Major centralized crypto-for-fiat lenders have failed due to price driven liquidity crises. Other crypto-for-fiat lending solutions exist that do not face similar risk. Pool-to-peer lending platforms do not have the same liquidity requirements as centralized lenders, because all borrowing is over-collateralized. And when that is not enough to mitigate the risk of loss, liquidation bots are ever present to clean up most of what’s left.

The driver of the centralized lenders liquidity crunch is cost. Centralized crypto-lending’s costs are its greatest flaw, and bull markets tend to cover that flaw up very well. Costs for them start at the beginning. The customer acquisition funnel, from borrower prospect to funded loan, does not have a lot of prospects to feed in at the top. Unfortunately this is due to the newness of the crypto-lending landscape, and there are a limited number of people that fit the criteria. There is no inexpensive way to directly market as one can in other types of lending.

Oddly enough, costs of capital for centralized lenders are higher on crypto-backed loans than current unsecured lending rates. Securing and then hypothecating collateral is a tactic used by centralized crypto-lenders to offset these costs.  With P2P lending, the borrowers’ APY is what sets the interest rate for the lenders. There is little to no overhead, so all the traditional costs backed into centralized lender rates do not exist in the world of P2P.

If and when proper and reasonable hedging options, a broader lending base and reasonable baseline costs of capital can stabilize and normalize centralized crypto-for-fiat lending, collapses like we saw recently should become scarce. In the meanwhile, safer depositing, earning and lending comes in the form of pool-to-peer DeFi.

A New Form of Custody and the Role of Banking

Traditional custodians control risk by holding customer assets and then moving those assets upon client instruction only. Execution risk is present and, as we recently learned with Coinbase’s SEC filing, a custodian’s insolvency may result in held assets being treated as assets of the insolvent entity. P2P offers a solution here as well.

ReserveLending+, the P2P flagship institutional product of tech entrepreneur Howard Krieger’s unFederalReserve, is a fork of the popular Compound protocol. Non-custodial in nature, asset holders never relinquish control, but a custodian still plays a crucial role. Rather than hold customer’s assets, Aegis Trust Company, a qualified custodian, participates as a signer within the smart contracts governing the platform itself. By requiring that changes be approved by the custodian, a major attack vector for P2P platforms is mitigated.

“From our first conversations, we recognized that Aegis is special,” said CEO of Residual Token, Howard Krieger, “We are grateful that the Aegis Custody team took the time to understand our needs and craft an arrangement that creates, in our opinion, a best in class method for safe, U.S.-based company pool-to-peer lending.”

The incorporation of a custodian in the product’s core trunk provides protection without adding inefficiency. The same construct can be incorporated into any non-custodial crypto lending platform today.

Serra Wei, founder and CEO of Aegis Custody, aimed for her startup to become the go-to digital asset custodian in the U.S., Hong Kong and Singapore. “DeFi enables asset transactions to become frictionless. Moreover, assets are made more liquid on blockchain,” she said.

In addition, the ReserveLending+ only accepts users who are customers of unFederalReserve’s banking partners, NextBank, International , a Puerto Rican IFE bank. NextBank operates under the laws of the Commonwealth of Puerto Rico. NextBank is licensed under Act 273 by the Office of the Commissioner of Financial Institutions (OCIF), and currently offers concierge banking services and lending products to successful entrepreneurs and companies.

Alternative Investments Turn to Crypto For New Capital

ReserveFunding, unFederalReserve’s alternative asset to crypto high net worth individual bridge allows qualified individuals to invest in private deals without having to liquidate their digital holdings first. The latest fund to take advantage of this new channel, is Trivium2, a self-described, “… three dimensional fund of funds.” Along with Atipana Capital before it, Trivium2 seeks to leverage the efficiency of on-chain data transfer while providing non-Ethereum correlated returns to folks currently holding crypto with those diamond hands.

Trivium2 is a direct feeder fund into the Alumni Ventures Group, globally the most active VC fund today, participating in a variety of crypto-related projects.

One of the ways another alternative fund, ReserveFunding – Series 2 (“RFS2”), is raising capital is by offering to recognize a token’s value at a much higher valuation than current market prices. In this case, RFS2, will make distributions on a pro rata basis to all LP unit holders assuming a price for eRSDL of $0.50/token versus its much lower observed price. This contribution structure is used by other funds for other types of non-fiat currency assets, but this method is one of the few times we’ve seen it used in crypto before. In essence, the fund is saying the contributed asset is worth well above what the market currency considers. The investor is guaranteed pro rata distributions based on the higher declared value, and will be entitled to a greater share of the distributions than the market value would imply.  It is expected that more low volume, low market capitalization projects will attempt something similar in the future.

Buying A Bank Just Became Easier

ReserveDAO is one step closer to buying a bank. The recent community vote locked in GovernorDAO (“GDAO”) as provider of the rails for the initial funding round and sale of RSRV. The RSRV governance token will not be yield generating, but will provide access to yRSRV, a soon to be generated yield token produced by an affiliated foundation in conjunction with the mission of ReserveDAO.  The DAO will then, in turn, focus on purchasing a bank or making a strategic preferred equity investment into a U.S. Treasury chartered bank.

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