Cryptonative Credit (CNC) is when there are no legal entities and agreements are executed trustlessly onchain with programmatic and automated repayment and recourse mechanisms.
One example is our Spigot automatically takes a higher percentage of borrower revenue to repay debt or liquidate collateral with no delay or legal fees.
In contrast, TardFi bond and loan obligations are enforced in bankruptcy courts based on signed loan agreements between borrowers and lenders. Proceedings can take anywhere from 6 months to multiple years depending on the type of bankruptcy. After these months and years of waiting, you might get half your money back.
CNC is an emerging market with outsized growth forecast for the years ahead. When compared to global fixed income markets, today CNC is >80,000x smaller in market value than its TardFi equivalent ($125 trillion global credit markets vs $1.5 billion peak crypto credit)
Table of Contents
Lending to onchain entities until now has always had drawbacks and tradeoffs. Onchain Lenders and Borrowers suffer from balancing between their risk and the cost of credit. Lenders mostly require Borrowers to post a lot of highly liquid assets as collateral in order to secure the debt. This represents a high opportunity cost of capital for Borrowers.
Also, because some onchain assets are very volatile, the loans using them as collateral can quickly become under-collateralized (i.e. the value of collateral falls) and subject to sudden automatic liquidation. This results in transaction costs and fees as collateral is liquidated which equates to an even higher cost of capital.
Options for cryptonative entities to raise capital are very restricted because of these limitations which extend to the absence in onchain lending of key building blocks that make for a conventional unsecured or revenue-based credit market (credit scores and liquid rate hedges for example).
Cryptonative entities have therefore mainly resorted to the relatively expensive method of selling native tokens (like raising equity capital) or continuing to borrow at high opportunity costs from decentralized lending platforms that offer limited lending features.
Benefits of CNC
For growth stage DAOs with product market fit, on-chain revenue and strong communities, debt is a far superior capital efficient option to fund operations and acquisitions rather than selling tokens. The DeFi community is full of experienced participants who know this.
- Programmatically enforced recourse (so no expensive lawyers or legal battles)
- Transparent operations and finance data on borrowers
- Entirely new asset class to gain exposure to. CNC is to bonds as tokens are to stocks.
- Less correlated with broader cryptomarket prices and volatility (some DAOs earn more from volatility e.g. DEXs meaning they’re more likely to payback from revenue even if token price falls)
- Increased security with trustless assurances that a borrower will repay
- Lower cost of capital = lower running costs
- No diluting token holders or selling tokens at depressed valuations in a bear market
- Can fully automate payroll, revenue reporting, internal accounting, funding new ventures via governance, etc.
OpEx - Pay In Stables Without Selling Tokens
Asset liability mismatch between tokens in DAO treasury and their ongoing expenses are a huge roadblock to growth. Fund product development and community initiatives in stablecoins without ever selling a token.
Strategic Asset Acquisitions
Acquire strategic assets for your treasury with minimal or no collateral requirements through programatic borrowing strategies
LaaS -Liquidity as a Service
Increase liquidity immediately without diluting holders by issuing more tokens
Crypto M&A - Leveraged Buyouts
More efficient transactions powered by tokenized revenue streams through the Spigot.
Comparing CNC Providers
Debt DAO’s credit marketplace achieves CNC status by utilizing our Spigot smart contract that trustlessly secures onchain revenue streams so Lenders are assured they are repaid even if a borrower doesn’t put up collateral today. Lenders can provide credit trustlessly because Borrowers can only execute a few whitelisted actions with their loan.
There may of course be other methods to achieve CNC without the Spigot module. GearBox is a simplistic example. However unlike Debt DAO, on Gearbox if the Borrower defaults the Lender has no recourse. They are only protected by (hopefully) secure smart contracts and the pool’s configuration which is controlled by governance (a bug) and which can be exploited or mismanaged.
While Gearbox and Debt DAO are an improvement over TardFi platforms like Maple Finance, there is still much work for the crypto community to do for truly cryptonative credit to proliferate.
Debt DAO is doing active R&D to find novel forms of CNC and new ways to enable them.
- New DeFi primitive
- Trustless, pre-approved use of funds
- Easy leverage
- High liquidity w/ pools
- Super simple app
- No recourse in defaults (assets or revenue)
- Restricted use of debt
- Homogenous interest rates w/ pool
- Centralized Pool Managers
- New DeFi primitive
- Asset + revenue collateral
- Free use of funds
- Automated repayments
- Customizable parameters incl. interest rates (p2p)
- Low liquidity (p2p but pools coming soon)
- Credit origination effort
- Centralized Arbiter role in v1
- Complex app for professional investors