DEPRECATED: Maple Venue Onboarding

EDIT: This VIP has been deprecated following Orthogonal Trading’s fraudulent misrepresentation of their exposure to FTX, which led to uneven losses among Maven11 pool depositors, some of whom were able to safely withdraw prior to the loss being declared. A more detailed retrospective on recent events at Maple will be published in this thread in the future.

Motivation

To reach a desirable VOLT rate, one of the most powerful tools available is to deploy a portion of the PCV into a less liquid and high yielding venue like Maple, while the majority remains in highly liquid and low yielding venues like Compound or Aave. This can result in a higher blended yield than legacy markets with minimal liquidity risk thanks to the presence of the surplus buffer.

Venue Information

The Orthogonal Trading Pool on Maple has a generally well-regarded borrower set. Based on our user interviews with certain Maple borrowers, the diligence process performed by Orthogonal is thorough.

Borrowers with active loans in the pool:

  • Portofino Technologies AG
  • Wincent
  • Folkvang
  • Auros
  • Wintermute Trading Limited
  • Reliz Ltd
  • Nibbio
  • Amber Group
  • FBG Capital

More information on the loan profile of the pool will be discussed. Notably, the largest individual borrower entity Nibbio at 18m borrow represents 20% of the pool, higher than would be ideal but mitigated by the 6m in first loss capital provided by the pool delegate.

Pool Performance Information: https://downloads.maple.loans/pool-delegate/orthogonal-trading-usdc01-update-aug-22.pdf

This pool has experienced one borrower liquidation, allowing us to observe Maple’s loss handling in practice. No other RWA protocol we are aware of has successfully demonstrated a handling of borrower default (or arrears), so seeing this in action is a derisking element. Babel Block Limited, the borrower in question, is apparently in negotiations to either seek relief funds or unwind with repayment structuring, so it’s unlikely to be a full loss. More details to be shared here soon.

Integration Details

Establish a maximum allocation limit equal to the size of the surplus buffer to constrain the risk to the VOLT system.

Add handling around Maple deposits and withdraws to ensure the cooldown functionality is not vulnerable to grieving.

Maple Finance Allocation Limit

Volt Protocol is preparing to integrate with Maple Finance as our first higher yield, illiquid venue. As part of this VIP, we need to decide on an allocation limit for the platform. There is no allocation limit on the most liquid venues like Compound, but riskier or illiquid venues require it.

While the veto module is not yet complete, this post is intended as an example of the proposals the core team or VCON holders should make in the future if they expect VOLT delegates to allow their changes through. This post is WIP.

Un(der)collateralized Lending and Risk Management

Uncollateralized lending is common in tradfi and with appropriate risk management is an attractive yield source. In the most mature markets, the margins between secured and unsecured lending are quite small.

Source: Interest rates on secured and unsecured overnight lending | FRED Blog

In other cases the spread needed to compensate for the additional risk of unsecured lending is very large. The question is, who is doing the risk management? What is their track record, do they have skin in the game?

We must also recognize that on a long enough timespan, losses are inevitable in any lending market. Volt Protocol should never risk a loss greater than the surplus buffer can endure. This sets an upper bound for risk tolerance, below which market governance can act.

By allowing a portion of the PCV to enter higher risk or less liquid venues, and the majority to remain in lower risk highly liquid markets, a higher blended VOLT rate is possible while maintaining a level of risk manageable by the surplus buffer.

The Maple Opportunity

Of the yield options available within DeFi today that offer high rates (>4%) even without incentives, and which can be expected to be sustainable at scale, Maple represents one of the best risk profiles.

Given that the largest borrower represents about 20% of the outstanding debt in the Orthogonal pool and 40% in the Maven 11 Pool, while both have similar levels of first-loss pool operator capital, the Orthogonal pool is judged to be less risky. Single-borrower default is the most likely scenario for loss in a Maple pool, and is the most obvious criteria on which to base risk assessment.

Volt Protocol has a surplus buffer of about 300k. On the basis that a loss of more than half of the capital in the Orthogonal Pool is relatively unlikely, as this would represent simultaneous default of more than two of the borrowers, and there is 6%+ first loss capital, we consider it a high probability that if loss did occur in the pool (as it has once already), it will be limited to the size of the largest borrower. It is therefore within safe tolerances reasonable to set an allocation limit of 750k USDC in the pool. At 33% of the current PCV, this would support a VOLT rate of ~3.5%. At the maximum VOLT supply possible with the current surplus buffer, the rate would compress to ~2.5%.

If the largest borrower in the Orthogonal pool were to default, Volt Protocol would take a loss of 12% on its allocation to Maple, representing at this sizing a 90,000 loss which would be fully absorbed by the surplus buffer.

From a purely risk perspective, the allocation could readily be increased, but liquidity is of greater concern, and in general no more than 40% of the PCV should be committed to less than fully liquid venues until the algorithmic VOLT rate is well established in production. This is because it is uncertain and impossible to definitively determine the future VOLT rate needed to ensure liquidity is maintained at peg when holding illiquid backing.

