Maple Finance is a decentralized corporate credit marketplace connecting institutional crypto-native borrowers with DeFi depositors. The protocol is one of the few lending platforms in the market today that provide undercollateralized loans – a key primitive required for DeFi to truly reach mainstream adoption.
Today, DeFi lending platforms like Compound and Aave offer permissionless loans facilitated by smart contracts. What does this mean?
Anyone can borrow on the platform (permissionless, democratized access) because they are required to post collateral exceeding the value of the loan itself
Overcollateralization provides a capital buffer in volatile market conditions; if the collateral value gets too low, smart contracts automatically liquidates the collateral to protect the loan principal
Overcollateralization prevents true credit creation and limits capital efficiency, preventing businesses from accessing credit for productive use. As a result, on-chain borrowing today has primarily been retail-driven, used to facilitate additional leverage and more often than not, speculative trading
Undercollateralized lending in crypto, on the other hand, has been difficult to crack because of two key challenges. For one, protocols currently lack the tools to properly assess the credit risk profile of anonymous borrowers from their on-chain activity, as the use of on-chain credentialing for non-collateralized lending is still in early stages of development. Secondly, low collateral values do not provide the necessary capital buffer to protect the loan principal.
Maple Finance solves these two key problems above by reintroducing elements from the lending models in traditional finance. First, they employ 3rd-party agents called ‘Pool Delegates’ to underwrite undercollateralized, permissioned loans to KYC’ed, positive cash-flow businesses. Secondly, they ensure the loan principal is fully protected through the use of 3rd-party agents that provide insurance in the form of a capital buffer, or “Pool Cover”. These two elements are, of course, tied together through their well designed tokenomics model, facilitating a lending flywheel that has resulted in Maple originating $1.5bn loans to date.
Fundamentally, Maple’s business model is no different to how lenders operate in traditional finance. Revenues consist of interest income and loan origination fees, while major expenses consist of funding costs, underwriting fees, and insurance premiums (this one isn’t as common). At the same time, Maple completely differentiates itself from normal lenders through the utility and mechanism design of its native the token, MPL. MPL is an example of how tokens, when used right, can help to enhance solid business models.
A zoomable diagram of its Tokenomics can be found here.
Lenders, or depositors, get access to the private credit market, earning higher interest on their capital for risk they take on in extending undercollateralized loans.
Borrowers are KYC’ed, positive cash-flow businesses. Currently, this includes delta-neutral market makers or CeFi platforms, though Maple has plans on expanding into new verticals to include crypto mining and fintech companies as well. Borrowers are responsible for paying the loan origination fees and interest fees. In the future, borrowers who staked, or lock up, their MPL will also receive rebates on their borrowing costs.
Pool Delegates – (Underwriters)
Pool Delegates are professional managers with expertise in credit underwriting. They are responsible for all aspects of the underwriting process, performing KYC on borrowers, assessing their credit risk, and negotiating loan terms. For this, they are compensated with a portion of the interest income and loan origination fees. Given pool delegates do not use their own funds to directly underwrite the loans, they are required to assume a portion of the underwriting risk by becoming a pool cover provider. This helps to align their interests with the protocol and all other market participants.
Pool Cover Providers (Insurance)
Pool Cover Providers are 3rd-party agents that provide insurance for the lending pool. They provide a capital buffer in the form of 50-50% USDC-MPL Balancer Pool Tokens (BPTs). These BPT tokens become the first-loss collateral in the event of loan default, protecting depositors from losing their loan principal, but also ensuring there is adequate liquidity for the trading pair. As part of a new Maple Proposal, pool cover providers will also be able to provide one-sided pool cover in the future in the form of xMPL to reduce their exposure to impermanent loss. For providing insurance, they earn 10% of the interest income (their insurance premiums) and earn additional MPL awards.
Stakers have similar functionality as being equity investors in the protocol. As a reward for buying and staking the MPL token, they receive 50% of the protocol’s revenues in the form of MPL rewards from open market buybacks. In Q2’22, Stakers earned an average 3.76% APY in MPL tokens.
Maple has a fixed total supply of 10 million MPL tokens. Maple’s Token Generation Event (TGE) occured on April 28, 2021, with supply distributed and allocated to the groups shown below.
The public auction was done via a Balancer Liquidity Bootstrapping Pool (LBP), which raised $10.3mm across 1080 participants. Tokens held by insiders and investors were unlocked upon TGE and will vest linearly across a 1 to 2 year period, as shown by the vesting schedule below.
One additional thing to note is that private investors were able to purchase tokens at discounted prices, which will likely contribute to continued sell pressure until these tokens have completed their vesting schedule. At the time of writing (8/8/2022), Maple Finance’s circulating supply has reached about 69% of its fully diluted value, demonstrating relative maturity in its emission life cycle. In other words, demand for the token will only need to increase by a further 31% in order to meet the additional supply coming onto the market.
Value Creation and Capture
Maple’s value creation is simple. First, they provide depositors and insurance providers access to the private credit market, where they are able to earn higher yield coming from real cash flows.
More importantly, they provide true credit creation by extending undercollateralized loans to businesses for working capital expansion, while concurrently providing access to businesses that might be unable to receive funding from traditional bank and specialty finance lenders.
Currently, Maple’s closest competitors are GoldFinch and TrueFi, which employ different mechanisms and are focused on seperate borrowing verticals. Given the size of the global commercial lending market (roughly $8 trillion), there is enough room for all protocols to grow into, especially with the additional untapped market of borrowers who do not have access to these lenders in the first place.
The MPL token not only flows through multiple stakeholders, but has multiple use cases. These all help to generate demand for the token itself, capturing value from the protocol in varying degrees of effectiveness. I walk through each one below:
Governance: Indirect control over treasury
Users gain power to decide on budget decisions and proposals. This is especially important for DeFI protocols, which require proper governance to control and allocate their large treasury balances.
Staking: Accrue MPL Rewards from Open Market Buybacks
Stakers who ‘lock up’ their MPL tokens have claim to 50% of the protocol’s revenues in the form of MPL rewards from Open Market Buybacks. While this provides natural buying pressure for the token, it is wholly dependent on mercenary stakers that lock up their funds for yield. The quality of this yield, however, is questionable – stakers are not rewarded in stablecoins or crypto majors (ETH), but more native tokens. In a bear market, staking yields become much less attractive as MPL prices fall, which is further accelerated as stakers in turn sell their tokens (there is no lock-up period for staking). As of time of writing (8/8/2022), staked MPL represents 39.3% of total circulating supply.
Pool Cover: Earn insurance premiums (10% of interest revenue)
All pool delegates are required to provide pool cover in the form of MPL tokens, which creates recurring demand for the token as more Pool Delegates are onboarded to the platform. Additionally, 3rd party agents that buy MPL tokens for pool cover receive 10% of Maple’s interest revenue (their insurance premiums). This is one of the stronger demand drivers for MPL, as there is a clear value accrual for the MPL token holder in the form of non-MPL interest rewards. Conversely, in the event of a loan default, the selling of BPT tokens to cover the loan loss might have a large negative impact on MPL’s price.
Finally, Maple Finance has proposed to provide rebates to borrowers that stake MPL tokens. While the structure of these fee rebates has yet to be released, they will likely form another strong demand driver for the MPL token.
Admittedly, Maple’s tokenomics are more complex than other DeFi protocols. The large number of stakeholders involved requires careful consideration of how MPL token can be used to incentivize activity that adds value to the protocol.
Further consideration will also need to be given to how long Maple can continue paying out MPL tokens as rewards, especially to stakers who are not beholden to a lock up period and have little incentive to keep doing so should MPL rewards begin to go down.