The Chicago DeFi Alliance, launched in April, is poised to help members make a killing from the recent decentralized finance (DeFi) craze.
So many billions of dollars worth of assets are now cycling through various DeFi projects at such erratic rates that while you’re reading this the estimates are probably changing. Suffice it to say, the Chicago DeFi Alliance now has roughly 55 members, including new additions Binance.US and MakerDAO.
After graduating seven DeFi startups from its first accelerator program this summer, CDA partner Qiao Wang said the organization is now launching a Liquidity Launchpad program to get “informed and professional players in this space” committing their crypto to various protocols.
First, the program vets pre-seed DeFi startups (unlike the accelerator program for slightly more mature startups) with a standardized process that involves audits and traditional measures of professionalism, such as being a registered company. (Some of the food-themed DeFi projects garnering attention today are rough drafts without audits or formal teams.) Then, the CDA does matchmaking of experienced investors, market makers and DeFi builders. Teller Finance, the startup behind a credit and loan management protocol, is the first startup to kick off the launchpad program.
“The teams are validated and the smart contracts are audited. These are long-term, sustainable projects,” CDA and Volt Capital co-founder Imran Khan said during a Google Hangouts interview. “This allows institutional investors to provide liquidity for a fixed amount of time. … We hope to have market makers that are there for the long term, not just the short term.”
To that end, Teller Finance co-founder Ryan Berkun said the CDA launchpad provided his startup with $10 million worth of liquidity to kickstart Teller’s lending program. CDA’s backers and traders provide “liquidity,” continual market making, for a DeFi platform. This gives other users the ability to move money around without steep costs or hassle, letting them dabble in the yield farming of niche tokens that can be played for potential gain. In Teller’s case, providing a loan creates Teller reward tokens that can be used for voting.
“We’re starting with governance of your own money, on-chain variables that relate to how money moves and the data gets assessed,” Berkun said. “We’re rolling out progressive decentralization in ways that are similar to Uniswap.”
Users who aren’t financial experts or math students can delegate their voting tokens to an external expert, to vote on their behalf for favorable lending terms. Much like the DeFi protocol Compound, the Teller protocol offers a (mostly) noncustodial way to use assets like ether (ETH) as collateral for loans in stablecoins like DAI or USDC. But Teller is arguably taking a much more involved approach to risk management.
Risk management
So far, Khan said, the retail-driven DeFi experiments have been unnecessarily risky and volatile.
The launchpad offers institutional investors and traders a way to capitalize on the liquidity mining craze, focusing on these vetted projects.
Teller is taking a more heavy-handed approach to credit risk by using the Visa-owned service provider Plaid to assess users’ banking records. Plus, Teller Finance already raised a $1 million venture round since its founding in early 2020, according to the team.
“We’re using the Visa system to securely transmute banking data to the protocol, that helps with making sure the data stays private,” said Teller Finance communications lead Ben Noble.
“If you want to get your credit assessment … you submit your information and the [Teller] nodes come back with an open-source credit assessment,” Berkun said, adding the startup plans to launch the network in October with a small group of permissioned nodes.
These loans can be undercollateralized or even uncollateralized, so the option of a real credit assessment helps manage or prevent undue risk. More diverse access to yield farming and different assets will be rolled out slowly, the Teller team said. There will be a token sale in the near future, they added, but they want to get “enough tokens in circulating supply before we pull the trigger on that,” Noble said.
That’s what the CDA provides, a regulation-centric roadmap toward healthy circulation.
DeFi matchmaking
While startups gain access and capital from the launchpad, they aren’t subject to the whims of investors the way they might be in a venture capital raise.
CDA backers are expecting to make their own profits using the system, rather than rely on equity for returns. At the same time, launchpad startups can choose to keep their experiments open to the public and only place lockup periods on institutional players. If the institutional backers believe the DeFi startup will be profitable and sustainable, they might accept biased trading terms and as a longer play. Institutional investors have an inherent advantage anyway, since arbitrage strategies benefit from scale.
“Sometimes, you have under-the-radar products that don’t know how to do marketing. They don’t know how to market to retail users or providers. Those retail users are very hype-driven,” Wang said, explaining why social media buzz might highlight the silly DeFi experiments rather than the promising fintech startups. He hopes this launchpad program will counteract that dynamic.
While it’s too soon to say what impact CDA will have on broader DeFi trends, the accelerator program just accepted a new batch of participants and alumni reportedly feel satisfied with the experience.
Ming Ng, adviser to the alumni startup Kyber Network, said the imminent Kyber Pro framework for professional market makers “would not be possible without the collaboration with CDA.”
“Imran and Qiao have also been super helpful in matching needs and expertise within the groups,” Ng added.
Perhaps a more mature form of yield farming will emerge from the combination of the launchpad and the second accelerator cohort. After reviewing more than 100 applications, Khan said, the CDA announced its fall cohort: Pods, ParaSwap, Saddle, Notional, Tokenlon, Vega, Derivadex, Perp, Loopring, Deversifi, Mcdex and Acala.
Teller’s Berkun said his startup will collaborate with numerous CDA accelerator participants, offering a vetted white list where users can deploy their new crypto loans.
“The white list provides guardrails as people learn and get used to the system,” added Noble.