Let’s Talk Elephants
One of the loan platforms just wrote an article explaining the “necessity” of liquidations. It’s like a pharmaceutical company executive explaining the “necessity” of drug trials to an audience of mice. Merely because the current crypto loan industry operates in a retail way does not mean that is the only way. Think different.
Of course, there is plenty of truth in the article. Crypto remains a market without credit ratings, audited financials, and without transparency. One can’t simply wave a wand and create creditworthiness or even some way of assessing it. Certainly one needs to protect the ranch in a market where some participants think that manipulating the price on illiquid exchanges in order to steal money via a flash loan is a valid “strategy”. That is the equivalent of “hey! look over there” and then stealing someone’s car.
Our Tri-Party Repo is designed for institutions. We do things a different way. Digital Gamma bases its product on the transaction at the center of modern finance: repo. Sure, repo has had some bad headlines but the idea of collateralizing a loan with high quality assets has shown itself to be a bedrock foundation. Of course, in cryptocurrency, 100% loan to value is insufficient due to the inherent volatility of the asset.
The time for two-sided posting of collateral is here: if not now, after the margin call meltdown, then when?
Here is the key, however: one counterparty’s over-collateralization is the other party’s under-collateralization. That’s the real elephant in the room that these articles try to make disappear. To take animal metaphors too far, let’s grab the rabbit out of the hat. What happens if your overcollateralized lender — the one that you gave $60,000 of BTC to in exchange for $20K of USD — goes bust? Maybe because they are doing the standard Silicon Valley playbook and creating sales growth through subsidizing growth. Or using the deposits to trade. Or for some reason you just don’t know because, ya know, no transparency.
That’s why Digital Gamma TPR (Tri-Party Repo) was created. We are the trusted third party administrator of an institutional loan. Each party posts collateral at Digital Gamma to guarantee performance. That collateral is set in line with market conditions including volatility measures and common sense (and can be customized). We rebalance to match 100% LTV daily or based on movement thresholds.
Another aspect that makes TPR special is that regardless of which side of the trade you are on, you can use the collateral. Borrowing BTC? Of course, you get to use the BTC. Lending ETH? You get to use the USD (or GBP or BCH) that your counterparty posted. That makes TPR a true funding market in addition to being a crypto-borrow market. Trade and payments make an economy. Digital Gamma is helping to transform crypto into a financial system. Once there is finance, then crypto will transition from being an asset to being an asset class.
Digital Gamma can’t eliminate credit risk; only mitigate it. That’s why TPR is designed for institutions. Ultimately, each participant in a TPR is legally on the hook for the obligations of that transaction. We are intimately linked into the legal system all while still allowing for decentralized financing for cryptocurrency. The time for two-sided posting of collateral is here: if not now, after the margin call meltdown, then when?
