What is Clearpool? ELI5 (Explain Like I’m 5)
As with all things in the crypto world, the best way to learn about it is to use it! But we understand that when it comes to your hard-earned stables, you want to know what it is and what it does before you dip your toe in.
Firstly, Clearpool is one of the most credible projects in the DeFi space. Clearpool has been built by seasoned professionals from the traditional finance, fintech and blockchain industries, and is backed by world-class investors like Sequoia Capital, Arrington Capital, Sino Global Capital and HashKey. Clearpool has also been organically featured in top-tier media outlets such as Bloomberg, CoinDesk, The Block, Blockworks, Forkast, and many more.
Security is paramount for Clearpool, as such the Clearpool smart contract code has been stringently tested and audited by leading smart contract security audit firms CertiK and Pessimistic Security.
Despite being complex under the hood, Clearpool is a DeFi protocol that is refreshingly simple to understand and use. Here’s a quick ELI5 (explain it like I’m five) guide to help you get started.
What happens on Clearpool?
Institutional borrowers, who have been fully vetted, verified and have successfully completed a KYC (know your customer) process with Clearpool and one of its affiliated partners (such as X-Margin), can launch a liquidity pool on the Clearpool app.
Anybody, including you, can deposit USDC into these liquidity pools and immediately start earning CPOOL LP rewards. When the pool borrower removes (borrows) liquidity from the pool, you start earning continuously compounded interest paid in USDC on top of the CPOOL LP rewards.
This makes Clearpool one of the most attractive venues for lending stablecoins in the DeFi universe.
The amount of interest you earn depends on how much of the pool the borrower is utilizing (borrowing). As the borrower’s utilization rate increases, so does the interest rate, rewarding you with higher interest as risk increases. We refer to this dynamic as the “interest rate curve”.
Due to the shape of the curve, borrowers are discouraged from fully utilizing all of the liquidity deposited in the pool. Optimal utilization is usually between 70–85% depending on the borrower's current need for liquidity and their target interest rate.
This means that there should always be liquidity in the pool available for lenders to withdraw, meaning that your deposit is not locked, if there is available liquidity in the pool you can withdraw your deposit at any time.
👨🏫 ELI5: Go to the Clearpool app, select a borrower pool, deposit USDC, and start earning attractive yields paid in USDC + CPOOL. Withdraw your funds whenever you want. It is that simple!
Who are the borrowers?
Borrowers have to be institutions and have to pass comprehensive due diligence checks, verification and KYC processes before being whitelisted. There is no limitation on the type of institution that can request to launch a liquidity pool, however, at this time the majority of borrowers on Clearpool are highly reputable crypto-native market makers and quantitative trading firms with strong track records.
This profile of borrower should be familiar to the majority of people who understand the crypto space. They provide liquidity and make markets in all major digital assets on all of the major crypto exchanges. Their strategies are largely market risk-neutral, meaning that they rarely take directional positions in the assets that they trade.
Clearpool has partnered with X-Margin, who, as well as helping to verify and KYC Clearpool’s borrowers, also provide credit scoring and real-time risk monitoring through their privacy preserving zero-knowledge technology. This allows Clearpool lenders to take a real-time “look under the hood” when it comes to a borrower’s current level of risk.
Before a whitelisted borrower can launch a liquidity pool, the final step is to lock an amount of CPOOL tokens. The genesis pool borrowers locked 300,000 tokens each, subsequent borrowers have to stake the CPOOL equivalent of a percentage of the current TVL.
You can learn more about the borrowers on their respective pool pages on the Clearpool app.
👨🏫 ELI5: Borrowers on Clearpool are fully vetted, verified and KYC’d institutions. Borrower’s on-chain risk levels are monitored in real-time through Clearpool’s partnership with X-Margin. Borrowers must lock CPOOL before launching a pool.
What risk am I taking when lending to these borrowers?
Clearpool is an uncollateralized (unsecured) lending protocol. This means that you are exposed to the counterparty credit risk of the borrower to that you lend to. Essentially, this is the risk that the borrower fully utilizes all of the pool liquidity and fails to repay it during a specified period.
