Clearpool x Polygon AMA | Highlights & Recap
On Mon 25th July, Clearpool’s CEO and co-founder, Robert Alcorn, joined Polygon for an AMA alongside other industry players. The main topic of conversation was ‘Credit Protocols’ and what the future looks like for the growing space.
Here are some of the highlights from Robert below.
1. Explain what Clearpool does to our audience
Robert: Clearpool is a decentralized marketplace for uncollateralized liquidity. Clearpool has single borrower liquidity pools for each of the institutional borrowers that have passed the KYC/KYB whitelist process.
On the lending side, it is completely decentralized, anyone can access the pools as a lender. You can decide which borrower you want to lend to and how much you want to lend for how long. There is no lockup, so you can withdraw liquidity whenever you want, subject to liquidity.
Borrower interest is determined using a unique interest rate curve, with borrow utilization determining each pool rate. Borrowers can influence the interest rate by managing how much liquidity they utilize from the pool. When the liquidity risk increases as the borrowers withdraw more liquidity, the interest rate rises to compensate lenders fairly.
2. Has the recent CeFi lending news, such as the 3AC, contagion, and other business-related market news, changed your business plans or roadmaps as a result of public sentiment toward crypto-related lending and borrowing?
Robert: I believe decentralized credit protocols like Clearpool will come out on top when the dust settles. Essentially, the demand for credit will remain because that is how businesses grow. You can participate in that growth by lending to those companies.
As a result of recent news, people are more aware of the inherent flaws in centralized systems. This will drive up demand for protocols like Clearpool that eliminate the need for central intermediaries. When you look at it, those circumstances are due to poor decisions made by people in charge of others’ money. The system becomes much safer and more efficient when that single point of failure is removed, and people learn to trust the code written in smart contracts.
It will take time and an education process. Because so many people got affected, everyone is derisking right now. And it’s not just retail investors who may have had assets in Celsius, for example; even larger institutions that typically participated in lending markets are risk-off right now.
However, as people get more educated, they realize they can make their own decisions on the Clearpool protocol. They can assess and manage the risk themselves, giving them far more flexibility when lending. In addition, they are fairly compensated for the risk they are taking. So, it’s essentially an educational process, and I believe we’re getting there.
3. Is there a focus on catering to fintech lenders and being the backbone and infrastructure for these Web2 lenders? What is the strategy, and what should you focus on related to that?
Robert: We currently don’t have any fintech lenders yet as borrowers on Clearpool, but I can see a future where we do. The borrowers we focus on now are delta-neutral trading firms or market makers. They are crypto-native firms that understand the DeFi concepts and are comfortable trading in that environment and have a huge demand for unsecured liquidity. It’s also relatively easy to assess their creditworthiness. Clearpool has partnered with X-Margin (recently rebranded to Credora), which takes real-time data via API feeds from the borrower’s exchange accounts. This gives them a real-time look under the hood of how much risk those borrowers are taking at any given time.
I can see a future where we have many different types of borrower profiles on Clearpool, and we are already speaking to many of them. The challenge is figuring out how to provide the same type of credit computations for those borrowers who aren’t using borrowed liquidity on-chain. It’s hard to track what they’re utilizing funds for. Borrowers can eventually build an on-chain credit profile as they take and repay their loans. However, scoring them when they borrow for the first time is difficult because there is no real-time data to analyze. Hence, the risk assessment will be more traditional.
But all of that will evolve, and there are enormous opportunities here because what we’re doing is in high demand. So the next wave of borrower profiles will be exciting to see, whether it’s other crypto-native institutions like miners or even DAOs, which can potentially be borrowers and lenders.
4. What is the underwriting process for Clearpool protocol, and how is that handled on-chain?
Robert: When two institutions (borrower and lender) deal in traditional markets, they will assess the credit risk themselves. Before lending, they will conduct analysis and due diligence on the borrower. In that case, the value created by the transaction accrues only to the larger financial institutions. However, on Clearpool, the value accrues to the entire network.
Everyone, including retail and smaller individual lenders, who would like to participate in the growth of the borrowing company can lend and be rewarded. However, they lack the ability to professionally assess credit risk. That’s why, in the early days, Clearpool focused on specific types of borrowers and partnered with X margin, the market leader in on-chain credit analysis.
Our underwriting procedure is both rigorous and straightforward. The Clearpool team performs the initial due diligence. If the borrower passes, they are forwarded to X-margin, who conducts a second due diligence and KYC/KYB process, as well as a full credit risk assessment. Once completed, the resulting credit rating will be displayed on the protocol, assisting lenders in the decision-making process. But, as a lender, you must still do your own research (DYOR) before deciding whether or not to lend to that company.
Clearpool simplifies the process by allowing you to choose who you want to lend to. Other protocols would require you to lend into a pool, where someone else would decide who gets to borrow from that pool, how much they can borrow, how much interest they pay, and so on. In Clearpool, you make that decision yourself because all pools are single-borrower pools, so you have more control of your funds.
⏬[More from Rob about how the Clearpool underwriting process will benefit borrowers and underwriters]
With underwriters coming on-chain, we must proceed cautiously because we are reintroducing a centralized counterparty, that single point of failure. People can lose money if the underwriter makes a mistake. So it depends on the underwriting process, which must be done meticulously.
On other protocols where multiple borrowers borrow from one pool or one underwriter, it is more difficult for the borrower to build a credit profile. But on Clearpool, all pools are single-borrower pools. Clearpool is more market-driven, with everything driven by supply and demand once the borrower pool is launched, making it flexible for both lenders and borrowers. Borrowers can withdraw/pay back funds at any time, and those decisions will contribute significantly to their credit profile in DeFi.
So, as more borrowers join Clearpool, the on-chain data can be easily tracked and analyzed and eventually used to build a credit profile for those borrowers. That is one of the most significant opportunities here.
5. What are some of the biggest friction points from a credit protocol perspective?
Robert: We’re speaking to many traditional financial institutions that are looking into this space, and I believe there’s a huge opportunity here. They face two major challenges: regulatory and compliance. Because most of them are regulated in the traditional world, they have strict risk and compliance departments and must take all of that into account. Nonetheless, they are eager to participate. They see arbitrage and high yield opportunities on DeFi, which will significantly help this market to grow when they arrive.
To attract those institutions, we must develop protocols that address those issues. If you simply lift an existing traditional financial concept and build it on-chain, regulators will most likely insist that you apply for the same type of license held by the incumbent institutions, which may be difficult for some DeFi protocols, especially in certain jurisdictions. However, if you utilize the blockchain and the benefits of decentralization to create a brand new product that significantly improves the existing system, not only will you get a 10X improvement, but you’ll also get a seat at the table with the regulator to discuss why what you’ve built is superior to the incumbent system.
We give this a lot of thought, so we’re also innovating on our permissioned product and have recently launched a pool with Jane Street, a Wall Street institution, which is now borrowing stablecoins via Clearpool. That product keeps evolving, and we should see many more borrowers with similar profiles enter the market soon. Everyone in the permissioned ecosystem will go through the same KYC, KYB, and due diligence onboarding process. That is one of the factors considered by regulators.
Regulation is coming. We must keep regulatory and compliance requirements in mind when developing these protocols. So, those are two things we take very seriously here, and they will become a necessary part of what we do if we want this to succeed and achieve our long-term vision.