Maple Finance Taps DeFi Capital Markets
captainpearson.eth
0xd67a
May 12th, 2022

Maple Finance is tapping the institutional lending market in DeFi. Pun intended. Founders Joe Flanagan and Sidney Powell, both from TradFi backgrounds, found that traditional debt capital markets were broken and turned to smart contracts as the solution. What started as an idea for the world’s first crypto bonds, aka smart bonds, pivoted to a business that enables institutional borrowers to borrow in the DeFi ecosystem more efficiently (Crypto Unstacked, 2021). Launched in 2021, Maple’s business model for crypto-native market makers focuses on under-collateralized lending, true credit creation, and capital creation, leveraging the strong balance sheets and cash flow now present in crypto-native companies. Maple believes they are an on-chain capital market infrastructure, a technology company facilitating a system and marketplace for people to run lending businesses, fixed income asset management, and OTC lending desks. So far, it appears as though they’ve found the right tree vein, having originated $1.2B in loans since last May, with competition 30x their current levels. They are in the right forest. 🍁🌲

Maple believes the current market is ripe for several reasons. First, they see the broader market growing with crypto-native companies that have balance sheets large enough for true credit creation. However, these companies have typically been barred from TradFi lending due to the speculative uncertainty surrounding the crypto markets. In Maple’s opinion, the market desperately needs true credit creation for the industry to grow further, which implies the need for under-collateralized lending rather than the commonly used over-collateralized lending present in the crypto space. Moreover, they feel the broader market participation, development, and skillsets of the DeFi degens have grown. With crypto and Web3 now more accepted, Maple believes they are the solution that provides the significant and necessary capital required by crypto companies to scale their operations to the same magnitude seen in TradFi. What makes Maple different is the capacity to source new liquidity and originate more loans in the space. People can lend into pools to provide capital to real businesses generating real cashflows and part of these cashflows are paid back for the ability to access capital from Maple (Token Terminal, 2022). 🥞

https://maplefinance.gitbook.io/maple/protocol/maple-protocol-v1.0.0
https://maplefinance.gitbook.io/maple/protocol/maple-protocol-v1.0.0

How does Maple work? Maple’s Gitbook provides a great high-level overview, but here is a TLDR. A participant in the protocol can either lend, borrow, stake, and/or become a pool delegate (Chung, 2022). Pools of capital are funded by lenders who are either large institutions or sophisticated, smaller lenders. Lenders earn interest on their lent capital as well as $MPL tokens as lending rewards. Capital is then aggregated into pools and lent to institutional borrowers who are looking for capital to fund their operations and growth. These pools are then uniquely managed by pool delegates. Pool delegates are one of Maple’s competitive advantages. Delegates enable real scalability and play into Maple’s infrastructure rather than serving as a traditional lender. Delegates bring in reputable strategies, expertise, and capital networks. Delegates are responsible for underwriting, due diligence, and negotiating terms. They are essentially a checkpoint controlling the interaction with borrowers and, throughout the term negotiation, they are determining creditworthiness. They manage the liquidity pools, creating and pursuing their own unique strategy (Token Terminal, 2022). Stakers provide pool cover by staking MPL tokens into pools to provide first-loss capital. These tokens will be liquidated first in the event a borrower defaults. Stakers receive a percentage of the interest earned by the pool from borrowers and MPL staking rewards (Maple Finance Gitbook).

https://app.maple.finance/#/earn
https://app.maple.finance/#/earn

Here are some specs surrounding the architecture and structure of the protocol:

  • Maple offers fixed term, fixed rates, and fixed collateral parameters to optimize transparency and prediction for borrowers, making it a simple product to implement and understand.
  • Loan sizes have ranged between $5-15M, averaging 90-180 days paying borrowers 8.5-12.5%.
    • This turns capital roughly twice a year for establishment fees.
  • Loans are interest-only, paid monthly, with a 5-day grace period.
  • Originally launched with a level of collateralization, loan collateral is via cryptocurrencies such as wBTC, stablecoins (USDC), AAVE, and LINK.
  • Maple is sitting on 6 pools with delegations from Orthogonal Trading (USDC), Maven 11 (USDC), Maven 11 (wETH), Alameda Research (USDC), Celsius (wETH), and BlockTower Capital (USDC). Maple began the first 4 pools with USDC but recently deployed wETH pools through Maven and Celsius.
  • Smart contracts, on top of legal infrastructure and DAO participation, deliver the enforceability of the loans surrounding default collection. At the outset of the loan, the borrower deposits collateral into a smart contract based on the negotiation of the pool delegates. When a borrower defaults, the collateral is liquidated first. To align incentives across the platform and provide extra insurance and protection for the lenders, a cover reserve is created. Pool delegates are the first party to participate in the cover reserve. The cover reserve is liquidated first in the same way as the borrower’s collateral. This protects the lender from default. The cover reserves receive a portion of the interest revenues generated by a pool. The risk returns the lender receives versus the cover reserve identifies the risk difference. Cover pools aim for about 5-8% of the pool to be covered (Token Terminal, 2022).
https://consensys.net/blog/cryptoeconomic-research/maple-finance-creating-a-decentralized-credit-market/
https://consensys.net/blog/cryptoeconomic-research/maple-finance-creating-a-decentralized-credit-market/

