The Ethereum Credit Guild
I recently listened to a talk by Paul Frambot of Morpho, in which he accurately described Aave as a managed fund, operated by majority vote of token holders.
Aave lenders have no say in the lending marketplace’s risk parameters, such as the ability to ensure a certain collateralization threshold when a volatile token is used as collateral. And due to Aave’s shared collateral model, a single mistake could lead to all lenders losing funds.
In other words, Aave has substantial blowup risk, with over 700 risk parameters managed and monitored by token holders who likely don’t know much about risk management.
Just look at Gauntlet’s frustration with submitting risk mitigation proposals while being ignored or ridiculed by token holders, and finally quitting.
While I still use and enjoy Aave today, I will go out on a limb and say that it will blow up some day if nothing changes.
The Ethereum Credit Guild
Launching soon, the Ethereum Credit Guild hopes to mitigate some of the concerns surrounding the Aave-style shared-pool money market models.
To do so, the Credit Guild relies on a token staking system and the concept of lending terms.
Lending Terms
The terms (not to be confused with loan durations) are a set of parameters that define a lending market within Credit Guild.
These are limited to the following parameters:
For example, three terms might be created for borrowing ETH against USDC collateral, each with a different interest rate of 6%, 7%, and 8%, with the same borrow ratio of 1 ETH per 10,000 USDC (a maxDebtPerCollateralToken of 0.0001 ETH).
Now let’s take a look at how these markets are activated…
Staking
After a new lending term is proposed, stakers may activate the market by staking either GUILD or gTokens (lending deposit receipt tokens). The more staked, the higher the debt ceiling.
In return for curation-by-staking, stakers earn market fees, but stand to have their stake slashed, in totality, if the market suffers losses.
Token holders may also delegate their stake.
Wait… what happens when collateral value drops below the borrowed amount?
Note above that there is no oracle providing pricing of collateral.
I initially questioned whether there was an options component to these loans, since the value of the debt may drop below the value of the collateral.
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But the assumption here is that markets will be “offboarded”, meaning a minority of GUILD token holders will vote to close the market as it becomes risky (as the term’s maxDebtPerCollateralToken nears the value of the collateral token).
If this happens, a dutch auction is initiated for the collateral.
No liquidation fees are taken when this occurs, so while inconvenient for borrowers, they are not penalized financially during market offboarding events beyond the cost of the dutch auction valuation (and active borrowers may bid on their own collateral to avoid suffering a loss).
Why Fixed Rates?
What turns me off most about the Credit Guild design is the fixed-rate component, without a fixed loan duration/term.
While limiting duration of loans is possible by creating a lending term with the optional repay parameters, the average loan term is still uncertain. In my opinion, this will lead to “worst case pricing” by lenders, and therefore indirectly by stakers, ultimately resulting in inefficient, or expensive, pricing.
Most interesting is that the initial proposed lending terms do not include the repay limitations, and may therefore be thought of as “indefinite fixed rates”, or at least a guaranteed fixed rate until the market is offboarded.
Will this result in frequent off-boarding as rates change? And if so, how does that impact user experience?
With many of these lending “primitives”, we might expect optimization and abstraction layers to manage loans and improve the borrower experience, so perhaps this will work itself out, but I’m still wary of the potential pricing inefficiency and curious to hear your thoughts on this aspect of the protocol.
So… a Better Hedge Fund, but With New Risks?
I’d say the Credit Guild falls somewhere in between Aave and Morpho Blue / Euler V2 / Silo V2.
It is still a hedge fund of sorts, but one that has some power distributed to market participants.
And, while I haven’t taken a comprehensive look at the code and details, the following new risk vectors come to mind to evaluate:
What Do You Think?
Thoughts on whether this design will take off? Drop a comment and have a great day!
And a big thanks to our sponsor Size, building a DeFi lending marketplace with unified liquidity across maturities. Coming soon!
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