The Rise of Risk-Hedging Uncollateralized Loans: Clearpool PYTs

Announcing Wintermute’s USDC Perpetual Yield Tranches based on Clearpool

Idle Finance
Idle DAO
Published in
5 min readJul 20, 2022

Idle DAO and Leagues are proud to announce the introduction of risk-hedging instruments to DeFi uncollateralized loan markets. We are excited to launch Perpetual Yield Tranches (PYTs) based on Clearpool uncollateralized loans, starting with Wintermute’s USDC borrower pool.

These new PYTs allow liquidity providers to access the emerging DeFi uncollateralized loan market with senior and junior risk-adjusted profiles.

The DeFi uncollateralized loan market

On one hand, overcollateralized loans are one of the tenets of DeFi. They addressed the quest to eliminate centralization bottlenecks for the loan market: you do not have to source potential lenders or negotiate the interest rate since there is a single entry point for all loans, and the interest rate is determined algorithmically from market conditions. These lending/borrowing protocols work autonomously without reputation and borrowers use collateral in excess of the value of the borrowed assets (which function as a guarantee to cover potential losses in default cases).

On the other hand, uncollateralized loans, a missing piece in the DeFi puzzle, are finally coming to open finance. While this new component is opening up to better capital efficiency and countless applications for DeFi, it comes with a significant challenge: appropriately managing risk exposure.

Enter risk tranching. At a high level, investors can choose between different risk levels — each with its own tailored potential for upside and downside — when depositing their digital assets into a specific pool. Tranche lending products are widely used in traditional finance and offer a pathway to risk management for decentralized debt. Essentially, it allows risk to be redistributed among different investor profiles.

Uncollateralized Perpetual Yield Tranches

Perpetual Yield Tranches (PYTs) are a new risk-hedging DeFi primitive that allows investors to select the risk-return profile they’re more comfortable with. PYTs come in two different classes: Senior and Junior. With these classes, investors can earn yield optimized by their risk level.

Uncollateralized loans are part of the next iteration of DeFi, but currently lack hedging instruments. That’s why Idle DAO has partnered with Clearpool to build PYTs on top of their ground-breaking uncollateralized single-borrower pools, starting with Wintermute’s pool, cpWIN-USDC.

The Junior class is rewarded with a greater share of the underlying yield in exchange for taking on potential losses. Conversely, the Senior class benefits from built-in protection by foregoing a share of the underlying yield.

Additionally, PYTs are incredibly flexible and easy to integrate into any other system. This enables integrators to build innovative on-top products or plug their yield sources into PYTs.

At the same time, treasury managers can turn their reserves into productive assets and withdraw at any time to utilize their operational capital while maintaining a conservative asset allocation approach.

To increase PYTs’ yield efficiency, Idle DAO recently introduced the Adaptive Yield Split. This mechanism ensures a consistent over-performance for Junior Tranches (compared to underlying Clearpool APY) while guaranteeing at least 50% of the underlying APY to Senior Tranches (when there’s a high level of coverage). Clearpool PYTs come equipped with the Adaptive Yield Split.

The image below shows the APY trend generated by Senior and Junior Tranches depending on the ratio between Senior/Junior TVL, using an underlying APY of 10%.

Furthermore, Clearpool PYTs are also eligible for stkIDLE Gauges: in this way Senior holders would be able to stake their PYTs tokens and receive $IDLE rewards, potentially outperforming the underlying APY while maintaining their built-in protection.

The example below shows a $2.5m deposit into the Senior Tranche, which receives 30% of the Gauge weight. The minimum guaranteed Senior APY, which is equal to 5% when the Junior coverage is available, becomes 7% with Gauges.

Clearpool, Wintermute, and PYTs

In essence, Clearpool PYTs empower liquidity providers to lend crypto assets based on their preferred risk/reward level. And borrowers on the Clearpool protocol can now expand the potential size of the pool by enabling additional risk control measures and attracting liquidity from a wider network of lenders.

The Wintermute borrowing pool is currently the most liquid. It has a borrowing capacity of over $240m, resulting in the deepest for the protocol — and can optimize the utilization rate even with large-size deposits.

While Clearpool has already implemented safety measures in case of default/black swan events, with PYTs liquidity providers will be able to add a layer of protection.

About Clearpool

Clearpool is the first decentralized dynamic marketplace for institutional unsecured capital. Institutional borrowers can create single-borrower liquidity pools and compete for uncollateralized liquidity directly from the DeFi ecosystem. Liquidity providers on Clearpool can earn attractive yields, with pool interest rates enhanced by additional LP rewards paid in CPOOL — Clearpool’s utility and governance token. Clearpool LP tokens, called cpTokens, are the building blocks for a system of tokenized credit that will provide Clearpool LPs with risk management and hedging capabilities. Clearpool provides the new architecture to facilitate flows between the $120 trillion traditional capital markets and the burgeoning DeFi ecosystem. Clearpool is backed by leading investors, including Sequoia Capital India, Arrington Capital, Sino Global Capital, HashKey and Wintermute.

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About Idle DAO

Idle DAO is a decentralized organization that builds yield automation infrastructure for DeFi. From brand new DeFi protocols to institutional and DAO treasury managers, businesses of every size use our protocol to optimize capital efficiency and manage their treasuries with DeFi.

We believe everyone deserves the best for their idle funds in terms of returns and risks. Over the past three years, Idle has rolled out the features and services, defining and shaping the yield automation space.

To learn more about our products and services:

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Idle Finance
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