thecrypto industry and how the lending market will evolve.Short term-According to Jeff,there will no more“reckless borrowing”which evidently brought down multi

256、ple CeFi lenders.Masahide alsooffered a starker point of view where he believes uncollateralizedlending will be disabled and once the loan pools mature,we may see adormant market with the exception of Clearpool,which has singleborrower pool features.He believes CeFi lenders will have a hard timeto r

257、egain the trust of depositors.Longer term-Jeff believes that there will be a need for moretransparency and a need to build relationship with lenders.Transparency on the borrowers side means having audited financials.Masahide also believes that funds and financial firms,aside fromproviding audited fi

258、nancials will need to have proper governance.Thesefirms will need to dedicate resources for proper risk and credit officersin order to determine the creditworthiness of the counterparties.Future of the lending market The lending market will becomestronger and more mature-where the market will demand

259、 more 1)transparency 2)credit differentiation between borrowers(and lenders)and 3)there will be a need to understand the creditworthiness ofcounterparties.Eventually,when we get past the current macrodownturn and bear market,the lending market will revive.In terms ofnew protocols,Clearpool seems to

260、have caught the attention of bothborrowers.As an on-chain lender,it is leading in terms of how theinterest rates are optimized in the protocol both for the lender andborrower in its newest version.In addition,the partnership with X-margin provides a good capture of real time financials of thecounter

261、party using live API feeds.Crypto Lending Sector SeriesRose Choy46Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother s

262、ubject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissio

263、ned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Rose Choy(06 Jul 2022)Crypto Lending Sector SeriesRose Choy47SMARTKARMA RESEARCH:This public

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