With relatively short duration and a total allocation limit less than the liquidity that could be provided in an emergency by the Governor Multisig, a 750k allocation limit will drive a stronger VOLT rate at acceptable risk.

In all cases, the rates mentioned above assume a net interest margin of between 0.1% and 0.6% accruing to the surplus buffer, and have been rounded down accordingly.

Pool Concentration vs Borrower Concentration

We’ve considered splitting the protocol’s allocation limit 500k for the Orthogonal Pool, 250k for the Maven11 Pool. It is generally better to avoid excess concentration of the PCV in a single pool. However, the borrowers in the Maven 11 pool are all present in the Orthogonal Pool except for the largest borrower Wintermute who is responsible for ~40% of outstanding Maven 11 Pool debt. This means that the likely maximum loss in the Maven 11 Pool is higher, and diversifying may not represent a risk reduction at this time.

The community may consider approving both pools, and waiting for reduction in borrower concentration before depositing in the Maven 11 pool.

The above list is not quite accurate; it is missing Framework, and neither Wintermute nor Nibbio have active loans.

Let’s continue to break down the individual borrowers in the pool as much as possible. Keep in mind that the role of the Volt core contributor team is not to serve as underwriters for this kind of lending. This is intended as a review providing context and looking for any red flags.

In the mature system, VCON holders will propose new lending operations which VOLT holders and their delegates can veto if appropriate underwriting has not been done. In Maple, the Orthogonal Credit team serves as the pool operator with ~2% of the pool’s TVL being their own first-loss capital. This skin in the game and their experience in the same operations as most of the borrowers (via Orthogonal Trading) gives them credibility as an underwriter.

Portofino
Home jurisdiction: Switzerland
Experience/track record: Founders are ex-Citadel. Recent raise of $50m well in excess of $8m total Maple loans.

Wincent
Home jurisdiction: Slovakia
Experience/track record: Allegedly over 3b in daily volume across multiple exchanges, although I currently lack a way to verify this information. Despite existing since 2018 and this large size, I’ve had a hard time surfacing news or other details about Wincent.

Folkvang
Home jurisdiction: The Netherlands
Experience/track record: Well known ecosystem participant with a track record of active participation on Clearpool and responsible behavior towards depositors. Originally received its major outside investment from Alameda. Expected that they are capitalized well in excess of current DeFi loans.

Auros
Home jurisdiction: Hong Kong
Experience/track record: Allegedly “we account for a significant proportion of global cryptocurrency volume”, founders and leadership team have deep trade exp. They are active elsewhere in DeFi, such as providing data to Pyth.

Reliz Ltd
AKA Blockfills.
Home jurisdiction: Chicago, USA
Experience/track record: Raised $37m in most recent round. Besides trading, they provide custody and other services.

Amber Group
Home jurisdiction: UK (Amber Global Limited, also may have other subsidiaries)
Experience/track record: Very large player, claiming over 1T in total traded volume, even sponsors a football club. Providers of institutional and individual management platforms.

Framework Labs
Home jurisdiction: San Francisco
Experience/track record: Framework Ventures is of the two lead VOLT investors, and the Framework team are well known DeFi natives. We can feel good about this one.

FBG Capital
Home jurisdiction: Singapore
Experience/track record: The oldest firm on the list going all the way back to 2015, this track record speaks well to their risk management.

As you can see, this can hardly be considered an exhaustive or rigorous look into these borrowers, I have not had any opportunity to directly vet them or examine their books. None of them raise any big red flags for me except the difficulty I’ve had finding materials on Wincent. I will be following up w/ Orthogonal for additional information in this regard.

1 Like

Illiquid Venue Caps

We’ve been having discussions about Volt Protocol’s policy around deposit limits in illiquid venues. Let’s review two possible stances the protocol could take.

Minimum Risk

It’s safest to limit any single higher risk yield venue deployment to the size of the surplus buffer. In this case VOLT holders are highly unlikely to be impacted by venue risk. This strategy has the lowest chance of loss greater than the surplus buffer. However, diversification may mean allocation into overall lower quality venues and increase risk of surplus buffer losses. Early on, we may only have access to one or two venues.

In general, the system should trend toward this stance over time as it gets larger and a variety of quality venues can be onboarded. This strategy would result in a VOLT rate of 2-2.5%.

Market Yield Target

Ultimately, the VOLT rate will be determined by supply and demand along with the consent of the VOLT holders (veto power). While we work on implementing the algorithmic rates system, the Volt Protocol team hopes to make sure that the venues added and allocation limits suit the risk preferences of the VOLT holders. At the same time, a competitive market rate is needed for the protocol to grow to the target surplus buffer ratio.

