Crypto Fixed Income and SmartCredit.io

SmartcreditEditor

Published in

SmartCredit.io

5 min readOct 18, 2020

The traditional Fixed Income market can be divided into:

Bank credit — it’s not a security; it is not transferable.
Bonds are securities; they are transferable from one holder to another holder, and they are tradeable via OTC or exchanges.

The Fixed Income market is 5–10 times bigger than the global equity market. However, in the crypto sector, the fixed income is 5–10 times less than the crypto equity market. This indicates significant crypto fixed income potential in comparison to the traditional markets.

Crypto Fixed Income can be divided into:

Custodial lending — the user does not control his assets. A platform user has to deposit their crypto into the platform wallet. The platform will lend users assets either in the peer-to-peer mode or consolidate them and lend them via the OTC (Over The Counter) to the counterparties. Or the platform will lock these assets as collateral and will lend fiat or stablecoins. The borrower will receive either crypto, stablecoins, or fiat on this platform. When the borrower is not paying his loan, then the lending platform will liquidate crypto collateral.
Non-custodial lending — the user controls his assets. This is also known as DeFi lending or Decentral Finance lending. DeFi focus is on the Ethereum blockchain-based assets. Users hold their keys, and the platform does not have access to the user’s private keys. Users can borrow crypto or stablecoins. Borrowing fiat is not possible in DeFi lending.

As custodial lending defeats the purpose of blockchain via introducing a third party, which controls client assets, then the focus here is on the non-custodial lending / on the DeFi lending.

How does DeFi Fixed Income work now?

DeFi Fixed Income is very much money-market based. The lenders deposit their assets into the pool and receive the shares of this pool. Then, the borrowers can borrow from this pool against the collateral.

The interest rates are fluctuating — they are not fixed. When the market thinks that Ethereum is moving up, then DAI will be borrowed — this drives the DAI interest rates up. When the market thinks, Ethereum is moving down; the opposite will happen. As the market moves in the herd movements, this translates into a fluctuating interest rate.

The loan maturity for the borrower is variable (unlimited); the loan maturity for the lender is daily (as far as liquidity is available).

So the existing solutions are based on:

Pooling
Fluctuating interest rate
Variable loan maturity

How does SmartCredit.io work?

The alternative solution would be:

No pooling, but clear peer-to-peer
Fixed Interest rate
Fixed loan maturity

That’s what SmartCredit.io is doing. The critical difference is visualized in the following image:

Why is this important?

Fixed Interest Rate is the opposite of the fluctuating interest rate. It gives stability to both lenders and borrowers. Both sides will not be exposed to the herding movements of the market. Both sides can fix their loan interest payments or invest received at the beginning of the contract.
Fixed Loan Maturity allows SmartCredit.io to reduce the collateral requirements to the borrowers. Just compare how much are collateral requirements for unlimited loan maturity versus 30 days loan maturity — the 30 days loan maturity will have fewer collateral requirements.

What’s about the pooling of the assets?

Pooling is a good concept; however, pooling retail investor assets and promising them a return from the pool is a regulated activity in all countries. Of course, pooling-based projects try to explain that it’s open-source; there is no central point of control, etc. However, this doesn’t change the essence — it’s pooling retail investor assets… That’s why SmartCredit.io is not pooling client assets but always working in pure peer-to-peer mode.
Fixed Income Funds (the combinations of loans of different maturities, which offer better Sharpe Ratio) cannot be implemented via the pooling of the assets but via tokenization of the peer-to-peer loans. SmartCredit.io will launch the Fixed Income Funds feature soon — it’s based on the fixed-rate, fixed-term loans. The passive investors will get exposure to the whole yield curve and not only to the money-market-funds.

Where is the value-added of SmartCredit.io?

SmartCredit.io solves the following critical issues:

Borrowers have today too high collateral requirements (i.e., Maker, Compound have ca 350% 400% collateral ratio), meaning borrower’s capability to borrow is low. Because it’s not clear for how long borrowers borrow, then high over-collateralization is the solution on these platforms.
Limited choice of collateral — Borrowers on Maker or Compound have limited choice of collateral (just 4 or 8 tokens)
Lenders cannot transfer their loans (or parts of the loans) to other parties during the loan term.
Other platforms would like to earn revenues with value-adding services (like credit as an API service)
Investors would like to earn passive income (with no activity)

The SmartCredit.io key idea is to focus on the borrowers because they are the key to lending. The lenders will follow the borrowers.

The focus on the borrowers is achieved via:

Low collateral requirements for the borrowers — primarily via fixing of the loan maturities
High choice of collateral — borrowers will have a wide selection for the collateral
Loans are transferable — lenders can transfer their loans to others
Passive Investors would like to earn passive income — SmartCredit.io offers the Personal Fixed Income Funds, which will automatically invest, based on the rules, into the Borrowers Loan Requests
Credit As A Service API and Widgets — the partner platforms can integrate “give credit” and “take credit” widgets. Borrowers can be on other platforms, but they will still receive the credit via the devices.

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