Preface
If there’s one bellwether that accurately portrays the state of an economy at a given moment in time, it’s lending markets. This has been the case for centuries, but it’s never been more true than it is today. The modern global financial system that has taken shape over the last several decades is staggering in its scope and complexity. However, if you know the state of lending markets, you can generally infer almost everything else you’d want to know about the overall health of the system, regardless of where the economy is in the boom-and-bust cycle. Lending activity is an incredible microcosm of the broader picture.
This is just as true in digital assets as it is anywhere else, which makes revisiting the history of crypto markets through the lens of lending activity into an interesting and worthwhile exercise. The early quarterly reports from Genesis Trading, circa 2018-2019, tell the story of a market with participation that more closely resembled a local fish market than that of an emerging global asset class. There were a few hedge fund short sellers looking to borrow tokens, and some early crypto whales willing to lend, but that was really the extent of things for the first couple of years. Then came 2020, and with it, DeFi Summer and the beginning of a new crypto bull run, which would be the largest one yet.
Part 1: Ignition
DeFi Summer was the equivalent of the Big Bang for crypto lending markets. It was an explosion of economic activity catalyzed by a technical breakthrough: smart contract-based lending. For the first time in history, borrowers and lenders were able to face off directly via peer-to-peer lending on platforms such as Compound and Aave without needing to rely on any traditional banking infrastructure. Overcollateralized, floating rate lending quickly became the backbone of this new, permissionless digital economy, with billions of dollars flowing through these smart contracts in just a matter of months. And the timing for this new DeFi primitive to emerge could not possibly have been any better. Interest rates in the traditional economy had been slashed to near zero, and money was being printed by central banks around the world at an unprecedented rate. A new class of crypto natives, urged on by the upward trajectory of risk assets and the growth of stablecoins, was born, and they were hungry for yield.
It’s impossible to overstate how uniquely perfect the broader macro environment was for the growth of crypto lending. Lenders were able to earn double digit yields on dollar-denominated assets at a time when interest rates in the traditional financial markets were historically low. Borrowers were just as enthused, as they were able to lever up their crypto exposure more easily than ever before. And the market was rewarding both parties handsomely: both lenders and borrowers were capturing generous liquidity mining incentives, which represented the distribution of native tokens to the users of these protocols. As more users came on-chain for the first time, the protocols themselves became more valuable, and their native tokens continued to appreciate in turn. This characteristic reflexivity of permissionless networks is often referred to as the “DeFi Flywheel,” and it was spinning faster than ever.
Part 2: Burning Bright
With DeFi leading the way, cryptoasset prices marched relentlessly higher throughout 2021. But it wasn’t only the dApps that were booming—elevated trading volumes were a massive catalyst for the many CeFi businesses in the digital asset ecosystem, including the exchanges, prime brokers, and lenders. It was during this period that traditional debt capital markets became open to crypto companies for the first time, with corporate issuers such as Coinbase, Microstrategy, and Block (formerly Square) tapping the high-yield bond market. However, these deals were the exception and not the rule. The majority of credit creation in the digital asset ecosystem would happen through the CeFi lenders. Again the Genesis quarterly reports are quite telling here, as their loan originations swelled from $17 billion in 2020 to north of $130 billion in 2021— nearly an 8x increase in activity year-over-year. Newer players including Celsius, BlockFi, and Voyager, which were founded at the height of the previous bull market, were finally seeing the growth that had eluded them during their first few years. More traditional growth investors who were often unable to participate in crypto markets directly were clamoring to invest via traditional venture-style equity in the private funding rounds of these high-flying crypto businesses. Late 2021 and early 2022 saw Series B and Series C rounds getting done at staggering valuations, with a couple of the most notable examples being FTX and OpenSea, which were valued at $32 billion and $13.3 billion respectively in January 2022. Less than two years earlier, FTX had been valued at $8 billion, and less than one year earlier, OpenSea had been valued at $1.5 billion. The market was starting to look more than a bit frothy.
Part 3: Wildfire
As they were being showered with hundreds of millions of dollars in equity capital, CeFi lenders like Celsius and BlockFi needed to grow at all costs in order to justify their multi-billion dollar valuations. Under the hood though, these businesses faced structural challenges. Competition was fierce, with lenders readily chasing any promises of incremental yield pickup and borrowers shopping around widely for the best terms they could get. High yields subsidized by liquidity mining incentives across DeFi coupled with cheap access to leverage from exchanges like FTX meant that CeFi lenders needed to take on more risk for less reward just to win business. Sometimes this worked—sacrificing your net interest margin could win you more lucrative deals down the road— but as further irresponsible risk taking piled more and more leverage into the system, the stage was being set for a deleveraging event down the road. Sure enough, the collapse of Terra’s LUNA token and its algorithmic stablecoin UST proved to be the first domino to fall in an unfortunate series of events that would culminate in the collapse of FTX, which had been the second-largest crypto exchange in the world. The broader industry was decimated, and CeFi lenders were left holding the bag.
