Introduction

Most DeFi lending platforms today offer overcollateralized borrowing. Collateral reduces lenders’ risks and keeps platforms free of bad debt. However, money is usually borrowed because the borrowers do not have enough liquidity and cannot afford the requested collateral. Undercollateralized lending could make decentralized credit markets accessible for a wider set of users and use cases.

Credit markets are crucial to any economy, and Maple provides undercollateralized lending for borrowers at fixed interest rates on-chain through its lending pools.

It was first launched on Ethereum in May 2021 and has recently launched on Solana in April 2022, becoming the first undercollateralized lending protocol on Solana.

Maple’s approach requires a trusted third party between lenders and borrowers (the Pool Delegate) to perform the role of credit assessment by conducting additional due diligence, and carry first-loss risk against any underperforming debt.

The capital is aggregated from institutional and DeFi users into lending pools (same as liquidity pools), and then the funds are lent out once the pool delegates do all due diligence and credit risk analysis work.

To participate on the platform, you can lend, borrow, stake, and/or become a pool delegate.

Why do companies need debt to grow their businesses?

Capital is needed to build new products and services and grow businesses. There are two ways of financing the activity of a company, whether through debt or equity.

Since equity provides ownership of the business and consequently theoretical infinite potential upside, the cost of equity is higher, making debt an excellent way of bringing down the cost of capital. However, debt financing brings extra pressure on the operations since the debt must be served with periodic payment of interest. In case of bankruptcy, the assets are liquidated, and debt holders are the first ones to recover the investment.As long as the debt ratios are kept at healthy levels, debt is a solid financial instrument to help companies grow faster.

DeFi Lending Markets Overview

Usually, in traditional finance, before granting a loan, the bank’s credit risk department checks the user’s ability to repay the loan by analyzing the operational cash flows and requesting guarantees – assets or a source of income – something difficult to do in the crypto space due to its anonymous nature.

Decentralized lending is on peer-to-peer basis and started in 2017 with a straightforward and safe approach: overcollateralized lending, to remove the difficulty in recovering default loans principal by allowing anyone to secure loans on decentralized platforms without needing any credit checks, remaining anonymous.

This first approach allowed users to request loans without any credit checks since they had to lock their digital assets and borrow against collateralization ratios above 100%. The smart contract holds the collateral, and when the loan is repaid, the protocol returns the collateral, and if you fail to repay it, the lender will liquidate it.

Overcollateralization has been required in the crypto space due to crypto’s volatility, as it guarantees that if the collateral value drops to a point where there would not be an incentive to repay the loan, that collateral can automatically be sold using smart contracts to benefit the lender and avoid a capital loss.

What is the use case for Maple?

Imagine a company seeking a loan of $100,000. In the current overcollateralized DeFi lending market, the business owner must offer, for example, $150,000 of loan collateral to reduce the lender’s credit risk.

There are obvious benefits in keeping the platforms solvent. However, the need for collateralization narrows the total addressable market — people or companies usually borrow money because they do not have enough liquidity and cannot afford the necessary collateral requested in overcollateralized loans.

According to the Delphi Digital report, “The Race to Build a “Sticky” DeFi Debt Market“, undercollateralized loans make up less than 5% of the total value locked across DeFi lending markets.

How does Maple work?

Maple Participants:

The Maple ecosystem has four key participants: pool delegates, borrowers, lenders, and cover providers.

• Pool delegates: whitelisted institutions with experience in credit and fund management are responsible for managing their lending pools and providing loans.

Each pool delegate is responsible for negotiating loan terms, conducting solid due diligence on borrowers, and managing collateral liquidation in case of default.
Pool delegates earn loan establishment fees and ongoing fees representing a percentage of interest received.

• Borrowers: institutions that are looking for efficient financing.

Borrowers must complete KYC first and can negotiate loans with pool delegates for a fixed interest rate, fixed term, and fixed collateral ratio. A fixed loan offers stability compared to other available options as they can borrow at a predictable cost.

• Lenders: seek yield opportunities by providing capital used to lend to borrowers. On top of the sustainable yield, they receive MPL tokens as lending rewards.

