What is Credit Protocol? Credit Protocol is a small branch in the Lending & Borrowing segment but brings a difference to the crypto market. Unlike regular Lending & Borrowing platforms that target users and assets in the crypto market, projects in the Credit Protocol segment target users and organizations outside of the traditional financial market.
So what is the difference between Credit Protocol? Let’s find out in this article!
What is Credit Protocol?
Credit Protocol is a branch in the Lending & Borrowing segment, however projects in the Credit Protocol segment target users who are individuals and organizations outside of the traditional financial market (TradFi) and the amount of collateral also reaches below standard. This makes it easier for individuals and institutions to easily access loans in TradFi, and DeFi users can earn higher returns than depositing money in conventional Lending Protocol platforms.
It can be said that Credit Protocol is an array that helps connect DeFi and TradFi together. However, besides great opportunities, projects in the Credit Protocol segment also contain many potential risks.
Mechanism of Action
The operating mechanism of Credit Protocol platforms is relatively simple, including the following steps:
- Step 1: Individuals and organizations outside TradFi will submit their proposals to the platform including some information such as the amount they want to borrow, interest rate, payment time, payment method, collateral,… At At this stage, individuals and organizations are required to KYC with the project.
- Step 2: Here each project will have a different way of operating. However, the common point is that the platforms will have individuals (Manage Pool) evaluate customer proposals in step 1. If the proposal is approved, it will go to step 3.
- Step 3: Individuals and organizations will deposit collateral into the pool opened by Manage (the assets here are mostly assets from the real world and have a smaller value than the actual loans of organizations). During the same period, users in the crypto market can deposit assets (be it USDC, WETH,…) into the pool to lend to institutions.
- Step 4: Once there is enough money, the money will be sent to the organizations and individuals who registered for the loan and they will take the next steps in repaying the debt.
- Step 5: If the borrower defaults or goes bankrupt, their collateral is immediately liquidated by Manage and the money is sent back to the lenders in the pool. However, because the loans are all subprime mortgage loans, each party will have a different strategy to fully compensate the lender.
Opportunities and Risks with the Credit Protocol Segment
Credit Protocol is a new innovation in the crypto market
For TradFi, this makes it easier for TradFi to access new loans in DeFi with low collateral. Accessing loans in DeFi is much easier than it is for institutions to access loans at banks. Credit Protocol helps bring TradFi and DeFi closer together.
For users in DeFi, they now have new choices in their form of investment. Depositing money into Credit Protocol platforms gives users higher returns than depositing money into regular Lending Protocol platforms.
Risk is imminent
The biggest risk for non-TradFi loans is that the borrowers are individuals or organizations that go bankrupt and are unable to repay the borrowed amount. Each project will have different ways to handle these risks, but up to now there is almost no solution that can completely handle all the risks of this segment.
Evaluating the Effectiveness of Ongoing Projects
For now, we will temporarily compare the performance of three projects, Goldfinch, TrueFi and Maple Finance, without going into how the projects work.
About Calling for Capital
|
Project |
Amount of capital raised |
Investors participate |
|---|---|---|
|
Goldfinch |
$37.7M |
Coinbase Ventures, Helicap, MSA Novo, Kindred Ventures, SV Angel, A16Z, IDEO Colab Ventures,… |
|
Maple Finance |
$2.7M |
The LAO, Alameda Research, FBG Research, BitScale, One Block Capital, Framework Ventures,.. |
|
TrueFi |
$12.5M |
A16Z, Alameda Research, BlockTower,… |
|
Credix Protocol |
$13.9M |
Parafi Capital, Motive Partners, Cumberland, Parrot, PetRock Capital, Solana Ventures,… |
As of the time of writing, Goldfinch is the project that has raised the most money compared to its competitors in the same industry at $40M. In addition, most of the investment funds participating in investing in Goldfinch, Maple Finance, TrueFi,… are mostly long-term investment funds in the crypto market such as Coinbase Ventures, A16Z, Parafi Capital or Polychain.
This proves that most long-term investment funds are investing in the Credit Protocol segment and with a not too large amount of money. The amount of money that Credit Protocol platforms successfully call for is equivalent to an AMM or a Lending & Borrowing platform, but the operating costs of projects in this segment are very expensive.
About Performance Results
In terms of total loans offered in the market right now, TrueFi has $1.7B offered in the market. Next is Maple with $1.6B provided to companies, funds, corporations, etc. And finally Goldfinch with more than $100M approved for lending outside the traditional financial market.
|
Goldfinch |
Maple Finance |
TrueFi |
|---|---|---|
|
Caurius Fund |
M11 Credit |
END Capital |
|
Almavest Basket |
Icebreaker Finance |
Woo Network |
|
Lend East |
Alameda Research |
NeoFi |
|
Divi Bank |
Orthogonal Trading |
Caurius |
|
Tugende |
– |
USDC.homes |
|
Quick Check |
– |
Alameda Research |
Similar in revenue, projects are still constantly changing and upgrading to lead the market. For me, the Credit Protocol game is just in the process of starting up and it is not yet possible to conclude who is the winner.
The first person to open this game was AAVE, but AAVE deployed ineffectively, from there we had Goldfinch, Maple,…
Projects in the Credit Protocol segment are doing extremely well in attracting users and generating revenue. What we need is the development and expansion of the above projects, thereby capturing the outbreak of this trend in the future.