Part 4: From The Ashes
The beginning of 2023 was one of the bleakest periods in crypto’s short history. The industry had arguably never looked worse. Its many skeptics were full of schadenfreude, while many of its believers were questioning their faith. At the time, BTC was trading at a little over $16k. The market was starved for good news, but ultimately it rallied decisively off of the lows. Halfway through the year BTC had nearly doubled. By the end of the year it had nearly tripled. Why? Crypto is many things, and prices move for many reasons, but first and foremost it is a game of narratives. The narratives drive the flows; the flows drive the price action; the price action drives user interest, which in turn reinforces the narrative. And so a virtuous cycle is created, no different from the DeFi flywheel discussed earlier. Anyone who has spent time in this market knows this to be true. In retrospect, there has been one overarching narrative that has carried us from the abysmal lows a year and a half ago to where we are today—institutional adoption of digital assets. By the end of the year, it was clear that the institutions had arrived, and they were here for both crypto as an asset class and for its underlying technology.
This last point is worth harping on. For the past several years there has been a growing institutional interest in digital assets, and it’s been bidirectional. That is to say, not only have institutions been interested in putting cryptoassets into traditional investment wrappers (BTC ETFs would be the best example of this), they have also become increasingly interested in the converse: putting traditional assets into crypto wrappers. This is commonly referred to as the tokenization of real-world assets (or RWA for short).
Both facets of the institutional adoption narrative have been deeply intertwined with crypto lending markets. When crypto prices and native DeFi yields were low, Maple brought traditional yield products to crypto lending markets, such as our Cash Management lending pool, which is backed by T-bills held with a regulated prime broker in a bankruptcy remote brokerage account. This structure allows DAOs, corporate treasuries, and crypto fund managers to instantly start accruing yield derived from US Treasuries, without having to deal with the headache of offramping to fiat and going through the traditional banking channels. Numerous others such as Goldfinch and Credix have been building on-chain credit infrastructure that allows SME borrowers in emerging markets to access USD lending markets via stablecoin rails. These kinds of on-chain, real-world yields gained significant traction during the most recent crypto bear market.
Part 5: A New Day
Now that we are back in a bull market though, tokenized T-bills and other real-world assets seemingly look less attractive than the memecoins and DeFi yields that are back en vogue. And that is a good thing. It brings more attention, more users, and ultimately more capital into the space. It creates a wealth effect and stokes the flywheel, feeding the virtuous growth cycle. But it also can take the spotlight off of the all-important real-world use cases—which is why it was great to see the news last month that Blackrock had launched its new BUIDL fund on Ethereum Mainnet. The fact that the world’s largest asset manager made the decision to launch its first tokenized fund on a public, permissionless blockchain less than 18 months after the collapse of FTX speaks volumes. It feels like we are at the stage where the market is reinforcing the narratives around digital asset lending and institutional yield products on-chain.
In a bull market, crypto native yield opportunities tend to look attractive relative to traditional yields. We’ve seen this play out thus far in 2024, with popular new yield opportunities like Ethena and EigenLayer quickly attracting billions of dollars worth of TVL. On the lending side, there's a common misconception amongst many market participants that OTC-style digital asset lending will be nonexistent this cycle. It's no secret why: last cycle's largest lending desks are defunct. Maple was a relatively small player last time around, focused primarily on uncollateralized lending to market makers. As a new entrant committed to doing things the right way, it can be difficult to compete in a business where you are often at the mercy of your most irresponsible competitor (until they go out of business, that is). This time around, though, things are shaping up differently. Less than eight months ago, our direct lending arm Maple Direct launched with the first overcollateralized loan from our Blue Chip Secured pool for $75,000. Since then, Maple Direct pools have done well over $100 million worth of overcollateralized lending with no losses. The changing market conditions only reinforced the strength of the Maple Direct offering during the first quarter of the year, as our quarterly data demonstrates:
- 96% of Maple deposits (>$30MM) in Q1 went into a Maple Direct product
- Loans from Secured pools represented just ~30% of outstanding loans while accounting for the majority of Maple revenue as of April 1, 2024
- Active lenders +29% and lenders in more than one Maple pool +67% in Q1
- TVL +30% in Q1 as we accepted new lending assets & collateral
Today, our High Yield Secured pool is netting 20% yields for stablecoin lenders. Our wETH and SOL lending pools offer native yield pickup at a premium to staking returns. Last week we launched Maple Direct’s first BTC lending pool, allowing holders of crypto’s largest asset to put their bags to work and earn high single digit yields. This is all being done via secured lending structures with active risk management, leveraging the benefits of on-chain finance, and with the proper legal infrastructure in place. We saw these benefits exemplified during recent market volatility, as token prices moved and margin call levels were reached. Collateral was swiftly topped up in our High Yield Secured pool, replenishing the health of the underlying loans in the pool, while lenders were able to monitor the performance of the loan book with real time transparency via the Maple webapp. We continue to see the demand to borrow is increasing in this market, which means Maple will only become more important for institutional borrowers who need access to capital. This supply-demand imbalance also means that lenders will be compensated with superior risk-adjusted yields across stablecoins, majors, and altcoins that they simply cannot access anywhere else. Contrary to popular belief, digital asset lending will not be left behind in the wreckage of 2022. It's seeing a resurgence that's in its very early innings, and Maple is at the heart of it.
Epilogue: Beyond
The final question that we are left with is—where do we go from here? We believe that over a long enough time horizon, all of the world’s assets—regardless of whether they are physical or financial, old or new—will be tokenized and live on public, permissionless blockchains. In this on-chain end state, anything of value will become eligible as a collateral asset, freeing up trillions of dollars worth of locked asset value. In this sense, it’s our view that the future of crypto lending is the future of all lending, and as previously stated, this microcosm will be representative of the broader economic reality. In retrospect, programmable capital markets will seem to have been inevitable.
Written by Luke Chmiel
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