• Cover providers: first loss capital providers in case of default. To incentivize them to take the liquidation risk, they receive 10% of the interest generated in the lending pool.

Lending Pools:

The pools are crucial to fund loans and ensure Maple’s success.

Pool Delegates with credit expertise are responsible for managing the pools. Lenders can join the lending pools by depositing funds, as long as there is capacity, and can leave at any time after 90 days, as long as there is enough liquidity. To align incentives, pool delegates must stake the pools they manage.

Cover providers offer default insurance to an existing lending Pool by staking their MPL tokens – thus earning a percentage of the Ongoing Fees.

	USDC	wETH
Lending	10.4-11.1%	3.3-3.8%
Borrowing	Determined on a loan-by-loan basis.	Determined on a loan-by-loan basis.

The Process:

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

1. Pool Delegates must be whitelisted through the Maple governance approval process before establishing a lending pool.

2. Borrowers who want to get a loan must create a profile and summarise their desired loan terms to the Pool Delegate.

3. Pool Delegate reviews and negotiates the loan.

4. Once both parties agree on the terms, the loan smart contract is launched by the Borrower. This allows the Pool Delegate to send the funds to the Borrower’s wallet.

5. The collateral the Borrower provides is locked on a smart contract vault to protect the Lenders until the loan is fully repaid.

6. Borrowers make interest payments during the agreed loan period.

7. Pool claims interest that is shared between Lenders, Cover Providers, and Pool Delegates.

8. Once the loan is fully repaid, the collateral is claimed by the Pool Delegates and returned to the Borrower.

What happens in case of default?

In every loan, after the due date, there is a grace period where Borrowers can make the payment without any penalty. Once the grace period ends, the Lender can charge late fees or declare the loan default.

In Maple, the grace period is equal to five days. During that time, Borrowers must keep an open conversation with the Pool Delegate to arrange payment or inform them about any temporary liquidity issue.

If the payment is not made within the grace period, the Borrower’s collateral can be liquidated by the Pool Delegate and repaid to the Lending Pools that funded the loan, and if the liquidated collateral is insufficient to cover the loan balance, the staked tokens will get liquidated to cover the difference.

All Borrowers must go through a KYC process, so institutions that default will face severe reputational deterioration since the default will be registered on-chain, which would damage their ability to get a loan in the future.

Maple’s Performance

Maple is managing almost $1B in deposits, being most of these deposits done in the Ethereum network (~$777M total deposits in Ethereum Network as opposed to ~$115M total deposits in Solana).

Maple total deposits have been steadily increasing from $17M to around $871M in just a year and from $505M to $817M in six months, representing a growth of ~5023% and 72%, correspondingly. This demonstrates Maple’s strong momentum and demand for on-chain credit.

The following info graphics in this section were extracted from the most popular Maple’s Finance Dune Analytics dashboard: https://dune.com/chloebbq/maple-finance.

Ethereum:

Since launch in May 2021, Maple has already funded almost $1.5B in loans, with ~35M in interest paid and ~$632 loan already repaid.

It offers currently 5 pools with different APYs from ~3% to ~11%, and has 65 active loans. Orthogonal Trading is the pool delegate who underwrites more value in loans, in the time of writing.

	Token	APY	Offered loans in USDC
Orthogonal Trading	USDC	~ 11.1%	~ $518M
Maven 11 Capital	USDC	~ 10.5%	~ $468M
Alameda Research	USDC	~ 3.3%	~ $288M
Maven 11 Capital	wETH	~ 6.6%	~ $21M
Celsius	wETH	~ 3.8%	~ 17M

Pool utilisation rates have been consistently over 90%, showing high demand and smooth functioning of Maple’s pools.

Solana:

Since launch in April 2022, Maple has already funded almost $114M in loans.

It offers currently 2 pools with different APYs from -7% to ~10%, and has 10 active loans. Genesis is the pool delegate who underwrites more value in loans, for the time of writing.

