A Bulletproof Design for Institutional Lending?

The sweaty green palms of the average degen know the feel of financial risk too well. Institutions, on the other hand, hold a different set of standards, and prefer their opportunities well-moisturized for sustainable success.

That’s why this week we’re looking at Infinity Exchange and what a DeFi fixed-rate lending protocol might need to soothe the suits enough to ape in.

Why Fixed-Rates?

For new readers, our research focus is on crypto yields, with some macroeconomics mixed in. We believe DeFi fixed-income markets will mirror TradFi in being some of the largest and most liquid markets.

Of course, while degens may argue that steady isn’t sexy, they get excited for inflows in size, and institutions are packing. The market cap for US Government Treasury bonds alone is in the trillions.

That being said, DeFi fixed-rate lending is currently still in its infancy and a lack of traction suggests its moment has yet to come.

To Infinity and Beyond

Let’s look closer at Infinity Exchange and how it’s aiming to solve that.

It positions itself as ‘an infrastructure for permissionless lending of digital assets for institutional investors’ and offers users access to both float and fixed-rates.

It achieves this by employing an order book for interest rates, in contrast with the typical pool-based model we’ve seen elsewhere in DeFi.

Lenders and borrowers place offers or bids on either side of this order book to create a marketplace for each loan term.

Two Market Model for Floating Rates

Infinity Exchange has developed what it calls the ‘Two Market Model’ for 1:1 matching of lenders and borrowers. This model combines two markets: the Subscription market, which maintains an equal number of lenders and borrowers paying and receiving interest at a floating rate, and the Reference market, where lenders and borrowers await matching to enter the Subscription market.

Interest Rates

One core benefit to this approach is that interest rates are driven by organic demand and not governance or third-party risk assessment. This is important when thinking about utilization rates and capital efficiency.

On a protocol like Aave, each lending pool has a deterministic rate designed to continually buffer capital use to maintain a surplus for LPs looking to exit. An ‘optimal’ rate for a pool is typically around 70-85%, but even at this peak performance gains are still diluted.

Infinity Exchange’s order book model essentially acts as a set of P2P loans that generates greater capital efficiency and supports yield-bearing collateral to ensure that depositors constantly earn.

New Markets

We’ve previously discussed Silo Finance and lending for the long tail of assets. The development of market-driven interest rates potentially enables Infinity Exchange to act as a primitive for more exotic lending markets.

If we look again at Aave as an example, we know that each pool is bound by socialized risk, severely limiting the breadth of assets that the protocol is willing to support. Aave may be a giant but it isn’t an agile one.

Discussion Points

Dig deep into Infinity Exchange and there is a lot to be excited about but it does beg questions about the vision and implementation.

1. Decentralization. Apart from being prompted to deposit assets on-chain, we got the impression that the exchange is currently centralized. A multi-sig seems to control deposits, and the rest happens on a centralized server. While this may appeal to some TradFi traders, the security guarantees are definitely lacking. We wouldn’t even go as far to call it a DeFi product. While they mention plans to progressively decentralize, we find the planned first version a bit of a disappointment in this regard.
2. Great UX. The team has done a great job with bringing helpful charts that display your orders, positions, and PnL across the spectrum of supported maturities, as well as a dedicated risk dashboard to monitor positions. It’s clear the team has spent quite some time refining the UI.
3. Skeuomorphism. In its current form, the platform is geared towards TradFi and institutional investors, feeling a bit like a TradFi trading product branded as being DeFi.

Let’s Wrap Up

Web3 can’t stay truly degen forever. It will mature soon and when it does things like bonds, fixed rates and yield curves will form a base narrative that short-term trends bounce off, in the same way as TradFi. DeFi fixed-rate lending is still in its infancy but Infinity Exchange has taken a solid shot at realizing that vision and we’ll be watching it closely.

Thanks for reading. See you next week!

And a big thanks to our sponsor Size, building a DeFi lending marketplace with unified liquidity across maturities. Coming soon!

This newsletter is for informational purposes only and does not constitute investment, financial, or professional advice. Perform your own research and consult a professional before investing. We're not liable for any direct or indirect financial losses resulting from the use of information contained in this newsletter. Past performance is not indicative of future results, and investing in financial markets carries risks, including the potential loss of principal.