Why these $2.5bn crypto lenders are taking another shot at uncollateralised loans

TrueFi, a credit protocol, is teaming up with risk managers Cicada Markets to bring what’s been a cornerstone of traditional finance — borrowing more with less — to crypto.

Undercollateralised lending is a fraught business, marred by catastrophic failures over the past few years.

The multi-billion-dollar collapse of centralised lenders Celsius, BlockFi and Genesis sent ripples across the industry, defining the crypto winter of 2022 and 2023. Decentralised lenders have had their fair share of carnage, too. Recent attempts at unbacked lending on DeFi protocols like Goldfinch have resulted in millions of dollars worth of defaults.

Despite previous catastrophic failures, TrueFi and Cicada are giving it another shot.

After all, it’s a massive opportunity.

A 2023 report from Allied Market Research predicts the global market for unsecured business loans across all industries will hit $12.5 trillion by 2031.

“The negative stigma is largely one that comes from a lack of education on the topic,” Ryan Rodenbaugh, CEO and co-founder of Wallfacer Labs, the company behind TrueFi, told DL News.

To be sure, lending exists in the crypto industry, but the majority of loans demand borrowers to put up more collateral than they can borrow. In the permissionless world of DeFi, it’s the only way to minimise the risk that your counterparty won’t run off with the money.

For uncollateralised lending, the only assurance of reimbursement is the trustworthiness and track record of the borrower.

It all hinges on a firm’s ability to accurately assess risk. In this case, that means TrueFi and Cicada.

“Given loans are issued based on onchain and offchain balance sheets, there has be a centralised underwriter who has to analyse all of this data and issue an opinion,” Ashwath Balakrishnan, head of Delphi Creative, told DL News.

Taking things slow

The two companies will provide lines of credit to crypto-native trading firms, a demographic notoriously unable to take out loans from traditional banks that can’t bear the risk.

But for an industry with a disastrous history of under-collateralised lending, attracting business is a challenge. When DL News asked how they’ll differentiate themselves from previous catastrophes, Rodenbaugh said by taking things slow.

“Risk-managed and slow-growth underwriting works well,” he said, referring to the process by which entities calculate and take on the financial risk of loans.

The new platform is not their first foray into lending. TrueFi already runs a small, uncollateralised lending market on Ethereum worth nearly $24 million.

The pair also underwrote uncollaterialised loans on DeFi lender Maple Finance, a venture not without its own failures.

Lenders on Maple took a big hit in December 2022 when borrower Orthogonal Trading defaulted on eight loans totalling $36 million.

Months prior, crypto hedge fund Invictus Capital and crypto investment firm Blockwater Technologies failed to repay loans on TrueFi totalling $4.4 million.

But Rodenbaugh said the TrueFi platform, which has in its lifetime lent $1.7 billion across over 150 loans, has a default rate of less than 1%. Similarly, Cicada Markets, which has underwritten over $850 million in loans since 2021, has a 1.2% default rate.

“Both protocols had losses, as you would expect in any form of credit, but neither of our protocols suffered the catastrophic losses seen by firms like BlockFi, Genesis, Celsius, etc,” Rodenbaugh said.

TrueFi and Cicada’s default rates are comparable to those in traditional financial markets. According to the Federal Reserve Bank of St. Louis, the average delinquency rate on business loans across all commercial banks was 1.13% in the first quarter of 2024.

“No standardisation means there’s no way to confirm for sure data is legit.”

Ashwath Balakrishnan, head of Delphi Creative

Sefton Kincaid, founder of Cicada Markets, told DL News the low default rates were because the pair were highly selective in who they loaned to and a strict due diligence process.

He said the pair examined the performance track records of potential borrowers across multiple trading cycles before agreeing to underwrite loans.

Still, that might not be enough. Compared to traditional markets, there’s little to no standardisation in how crypto firms are assessed for underwriting.

“No standardisation means there’s no way to confirm for sure data is legit,” Balakrishnan told DL News. “You as a lender must trust that the underwriter is doing their job properly.”

Deploying on Arbitrum

The pair have built their new lending market on Ethereum layer 2 Arbitrum.

Rodenbaugh said TrueFi and Cicada chose Arbitrum over other blockchains because it’s the Ethereum layer 2 with the most deposits and also the farthest along in terms of decentralisation.

The network’s foundation also agreed to provide an ARB token grant to encourage interest, but it has not disclosed publicly how big the grant will be.

The question now is whether TrueFi and Cicada can attract enough high-quality borrowers.

Cicada’s Kincaid said his firm identified over 20 borrowers — mostly trading firms — looking to take out lines of credit worth over $300 million at 13 to 15% interest.

If the pair courted all these borrowers, it would make the new protocol the fourth-largest real-world asset DeFi protocol as tracked by DefiLlama.

Tim Craig and Liam Kelly are DeFi Correspondents at DL News. Got a tip? Email them at tim@dlnews.com and liam@dlnews.com.