Maple has raised a total of $2.7M in funding from reputable Crypto VCs over two rounds (examples are Polychain, Alameda Research, and Framework Ventures) and already funded almost $1.65B in loans where around 91% of those loans happen on the Ethereum network. The protocol is currently with profit, with the Treasury Revenue remaining at about $3M:

However, Maple has already added better days as it is one of the DeFi protocols suffering liquidity pressures due to the current market situation and the default events around Celsius and Three Arrows Capital. Maple confirmed that both Celsius and 3AC did not borrow from Maple’s platform. However, there are some borrowers with minimal exposure to these entities. It’s important to mention that there have been no missed payments across the loan book. Due to protocol design, Lenders are struggling to withdraw their funds since there is insufficient cash in the pools, and it is only possible to withdraw funds when cash is available. The solution is to wait for balance as liquidity continues to flow to the lending pools in deposits and repayments.

Maple’s Value Accrual

Maple accrues value by charging Loan Establishment Fees to Borrowers at a rate of 0.99%, spread over the entire loan continuously.

66% of these fees are paid to the Maple Treasury.
33% of these fees are paid to the Pool Delegate that issues the loan.
If the terms of the loan change, the Establishment Fees are recalculated.

The loan’s interest (paid by Borrowers) does not accrue value to Maple since it does not flow to the Maple Treasury; it is shared between Lenders (80%), Cover Providers (10%), and Pool Delegates (10%).

There are no fees to deposit or withdraw funds. Maple protocol only makes money when interest or fees are being paid.

We can see in the chart below from Token Terminal that there are spikes that represent days when new loans were taken or interest was paid.

The team recently shared some excellent news on Maple’s Q1 2022 Treasury Report showing that Q1 2022 marked the first quarter of profitability due to the volume and interest in uncollateralized borrowing.

Most of the protocol’s expenses are with team costs, having code audits in the second place, prioritizing the security of their smart contracts.

These are encouraging indicators for a protocol with a goal to reach $5B loans until the end of the current year.

Trade-offs

Like in any other investment, the high yields offered in DeFi come with various risks that must be considered. Maple offers higher yields than most other lending protocols, and this higher yield represents the higher risk of providing undercollateralized loans versus overcollateralized loans.

On overcollateralized loans, lenders have higher certainty that the principal will not be lost since more collateral is locked than the valued loaned. However, undercollateralized loans require trust in Borrowers and Pool Delegates. Trust on Borrowers that they will not default and that Pool Delegates assessed the risk correctly. Maple tries to mitigate this lender’s risk by whitelisting credited institutions, and Pool Delegates try to minimize these trust issues by conducting solid due diligence processes before approving the loans; however, to do so, these borrowers have to complete a KYC process.

Another trade-off to consider is the liquidity locking period of 90 days, which ensures Maple is always notified before capital goes out of protocol. On top of this, the protocol is designed not to withdraw if there is insufficient liquidity, which can quickly limit those who need capital.

Comparing Undercollateralized Lending Protocols

Maple Finance, TrueFi, and Clearpool Finance are all undercollateralized lending protocols for institutions where Maple and TrueFi offer fixed interest rates, and Clearpool has differentiated itself by providing variable rates.

The credit risk analysis process conducted differs between the three protocols. Maple relies on professional credit analysts that stake $MPL to assess and approve loans. However, Pools Delegates can negotiate the terms of the loans with the Borrowers directly. TrueFi adopts a community voting. The credit risk team sets all the loan terms first based on the credit score, and the community approves the loan if consensus is reached. Clearpool takes a different approach by requiring approved borrowers to stake a percentage to be eligible for a loan.

Borrowers can draw funds from the lending pools if the loan gets approved. Protocols can have one or multiple pools for the same asset. A significant advantage of having multiple pools for the same asset is the ability to offer varying risk-reward levels for Lenders and more flexibility for the Pool Delegates. Maple and Clearpool offer multiple pools per asset type, with TrueFi providing just one pool per asset type, since any unused capital from TrueFi is sent to Curve protocol to maximize earnings.

