The decentralized finance (DeFi) ecosystem has seen massive growth in recent years. It has grown from an industry of just $700 million in 2020 to a burgeoning $200 billion in early 2022. This boom is due to the sheer number of innovative lending protocols that have emerged in recent years.
One such platform that has quickly made its way to the top of the DeFi ecosystem is Clearpool. However, while most other platforms in this space cater to retail borrowers, Clearpool is dedicated to institutional borrowing. Another thing that sets Clearpool apart from the crowd is that it operates a collateral-free model, which is pretty much unknown in the DeFi space.
Let’s take a closer look at this emerging platform that has the potential to usher in a new era in the DeFi space, especially as institutions realize the benefits of decentralized finance over traditional lending options.
What is Clearpool?
Clearpool is a decentralized network of investors from which institutions can borrow liquidity without collateral. Clearpool has partnered with trading firm Jane Street and blockchain investment firm BlockTower Capital to create what it calls an “eligible liquidity pool.”
Institutional borrowers whitelisted by Clearpool can create their own liquidity pools for individual borrowers. Clearpool is currently doing all the whitelisting itself. As it grows over time, native CPOOL token holders will gain audit rights to onboard more borrowers.
The pool was launched on May 3, 2022 and is funded with $25 million worth of USDC stablecoins. Clearpool intends to expand this pool to $50 million soon. Lenders who fund these liquidity pools can earn interest on the loan amount. It uses a unique dynamic interest rate model that determines the interest rate based on market demand and supply.
How does it work?
For borrowers:
Borrowers must stake their CPOOL tokens to become eligible to create a liquidity pool. Currently, each borrower puts 500,000 CPOOL tokens into the protocol while the Clearpool team works on a more case-specific model. The protocol has partnered with X-Margin, a credit lifecycle manager, to determine credit risk scores for borrowers and ensure KYC and AML compliance before disbursing anything. The protocol ensures that the entire process is carried out without compromising the privacy of the borrowers, which brings us to the end of the onboarding process.
Borrowers can easily connect their crypto wallets to the Clearpool app and they will be presented with a dashboard of the pool of liquidity available for borrowing. You choose to borrow or repay USDC from the same dashboard. Ethereum smart contracts manage these transactions.
Borrowers are free to choose when and how often to make repayments.
For lenders:
There is no limit to becoming a lender and there is no limit to the pool size. One can effortlessly connect their crypto wallet and provide liquidity by depositing USDC. In return, the pool credits “cpTokens” to the lender’s wallet. These tokens represent the lender’s contribution to the liquidity pool. They also represent the interest accrued and the risk profile of the borrower.
The accrual of the interest rate is per block, which means that each time a block is created on the blockchain, the interest is added to the borrower’s owed amount. The underlying metric is “Usage Rate”. That is, when a pool of liquidity is more drawn upon by borrowers, the interest rate for lenders is higher.
The liquidity pool can only be utilized to 95 percent (set default). This state is called “high-utility,” and lenders are allowed to continue pumping in liquidity or withdrawing their funds while borrowing is halted. Lenders attempting to withdraw their funds must do so before the utilization rate reaches 99 percent, because then the pool will not allow any funds to be withdrawn. At this point, the pool enters the “alert phase,” giving borrowers a period of 120 hours (5 days) to repay funds and reduce the utilization rate to 95 percent.
So how does Clearpool manage without collateral?
An automatic auction is triggered if borrowers fail to return the borrowed amount within the 120-hour grace period and bring the pool back to its active state (<95 percent utilization). Clearpool users can bid cpTokens equal to the defaulted amount to purchase legal rights to the pool's debt. All institutions and persons on the whitelist may participate in the call for proposals. The auction runs for 168 hours or 7 days and the bids must total an amount greater than the "Insurance".
According to the Clearpool website, if a winning bid is accepted, the winning bidder will receive “an NFT containing statutory rights to the pool’s debt and the exclusive statutory right to pursue the defaulted borrower.” However, if the offer is rejected, any cpToken holder can redeem their cpToken for a proportional share of the pool insurance account.
Each liquidity pool has an associated insurance account. For each block created, a small percentage of the liquidity pool’s interest is directed to this insurance account (currently set at 5 percent). This can be changed later through governance changes.
There is also a reserve pool which, unlike insurance, is not pool specific. Each transaction on the clearpool protocol forwards 5 percent of the amount to the reserve pool. This pool is used to build the network and also in case of a CPOOL buyback.
CPOOL tokenomics:
“CPOOL” is Clearpool’s native governance and utility token and has yet to be launched. Going forward, CPOOL owners will be the ones who whitelist borrowers.
Borrowers must stake their CPOOL tokens to qualify for the whitelist. Lenders receive additional rewards in CPOOL tokens for providing liquidity to the system.
There will be a maximum of 1 billion CPOOL tokens in circulation, of which only 40.35 million will be released initially. CPOOL cannot currently be purchased with fiat currency. However, it can be bought on exchanges using BTC, ETH, USDT, and BNB.
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