A Mexican lender is taking DeFi lending beyond crypto to the broader financial market, extending $40 million in credit lines to small business customers.
Decentralized finance, or DeFi, has been touted as a threat to traditional financial institutions, which can be disintermediated by peer-to-peer lending platforms and automated exchanges without a controlling central authority.
In practice, however, DeFi lending has largely been a circular market, with borrowers using funds to invest in other DeFi platforms to fund bets on crypto derivatives or the very high interest rates and DeFi lending/borrowing project on offer – earn tokens.
See: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
On Thursday delt.ai, a Mexican company that provides credit card-based lines of business credit to small businesses, announced that it is using a DeFi lending protocol to assess the creditworthiness of potential borrowers and provide lines of credit to customers.
The company has already paid out $40 million to companies like Terapify, which it says offer app-based emotional support and therapy from certified mental health professionals.
“delt.ai makes sending bulk transfers really easy and fast. We used to waste more than four hours every Monday doing countless bank-to-bank transfers,” said Juan Daniel Vélez, co-founder and CEO of Terapify, in a testimonial on the lender’s website. “Now we just load an Excel document and they will be processed in a few minutes.”
To fund the company, delt.ai is partnering with the TrueFi lending marketplace created by stablecoin issuer TrustToken (TrueUSD).
TrueFi is something rare in the DeFi world: an unsecured lending protocol.
Most DeFi loans require cryptocurrency collateral of much higher value than the loan: issue $150 worth of Ether (ETH) and receive $100 worth of stablecoins is a fairly common example. If the value of Ether falls too far, the collateral will be liquidated – at the bottom of the market – to repay the lenders.
Backed by venture capital giant Andreessen Horowitz’s crypto-focused a16z arm, TrustToken’s TrueFi lending market takes a much more traditional approach – albeit with a big asterisk.
However, TrueFi isn’t aimed at small retail borrowers. It is described as an “app store for lending” that allows wealth managers to launch new lending platforms for corporate borrowers.
Its clients are “largely private, pseudo-anonymous individuals and family offices in DeFi that participate in a range of investment sizes,” TrustToken CEO Raphael Cosman told Cointelegraph on Thursday (Feb. 3). Its borrowers tend to be crypto hedge funds, VC-backed startups, and soon, Cosman said, traditional financial institutions.
With crypto lending protocols offering interest rates that are an order of magnitude better than traditional banking products like savings accounts, “the best returns are no longer in traditional markets like stocks or bonds, they are in DeFi,” Cosman said.
While investors need to be sure they understand the market and its risks, “capital will always be looking for the best risk-adjusted returns,” he said. “This promise of lucrative returns is the biggest force pulling traditional finance on-chain, and we expect this to continue.”
So are regulators, Cosman noted, citing Gary Gensler, chairman of the Securities and Exchange Commission, who characterized crypto as the “wild west” of finance.
See also: The SEC’s campaign against crypto lending extends beyond Coinbase
Leveraging TrueFi, delt.ai is able to offer credit lines based on revenue and risk scores, with features for SPEI bulk transfers – up to 36,000 per hour – 45-day billing cycles and a Mastercard-branded corporate credit card.
The way TrueFi makes its lending decisions is not through a rating agency, but through the use of another DeFi product: prediction markets. When a borrower requests a loan, it is put through a decision market where TrueFi’s TRU token holders evaluate the request and vote yes or no. While the lender or loan pool need not follow this recommendation, this is generally the decision-making process. If the loan is repaid, Yes voters will receive a bonus in TRU tokens – as will the lenders.
“I used a ‘traditional’ bank for three years and kept being told I didn’t qualify for a corporate card. delt.ai did in two weeks what Santander couldn’t do in three years,” said Ana Ramos, CEO of Gigstack, a Mexican provider of financial management software for small businesses and freelancers, on delt.ai’s website. “Thanks to delt.ai, I no longer use my private credit card for company expenses.”