Continuous Improvement
Market shocks create opportunities to assess our methodology during times of stress and evaluate the inclusion of new metrics. Our systems track individual factor scoring per borrower, and the team regularly assesses our historical scoring. As part of this process, we evaluate curves used for scoring on a factor-by-factor basis.
Before the FTX events, we were progressing towards the implementation of a more granular assessment of the credit risk that is absorbed (and often ignored) by borrowers, primarily to exchanges. This upcoming implementation scores maximum concentration across venues and then scores counterparty risk by multiplying percentage exposure by a venue ranking (using 3rd party data providers). We will incorporate reliable proof of reserve and liability information as it becomes increasingly available.
Considering the role of FTT in recent events, we also recognize the importance of improving our quantification of borrower liquidity. We are working towards an implementation that multiplies asset liquidity rankings (using 3rd party data providers) by borrower asset exposure, resulting in a liquidity score, without the borrower having to reveal position information
We continue to invite broader factor and methodology feedback from the market, we genuinely appreciate input and challenges to our approach. We’ve outlined our vision for developing additional methodologies below.
Next Steps — Industry
Credit appetite will remain limited for a period as the industry reassesses various risks and elevates standards for due diligence.
Credora is open to work with industry participants and outside groups to help facilitate ongoing proof of reserves for exchanges. In our experience, validating liabilities is more challenging versus validating assets. We do believe our technology can be used to validate off-chain assets and privately calculate real-time liabilities, alongside using our platform for reviewing financial information.
We have a strong belief that the industry would benefit from third-party due diligence on other major providers, including lenders and prime brokers. This includes financial statements and risk monitoring analysis. Our platform is built for this.
We continue pushing towards higher standards for financial statements in the industry as a whole. Many market participants have no external party involved in the preparation of financials, and the presentation of information varies widely. Our team is currently working on a ‘best practices’ guideline, and we would be encouraged by more capable crypto native auditors.
Lastly, events including 3AC and Alameda highlight the difficulty of quantifying leverage for a particular borrower who is borrowing from multiple lenders. Our technology is ideally suited to solve this problem, and we are working towards an encrypted database of liabilities, where private computations can flag high-risk participants while keeping loan details completely private. This is particularly needed as long as the majority of lending activity occurs OTC.
Technology & Vision
Credora is positioned to support a more efficient credit market through robust and ongoing counterparty due diligence. This is especially true in the context of differentiating between who is struggling and who remains creditworthy during large shocks. Furthermore, by reducing the information asymmetries supporting credit warehouses, our technology can ease market deleveraging cycles and lessen second-order impacts on liquidity and the broader ecosystem. The unfortunate reality today is the average market participant is incapable of flagging bad risk, and therefore the only management strategy is closing all exposure.
Our roadmap aims to improve our underlying technology (privacy-preserving calculations on real-time data), incorporate new data sources, enable flexible model configuration, and add features servicing lenders and borrowers. We recently released features enabling counterparty discovery and RFQs on the Credora platform.
We are frequently referred to as the S&P or Moody’s of crypto, and although we appreciate the comparison as it is a role we are currently filling, it is not the ultimate goal of our platform or infrastructure. Rating agencies deploy specific methodologies on far more robust data sets in traditional markets. They have built up expertise across multiple different industry segments and have strong processes in place to analyze a range of clients.
Rating agencies, however, do not allow you to run your own methodology on all of the private data available to them. This is where privacy-preserving technology is materially different and more powerful. It enables flexibility for the ultimate lender or risk manager. If multiple lenders have factors that they evaluate differently, Credora infrastructure can support their assessment while respecting the sensitivity of borrower data. Ultimately, this can allow the market to price traditionally illiquid credit structures in real-time using different pricing methodologies.
As for expanding the methodologies on the platform, we are already working with partners on the development of methodologies for new borrower types. Our expertise is primarily in trading firms, and we are expanding this through partners who gain from our ability to provide real-time analytics for different borrower segments.
We expect regulation to be increasingly relevant for off and on-chain lending going forward. The market will rely on regulated access points bridging institutional participants and maintaining the benefits of transparent on-chain infrastructure while protecting the privacy of sensitive data. The majority of the on-chain market currently excludes the largest institutional participants, which we believe changes as access controls and legal frameworks are improved.
The image below highlights differences between the current credit stack and a more transparent, regulated on-chain market. Alongside our partners, Credora will continue to build infrastructure that supports a more efficient and resilient crypto credit market.
Join Us
We are actively looking to expand our credit and development teams. If you are data and model oriented, and believe that credit risk can be accurately quantified and assessed in real-time, we want to hear from you!
Additionally, we invite industry capital allocators to reach out and discuss our methodologies.
