Idle DAO & Clearpool PYTs

Published on: 21.07.2022

Idle DAO & Clearpool PYTs – Perpetual Yield Tranches based on Clearpool uncollateralized loans, starting with Wintermute’s USDC borrower pool.

These new PYTs allow liquidity providers to access the emerging DeFi uncollateralized loan market with senior and junior risk-adjusted profiles.

The DeFi uncollateralized loan market

On one hand, overcollateralized loans are one of the tenets of DeFi. They addressed the quest to eliminate centralization bottlenecks for the loan market: you do not have to source potential lenders or negotiate the interest rate since there is a single entry point for all loans, and the interest rate is determined algorithmically from market conditions. These lending/borrowing protocols work autonomously without reputation and borrowers use collateral in excess of the value of the borrowed assets (which function as a guarantee to cover potential losses in default cases).

On the other hand, uncollateralized loans, a missing piece in the DeFi puzzle, are finally coming to open finance. While this new component is opening up to better capital efficiency and countless applications for DeFi, it comes with a significant challenge: appropriately managing risk exposure.

Enter risk tranching. At a high level, investors can choose between different risk levels — each with its own tailored potential for upside and downside — when depositing their digital assets into a specific pool. Tranche lending products are widely used in traditional finance and offer a pathway to risk management for decentralized debt. Essentially, it allows risk to be redistributed among different investor profiles.

Uncollateralized Perpetual Yield Tranches

Perpetual Yield Tranches (PYTs) are a new risk-hedging DeFi primitive that allows investors to select the risk-return profile they’re more comfortable with. PYTs come in two different classes: Senior and Junior. With these classes, investors can earn yield optimized by their risk level.

Uncollateralized loans are part of the next iteration of DeFi, but currently lack hedging instruments. That’s why Idle DAO has partnered with Clearpool to build PYTs on top of their ground-breaking uncollateralized single-borrower pools, starting with Wintermute’s pool, cpWIN-USDC.

Clearpool, Wintermute, and PYTs

In essence, Clearpool PYTs empower liquidity providers to lend crypto assets based on their preferred risk/reward level. And borrowers on the Clearpool protocol can now expand the potential size of the pool by enabling additional risk control measures and attracting liquidity from a wider network of lenders.

The Wintermute borrowing pool is currently the most liquid. It has a borrowing capacity of over $240m, resulting in the deepest for the protocol — and can optimize the utilization rate even with large-size deposits.

While Clearpool has already implemented safety measures in case of default/black swan events, with PYTs liquidity providers will be able to add a layer of protection.

About Clearpool

Clearpool is the first decentralized dynamic marketplace for institutional unsecure capital. Institutional borrowers can create single-borrower liquidity pools and compete for uncollateralized liquidity directly from the DeFi ecosystem. Liquidity providers on Clearpool can earn attractive yields, with pool interest rates enhanced by additional LP rewards paid in CPOOL. Clearpool LP tokens, called cpTokens, are the building blocks for a system of tokenized credit. It will provide Clearpool LPs with risk management and hedging capabilities. Clearpool provides the new architecture to facilitate flows between the $120 trillion traditional capital markets and the burgeoning DeFi ecosystem.

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