All these lending protocols require a KYC process for each institution, where they must undergo an application process by filling out a KYC form. TrueFi and Clearpool do not require any lock-up period, and Maple has a 90 days lock-up period.

Finally, Maple does not charge any fees on the loan’s interest, just Loan Establishment Fees, while TrueFi charges 10% from the interest generated by the protocol’s lending activity and Clearpool charges 5%.

	Interest Rates	TVL	Total Loans Originated	KYC	Loan Approval	Pools
Maple Finance	Fixed	$756M	$1.5B	Required	Once Borrower and Pool Delegate reach an agreement	Multiple pools for the same asset
TrueFi	Fixed	$437M	$1.7B	Required	Community Voting	One pool per asset
ClearPool Finance	Variable	$92M	$168M	Required	Borrower needs to stake a percentage	Multiple pools for the same asset

Tokenomics

The token of the protocol, MPL, is an ERC-20 with three functions:

governance of the protocol
collect a share of the fees generated
provide pool cover

The token also inherits the ERC-2222 standard for fee distribution in the form of USDC.

For a wallet to be eligible to vote or make proposals (MIP – Maple Improvement Proposal), it’s required to have at least 25 MPL or xMPL. For governance purposes, the token can also be delegated.

The revenue of the protocol comes from the Establishment Fee paid by the Borrowers. The fees accrued by the Maple Treasury can be used to:

repurchase MPL from the open market to be held in the treasury;
distribute to the Maple DAO to finance the development and growth of the protocol;
be distributed to the token holders. For this hypothesis, the MPL token holder is required to stake it in a ve-model contract to receive xMPL that accrues the revenue second-by-second in USDC terms.

Borrowers that hold xMPL for a certain quantity as a proportion of their loan also have a rebate of the interest to be paid.

To mitigate bridging risk, at the launch of the protocol on the Solana network, a native token on the Solana blockchain, SYRUP, was also launched and all the fees generated with SYRUP flow to the xMPL pool in Ethereum to don’t dilute those previous holders. The SYRUP token is a private token not available on public markets, and the DAO intends to keep it that way.

Total amount and initial distribution

The total amount of MPL to ever exist is 10 million tokens even though the current circulating supply as of the time of writing seats at 6 671 352 tokens.

At the launch, the MLP token allocation was the following:

The distribution of the SYRUP token is as follows:

Maple DAO treasury on Ethereum: 40%
Maple Solana treasury: 30%
Core team, advisors, and acquisition: 30%

Risks

As in any other DeFi protocol, Maple has already some risks that are important to consider:

Smart Contract Risk: Like in any other blockchain-based protocol, more value locked in the smart contracts increases the risk profile. Maple has already audited their code several times to mitigate this risk.
Liquidity Pool Growth: more liquidity provided to the pool leads to less APY as the MPL token rewards are distributed over a larger number of participants.
Market Conditions: during a market period with less volatility, like the one that we are facing in the last couple of months, Maple’s target borrowers (market makers) are less profitable, which might lead to less demand for leverage (less loans) and therefore a decrease in interest rates.
Default Risk: Lenders are the only ones who face liquidity risk but are only exposed to their pool. Maple mitigates this risk by posting all loan information on-chain and by operating all pools independently from each other.
Third Party Risk: Maple uses Chainlink as their pricing asset solution. Chainlink could misplace any asset available.

Final Thoughts

Traditional lending markets relied on human interactions and interventions, which increased the processing time and the potencial for errors caused by humans. Decentralized lending and borrowing markets have found an excellent market fit by leveraging the advantages of blockchain technology to create new decentralized credit markets available for anyone. The benefits offered by replacing traditional banks as a middle layer with decentralized protocols and automating the process through smart contracts, are such as allowing any user to become a Lender and be rewarded for it, quicker decision making, less friction in the process, lower fees collected from borrowers and less bad debts. This is expected to drive market growth.

Maple Finance’s future looks promising with encouraging indicators showing demand for undercollateralized loans and their plans to grow the total loan to $5 billion by year end.

Maple Finance – Making Institutional Undercollateralized Loans Possible in DeFi