The decentralized finance (DeFi) ecosystem has seen massive growth over the past two years. It has grown from a mere $700 million industry in 2020 to a booming $200 billion space in early 2022. This boom can be attributed to the large number of innovative lending protocols that have emerged over the past few years. .
One such platform that has quickly rocketed to the forefront of the DeFi ecosystem is Clearpool. However, while most other platforms in the space cater to retail borrowers, Clearpool focuses on institutional borrowing. Another thing that sets Clearpool apart from the crowd is that it runs a collateral-free model, which is almost unheard of in the DeFi space.
Let’s take a closer look at this rising platform which has the potential to usher in a new era in the DeFi space, especially once institutions realize the advantages of decentralized finance over traditional borrowing options.
What is Clearpool?
Clearpool is a decentralized network of investors from which institutions can borrow cash without any collateral. Clearpool has partnered with trading firm Jane Street and blockchain investment firm BlockTower Capital to launch what is called a “permissioned liquidity pool.”
Institutional borrowers that Clearpool whitelists can create their own liquidity pools for individual borrowers. Currently, Clearpool does all the whitelisting itself. As it grows over time, native CPOOL token holders will be granted verification rights to onboard more borrowers.
The pool was launched on May 3, 2022 and is funded with $25 million USDC stablecoins. Clearpool intends to expand this pool to $50 million soon. Lenders who fund these liquidity pools can earn interest on the amount they lend. It uses a unique dynamic interest rate model that determines the rate based on market supply and demand.
How it works?
Borrowers must stake their CPOOL tokens in order to become eligible to create a liquidity pool. Currently, each borrower stakes 500,000 CPOOL tokens on 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 borrowers’ credit risk scores and ensure KYC and AML compliance before they disburse anything. The protocol ensures that the entire process is executed without compromising the confidentiality of the borrowers, which brings us to the end of the onboarding process.
Borrowers can simply connect their crypto wallets to the Clearpool app, and they will be presented with a dashboard of the pool of liquidity available for borrowing. They choose to borrow or repay USDC from the same dashboard. Ethereum smart contracts handle these transactions.
Borrowers are free to choose when and how often they wish to make their repayments.
There are no restrictions to become a lender and the size of the pool is not limited. One can easily connect his crypto wallet and provide liquidity by depositing USDC. In return, the pool credits the lender’s wallet with “cpTokens”. These tokens represent the lender’s contribution to the liquidity pool. They also represent the accrued interest and the risk profile of the borrower.
The accumulation of the interest rate is done per block, which means that each time a block is created on the blockchain, the interest is added to the amount owed by the borrower. The underlying measure is the “use rate”. This means that when a pool of cash is used more by borrowers, the interest rate for lenders is higher.
The liquidity pool can only be used up to 95% (set by default). This state is called “High-Util”, and lenders are allowed to continue injecting cash or withdrawing their funds, while borrowings are halted. Lenders attempting to withdraw their funds must do so before the utilization rate reaches 99%, as the pool does not allow cash outflows at that time. At this time, the pool enters the “warning” phase and gives borrowers a period of 120 hours (5 days) to return the funds and reduce the utilization rate to 95%.
So how does Clearpool get away with no guarantee?
An automatic auction is triggered when borrowers do not return the borrowed amount within the 120-hour grace period and return the pool to its active state (
According to Clearpool’s website, if a winning bid is accepted, “the winning bidder will receive an NFT containing the legal rights to the pool’s debt and the exclusive legal right to sue the defaulting borrower.” However, if the offer ends up being rejected, each cpToken holder will be able to exchange their cpTokens for a proportionate share of the pools insurance account.
Each liquidity pool has an associated insurance account. For each block created, a small percentage of the interest from the liquidity pool is funneled into this insurance account (currently set at 5%). This may be changed later by governance changes.
There is also a reserve pool which, unlike insurance, is not pool specific. Each transaction on the Clearpool protocol routes 5% of the amount to the reserve pool. This pool is used to develop the network and also in the event of takeover of the CPOOL.
“CPOOL” is Clearpool’s native governance and utility token and has not yet been deployed. CPOOL owners will be the ones to whitelist borrowers in the future.
Borrowers will need to stake their CPOOL tokens in order to qualify for whitelisting. Lenders get 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 be purchased in fiat currency at this time. However, it can be purchased using BTC, ETH, USDT, and BNB on exchanges.