Why Arbitrum?
Options for builders has never been healthier than in 2024, with new and established destinations continuing to innovate and build new primitives.  With that said, Arbitrum was the logical choice for Cicero, as it establishes itself as the clear leader in Eth L2 solutions.

As of January 2024, Arbitrum commands over 51% market share among Ethereum Layer-2 networks in terms of TVL.We remain very excited about the scaling possibilities, and security benefits of Ethereum and considered it the obvious place for our initial deployment.

Cicero - Capital Efficient Private Credit

Cicero is a contract-to-contract credit market for institutional borrowers.  Our design will use a multiple pool approach to both mitigate risk and attract different lending appetites. Our core borrowers will be largely Web3 market makers, selected hedge funds as well off-chain opportunities such as property bonds (RWAs).   All governance decisions and underwriting will be made by community consensus on Cicero.   To avoid governance manipulation, we will make sure of depreciating voting power (the closer you are to unstaking, the less voting power your tokens hold).

Mission
Cicero aims to be the destination for on-chain for institutional Web3 borrowing.Our initial borrowers will be major market makers and select hedge funds.

In this model, many can lend but only few institutions can borrow.

Less counterparty risk means that lenders and token holders can have a more detailed understanding of the parties borrowing, and with this more peace of mind on how borrowed funds will be deployed.

The Importance of Capital Efficiency
The ability to lend and borrow assets is a cornerstone of any financial system.  Although overcollateralized lending is safer for the lender, it is not as capital efficient for the borrower and thus can limit market expansion. In a nascent industry such as Web3/DeFi this ability to access capital is even more important so that the critical financial plumbing such as exchanges, OTC desks, and other brokerage models have the required liquidity for the market to function optimally.

These are all benefits on the borrow side, but under-collateralized models also have many benefits on the lend side as well, namely through attractive yields.

Due to the fact that under-collateralized loans are a higher risk to lenders than over-collateralized models such as Aave/Compound they also justifiably offer a higher Annual Percentage Yield (APY) return on deposit.

The market rates for capital fluctuate based on market cycles, but are always attractive, especially so when there is a higher demand for working capital such as during periods of market optimism.  By judiciously lending to only the most robust businesses in the industry, LPs get the benefit of knowing they are only lending to a very select group of well-established borrowers.  This does not guarantee that loans will not default, but it does limit the amount of counterparties that lenders need to monitor and track repayments.

Selected Investors

Assessing risk
Cicero will work with trusted third parties to generate comprehensive on-chain credit scores and analysis.

Trustworthy creditworthiness data is used to estimate risk profiles of borrowers without disclosing sensitive information on blockchains.

At the outset loans will be approved by the core team to create initial flows and prove the model, however as we move towards true decentralization credit committees and allocators will be selected and made up from active members in the community.

Models that require a third party to approve loans can work, and do work, but without adequate financial penalty for defaults the incentive is almost always to approve loans.

We believe that a model where the users who are putting up the capital, can decide whether to fund or reject applications creates the right set of incentives to adequately underwrite loans, with the added benefits of keeping this value in the system (fees go to users, rather than an outside organisation).

Of course, no underwriting is perfect and defaults do occur - however having an extremely high bar to who Cicero will onboard as borrowers and with the protocol lenders can both select and use modular risk management when deciding how to allocate funds.

A post FTX / Voyager World
To address the elephant in the room, there may be some concerns around the sustainability of undercollateralized models due to fallouts and full collapses of Voyager, Celsius and Three Arrows Capital in the previous cycle which created enormous contagion across the interlinked crypto credit markets.While these are valid concerns for all undercollateralized markets, we only need to look at the fact that the private credit market hit 2.1T globally in assets and committed value. This figure is larger than the entire crypto market by some margin. This comparison to legacy markets implies an enormous growth potential for currently nascent under collateralized lending in Web3, where unsecured markets are a mainstay across all financial product segments. As previously stated, capital efficiency is a core tenet to expanding markets, and when allocated correctly an extremely powerful instrument in any financial market.

Real World Asset (RWA) Opportunities
Property bonds are preferred over real property as most investors don't have to be concerned about the hassle of fluctuation in price, liquidity (buying/selling of the asset), ongoing maintenance and keeping up to date with legislation in multiple regions. Facilitating these assets on-chain with a focus towards shortened maturity dates are a unique RWA tokenized opportunity for crypto savvy investors that Cicero is currently exploring.

Innovation and Community Value
-Community based underwriting
-Depreciating voting power
-Multi pool default security

Pre-Launch Roadmap

Conclusion
Capital efficiency is paramount to any financial market’s ability to expand and work optimally.

No underwriting is perfect, however creating the right incentives and equally disincentives should ensure that not only is allocation cautious, but also that the fees generated for approving loans is retained by participants in the protocol.

Community driven projects are often romanticised in web3 projects, but we believe we have only just begun to make good on this promise as a community. Communities are capable of much more involved and nuanced contributions rather than just voting on proposal snapshots.  At the same time, every participant can be as passive or as immersed in the project as they desire.

We are delighted to reach this point through meticulous planning and good not be happier than to work with the Arbitrum team and  community to help launch the Cicero Finance.