Building the next generation Digital Asset Lender: why we invested in Trident’s $8m Seed Round
By Sep Alavi, General Partner, Digital Assets Fund, and Marthe Naudts, Analyst, Digital Assets Fund
As they emerge from stealth, we’re excited to announce our investment in Trident’s $8m Seed Round, co-led with New Form Capital. Trident Digital is an institutional digital asset lender that will restore market liquidity with a new standard of risk management.
Trident’s stellar team combines the expertise of Wall Street and digital assets veterans. Led by Anthony DeMartino, an experienced trader who spent over two decades at Barclays, UBS, HSBC, and Coinbase, the co-founding team is made up of COO Julia Moiseeva, a capital markets expert with a background working at Barclays, Morgan Stanley, and Merrill Lynch, CTO Amir Sadr, a 20-year veteran in trading, risk management, and quant finance across Morgan Stanley, Greenwich Capital, HSBC, and Brevan Howard, and CCO Toby Norfolk-Thompson, who brings two decades of expertise in senior fixed income trading/structuring with previous roles at Barclays and Coinbase.
Read more on why we invested below.
***
Cryptocurrencies, and the trading thereof, have sparked a new paradigm for financial markets. When the asset class was nascent and illiquid, institutional capital entered, enticed by the easier winnings of arbitrage trading to take advantage of the inefficient price matching between exchanges.
Since then, it has rapidly expanded into a $438bn trading industry underpinned by two broad trends.
- As blockchain technology and supportive infrastructure became more efficient, advances in throughput and latency have enabled high-frequency trading and news trading strategies.
- Concurrently, increasing numbers of utility and alt-coins along with ways to generate yield from their speculation has led to the development of specialised crypto exchanges and protocols offering new activities like lending and staking.
With that, retail and institutional trading activity spiked, meaning monthly spot market volumes grew rapidly from $210bn in May 2020, to $4.25tn in May 2021. In 2022, the top 10 centralised exchanges alone reached a total trading volume of $40.87 trillion, even after having dropped over 50% YoY.
This has given rise to a class of institutions dedicated to fuelling this trading activity, analogous in many ways to TradFi institutions such as market makers and hedge funds. Many of these market makers use borrowed funds with leverage to trade larger positions across crypto primitives. This, in turn, has given rise to a new class of institutional lenders.
These lenders fall into four broad categories:
- Prime brokerages (e.g. FalconX, Hidden Road, Bequant)
- Dealer Funding (e.g. Genesis, protocols directly funding liquidity of alt-coins)
- Collateralised (e.g. Genesis, Wintermute, Cumberland, Jump)
- DeFi (e.g. Maple, Ribbon, Solv, Clearpool)
The Black Swan of 2022
In May 2022, the crypto world was heavily shaken, as Terra, the second largest ecosystem in DeFi in terms of value locked, crashed. Its algorithmic stablecoin, UST, depegged and, along with its sister token, LUNA, entered a death spiral, erasing about $45bn in wealth in the process.
Many borrowers were wiped out, either from having outsized positions in UST/LUNA, or simply from collateral such as BTC and Eth plummeting to their lowest points since 2020. As contagion spread, eventually FTX and its sister trading firm, Alameda, unravelled as fraudulently managed and ultimately declared insolvency.
FTX, valued at $32bn in its last funding round, was one of the world’s largest centralised crypto exchanges. Alameda was a trading firm with around $14.6bn of listed assets as of June 2022. As later became clear, FTX was loaning out user funds to Alameda and using its own (illiquid) FTT token as collateral, essentially printing money so it could lend user funds to itself.
The contagion of these events inevitably led to crypto lender Genesis’ downfall as FTX’s largest unsecured creditor. In January 2023, with more than 100,000 creditors and at least $3.4bn in unsecured claims from the top 50, Genesis filed for Chapter 11 bankruptcy.
These extreme events demonstrated the problems at the core of the shadow lending economy and the limited risk management — not least the limited diversification of exposure, but also notably the opacity of real-time assets and liabilities of debtors and over-exposure to illiquid coins like FTT as collateral.
Nonetheless, the demand for borrowing remains high, and there is a pressing need in the market for a lending institution managed by seasoned executives with deep experience in liquidity and risk management to fill the gaping hole left in 2022.
Enter, Trident
Trident is a crypto investment bank that meets this demand with a regulatory-first approach, offering a lending conduit matching borrowers and lenders of crypto assets and fiat currencies, and a position management portal and liquidation engine to ensure all loan terms are met.
For lenders that lack the tools to monitor crypto risks and liquidations, this means they can finance strong counterparties under a strict risk framework. Trident’s portal will have real-time API pulls, which will trigger liquidator enforcement if a position’s health changes. Its monitoring system for loan values will alert borrowers via their chosen channel and will allow lenders to assess portfolio value and account composition in real-time.
By only allowing lending positions in top-rated coins, and limiting positions to those able to liquidate in three days maximum, the result for both institutional lenders and borrowers is a transparent and adequately risk-managed lending ecosystem.
Trident will also go to market with a safe yield product for fintechs, crypto native treasuries, and other institutions who have significant capital reserves and wish to increase their capital efficiency without the duration risk, liquidity risk, and custody risk that lie with other ostensibly ‘risk-free’ offerings. Trident’s offering will instead provide yields linked to the risk-free rate while ensuring all deposits are physically backed by treasuries. Their platform will include a loan record system, daily securities reporting, and constant position monitoring.
Trident is set to become the next generation of digital asset lending, prioritising capital efficiency, accessibility, and security. We’re excited to support Trident’s next stage of growth as they bring a much-needed product to market.
If you’re interested in connecting with the team and hearing more about their secured yield product, please reach out to sales@tridig.io
