Ribbon Finance, a DeFi Lending platform, went public on Monday, 3 October 2022, saying that it will allow institutions to borrow funds without posting collateral.
Unless you have been lowkey for months, you have probably heard that unfavorable macroeconomic conditions have made cryptocurrency market participants risk-averse. Early activity in the recently launched high-stake lending product Lends from Ethereum-based structured products firm Ribbon Finance suggests otherwise.
Ribbons Lend will allow depositors to lend highly liquid unsecured funds to market makers at institutions of their choice. With this protocol, a user has deposited his 15 million USDC, a USD-pegged stablecoin.
More than $10 million of his USDC was borrowed from Alameda-backed quant trading firm Folkvang Trading and his Wintermute. The market maker recently lost $160 million to a hack.
DeFi Demands High Returns
Decentralized finance still demands high returns. Users will step out of the risk curve if the risk/reward trade-off makes sense. Ribbon co-founder and CEO Julian Koh told CoinDesk that “undercollateralized loans to reputable institutional investors seem to fit well into this category.”
At the time of writing, USDC’s loans to Folkvang and Wintermute have an annualized return of nearly 7%. This is well above the 0.5% available on top decentralized platforms such as Aave and Compound.
Decentralized Finance (DeFi) is a recent financial technology that challenges the current centralized banking system. It eradicates the fees that financial companies charge for using their services. DeFi enables the use of peer-to-peer or P2P transactions.
Decentralized finance is developing. Its ecosystem is riddled with infrastructure glitches, hacks, and scams. The current law was drafted on separate financial jurisdictions, each with its rules and regulations. DeFi’s unlimited transaction capabilities pose an essential question for this regulation.
Uncollateralized Aave
Ribbon Finance describes Lend as “an unsecured Aave offering the best of traditional and decentralized finance.”
Financial institutions can borrow USDC from AAVE at a much lower cost. This occurs at the expense of locking another cryptocurrency as collateral. This means that the borrower loses the liquidity of the blocked collateral, which is not the case with ribbon lending.
Lend users can earn higher returns on unsecured loans to institutions credit-rated by Credora. Lenders can close positions at any time. This depends on the availability of liquidity in the pool. According to Ribbon, most unsecured loans in decentralized finance (DeFi) are time-limited. Lenders cannot withdraw their deposits until the loan matures.
DeFi is a term used to describe a financial activity that takes place on the blockchain without the help of intermediaries.
After pioneering the concept of a decentralized options vault (DOV) in 2021, Ribbon recently launched the cryptocurrency options exchange Aevo. DOV simplifies options trading. Investors simply store their assets in vaults and use them in income-generating options strategies.
Ribbon’s venture into unsecured lending indicates that the sector dominated by Maple Finance, Clearpool, and TrueFi is overheating. A recent Reuters report cited TrueFi as putting the total unsecured lending market at $25 billion. Reuters poll of 11 lenders showed their willingness to continue unsecured lending despite the general market downturn.