How does Maple generate revenue and cash flow? There are two revenue streams. Maple DAO accrues establishment fees. When a borrower takes out a loan, two-thirds of a percentage goes to the Maple treasury and one-third goes to pool delegates. Also, there is an ongoing fee, of which a proportion of interest is provided to the pool delegate and then to the cover pools where Maple tokens are posted with USDC. Revenues increase with active liquidity and loan origination, and establishment fees generate cash flow when a new loan is taken out. Ongoing fees are distributed to the supply-side participants according to the loan pre-payment schedule (Token Terminal, 2022). 💸

Let’s talk about Maple DAO and its quest for decentralization. The token and protocol are governed by $MPL. Maple is undergoing progressive decentralization due to the upfront complexity surrounding the decisions of trusted third parties. Currently, its level of decentralization is such that a multisig controls the DAO wallet treasury funding and it can change settings. It’s been decentralized away from core team members to include that of the cap table. Right now, Maple polls the community for certain decisions: As it increases in sophistication, we will see full implementation of snapshot token-weighted voting and proposals will be queued for upgrades to codes and settings. Community governance voting will trigger these implementation changes (The Money Movement with Jeremy Allaire, 2022). 🌐

Recently, Maple Finance announced that it has launched on Solana. They chose Solana because of the strong institutional adoption of Solana’s chain. This past January, Maple acquired Avari, an uncollateralized lending protocol on Solana. Avari was pursuing a similar strategy and, as a mutual benefit, Maple decided to acquire Avari as well as its founding team. The move positioned Maple to become the first corporate credit marketplace to launch on Solana (Sinclair, 2022). Flanagan notes that Maple’s smart contracts on Solana have new beneficial qualities learned over time from development on Ethereum. However, the unique aspect of the move is Maple’s priority and long-term alignment of Maple ETH holders. 40% of the Syrup (Solana’s Maple token) minted will be owned by Maple ETH holders; therefore, 40% of revenues on Solana will go back to ETH without dilution (Deus Ex DAO, 2022). This is very bullish for Maple’s ETH holders and alludes to a belief that Maple deems Ethereum a long-term, more secure, and decentralized ecosystem while they leverage Solana’s institutional adoption and tokenomics. 🦄

https://twitter.com/maplefinance/status/1519279768910413824?ref_src=twsrc^google|twcamp^serp|twgr^tweet
https://twitter.com/maplefinance/status/1519279768910413824?ref_src=twsrc^google|twcamp^serp|twgr^tweet

What’s next for Maple Finance? Maple is looking to make continuous smart contract improvements to features like their cover pools, moving away from balance pool tokens to single-sided tokens. So, rather than having to provide balance support tokens at a 50/50 pair, users can now provide xMPL, wBTC, or USDC in their own right (current staking here). Also, they look to make continuous improvements and updates on their tokenomics for Maple token participation. They aim to update their pool contracts, building out more complex and beneficial features, such as making their LP tokens more transferable through the ecosystem. This would allow more strategic leveraging across the ecosystem, enabling secondary markets and creating a standard of interoperability in the protocol. When it comes to borrower verticals, Maple looks to remain crypto-native by expanding to crypto miners, which need lucrative financing to expand their operations. Moreover, they plan on expanding to DAOs as DAOs are now generating real cash flows but have no access to debt. Down the line, Maple sees their operations penetrating real-world borrowers in SAAS and Fintech, and eventually conventional DeFi (Deus Ex DAO, 2022).

Maple serves as a much-needed bridge between the TradFi capital markets and DeFi capital markets. Traditional institutional lending practices are now being put on-chain using DeFi technology. Crypto companies, protocols, and DAOs can now scale and push for broader adoption through Maple’s capital marketplace framework. According to its founders, Maple’s innovative framework promotes further development of innovative DeFi tooling to improve the overall financial landscape, such as zero-knowledge credit scoring solutions, on-chain identity technology, and Layer 2s to boost participation (Crypto Unstacked, 2021). Maple is on-chain, meaning it’s transparent; and historically archived, building its reputation through active and open participation. Similar to Decent, Maple builds software using Web3 technology, allowing people and companies around the world access to financial innovation. 💜

References:

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