This is why all borrowers are fully vetted and verified by Clearpool and its affiliates before a pool can be launched. However, this does not mitigate the risk altogether.
In order to borrow liquidity without putting up any collateral, institutions are prepared to pay higher interest rates, to reward lenders for taking on the risk. These higher rates are enhanced on Clearpool with the addition of CPOOL LP rewards. Therefore, the rewards for lending unsecured on Clearpool, are fairly commensurate with the risk that is being assumed.
Each borrower liquidity pool on Clearpool has an insurance account. On every block, a small percentage of the interest payment is diverted to the insurance account within the smart contract. This amount builds up over time, and in the event of default, the insurance account can be claimed by the pools LPs as compensation.
👨🏫 ELI5: Clearpool is an uncollateralized lending protocol. Lenders are exposed to the risk of borrowers not repaying. This risk is partially mitigated through higher interest rates and an insurance mechanism.
How much would I lose if the borrower defaults?
This depends on the amount of funds that have accumulated in the pool’s insurance account and the outcome of the subsequent default auction. But thanks to these mechanisms it can never be 100% of the liquidity that has been deposited.
In the event of a default, an auction is triggered, in which whitelisted bidders can bid for the total debt of the pool. The minimum bid for the auction is equal to the amount in the insurance account. At the end of the auction, a vote will take place whereby the pool’s LPs will vote to either accept or reject the winning bid. If the consensus vote to accept the winning bid, then LPs will receive their commensurate share of the winning bid amount but relinquish their legal right to pursue the borrower legally. If the consensus vote against accepting the winning bid, then LPs will receive their commensurate share of the insurance account and retain their legal right to pursue the borrower legally.
👨🏫 ELI5: Lenders will never lose all of the funds that they deposit, and can be compensated to a significantly higher degree through the Clearpool default auction mechanism.
What are cpTokens?
When you supply liquidity to a borrower liquidity pool, you receive cpTokens in return. cpTokens represent the amount of liquidity that you have supplied, and accrue the interest rate for the pool on every block through an exchange rate mechanism.
When you supply liquidity, cpTokens are minted and sent to your wallet. When you want to redeem liquidity, cpTokens are returned to the smart contract and are exchanged for the principal amount of liquidity originally deposited + interest earned, through the exchange rate mechanism. A more detailed and technical explanation of the exchange rate mechanism can be found in the Clearpool whitepaper.
cpTokens also represent the credit profile of the pool’s borrower. Clearpool is building decentralized interest rate and credit derivative products, as well as a secondary market trading infrastructure, that will give LPs the ability to effectively manage and hedge the risks of unsecured lending.
👨🏫 ELI5: cpTokens represent the liquidity that has been deposited to a liquidity pool and accrue the interest rate for that pool on every block. cpTokens are the building blocks for future risk management, hedging and secondary trading solutions.
What is coming next from Clearpool?
Clearpool has just launched v2 of the Clearpool protocol which will allow for future deployment to multiple blockchains and allow for seamless future product enhancements.
A new dynamically shaped interest rate curve methodology will shortly be introduced. Watch out for future announcements on how this curve is generated, and how you can not only play a part in this important element of the Clearpool economy but also earn rewards from it.
A new and improved user interface and website is scheduled for June 2022.
Polygon will be the first chain after Ethereum that Clearpool will be available on. Deployment to Polygon is scheduled for Q3 2022.
Clearpool will soon introduce a native staking mechanism that will bring significant additional utility to the CPOOL token. This mechanism will allow anyone with CPOOL, whether they are an LP or not, to participate in a delegated staking model, which will help to secure the Clearpool economy, at the same time as earning rewards. The staking mechanism is scheduled for launch in Q3 2022.
A number of other products and product enhancements are currently being designed and developed for release later this year.
👨🏫 ELI5: Clearpool continues to build and deliver on its roadmap. We have the best and most dedicated team in DeFi. We are not going anywhere other than head first into the future of finance. Are you onboard?!