Allocating more than the surplus buffer based on expected maximum venue losses, as discussed in the previous posts, represents an acceptable risk as the Orthogonal pool has multiple borrowers and is highly unlikely to suffer a total loss. An allocation limit of twice the surplus buffer would likely be enough to protect VOLT holders from risk in this venue. This would result in a more competitive VOLT rate of 3-3.5%.

Current Thoughts

Some compromise between these stances may be best. The thing to decide on is a “realistic maximum loss” for this pool, and relate this to the size of the surplus buffer. For example, if the realistic maximum loss were 80%, the protocol could allocate at most 125% of the surplus buffer to avoid excessive risk exposure. Example with numbers: current surplus buffer ~300k, could allocate 375k and if 80% lost, reclaim 75k and no loss to VOLT holders, only the surplus buffer.

I would argue that 80% losses in the pool in a single incident are unrealistic, and it is much more likely that any loss event will be a single borrower loss. A realistic maximum loss of 50-75%, allowing between 150-200% of the surplus buffer (300-600k) for the Orthogonal pool seems a reasonable decision.

We are continuing to do research and look forward to sharing more information with the community on upcoming calls. Please do let us know your opinions as a VOLT holder.

Hey everyone, Charlotte from Maple here :pancakes: :zap: I work closely with the Orthogonal team, the borrowers from their pool and DAO lenders across the Maple platform as a whole. I’m so excited to see this proposal and meet you all on Spaces next week. In the meantime, check out the linked proposal from Christine at Orthogonal which shares further detail on past pool performance, detail on borrowers, how risk is managed and ultimately how sustainable ‘real-yield’ earned by lending to credit worthy businesses in the space can enhance the capital efficiency of Volt and provide more economic value and resources to members. DAO Proposal_Orthogonal_Volt DAO V1(1).pdf - Google Drive

2 Likes

Thank you very much for this post (and Christine for the proposal :pray:) – both firsts for Volt Protocol.

I will provide commentary on the proposal and final recommendations for Volt Protocol as far as Maple allocation limits by the end of the week, so that VOLT holders have time to review before the community call next Tuesday November 1.

We are in the process of security review of Maple in preparation for integration, which will proceed separately from the economic review process. I expect PCV deposit in the Orthogonal pool will be possible in the third week of November.

Final Allocation Recommendation

Hello all, pending the results of the security review being led by @Eswak, here are my recommendations regarding quantities for deposit in Maple. Some relevant numbers below:

maple_deposit

Based on the current VOLT supply, the protocol will be earning around 3% on the PCV between the Maple and Morpho-Compound rates. As a result, I will propose to increase the VOLT rate to 2.75%, which leaves some wiggle room for rate volatility or for growth in the VOLT supply without requiring lowering the VOLT rate.

Here are the adjusted calculations showing a couple of different limits for the Maple deposit (2.5x and 3x the surplus buffer size respectively) for consideration:

In either case, this would support a higher VOLT rate of 3-3.5%, once again allowing for growth in the VOLT supply to the current limit of ~4.6m VOLT without needing to adjust the rate downward.

I wanted to update everyone that we are working on better live tracking of the PCV and the surplus buffer quantity. The previous figures overestimated the amount of circulating VOLT, as I incorrectly included the VOLT tokens bridged to Arbitrum as unbacked liabilities.

Some revised numbers:

User deposits: $2,433,346
Surplus buffer size: $293,758
Recommended Maple PCV Deposit: 600,000 USDC (nice round number, 2x surplus buffer)

We can extrapolate that at the current VOLT supply and market rates (assuming a 1.8% Compound rate and 8.8% Maple rate), a VOLT rate of 3% is viable. Returns on the total PCV including surplus buffer estimated at 3.34%, which will leave some wiggle room for rate volatility or VOLT supply increase.

If there is either a substantial increase in the VOLT supply or decrease in rates, we would need to either lower the VOLT rate or make additional deposit to the higher yield venue.

Small sneak peek, thanks to @Eswak we have an upgraded analytics UI coming along with accurate surplus buffer, PCV deposit figures: Webpack App

Only desktop friendly for now. Please take a look.

Hello all, just a touch base that I hope everyone is holding up in these troubled market conditions. We are looking at an end of month audit timeline which will also give time for things to shake out before a final allocation amount is confirmed.

1 Like

Just sharing this here. Naturally things have been changing in light of FTX events. So far things look good among the Maple borrowers and there have been several voluntary early repayments of loans from what I can see and ample liquidity in the pool to support withdrawals. Confirming our audit start date is November 28. In the interim and during the audit duration, we will have further time to observe conditions on in the USDC01 pool and make a final recommendation for the Maple venue deposit limit.

I spoke with the team at Orthogonal Credit today. Continue to be impressed by their professionalism and risk management as pool operators with skin in the game.

It looks like Maple v2 is on track for launch in December, so we will need to redo our Maple PCV Deposit contract to be compatible with the new Maple version. Furthermore, the OrthoCredit team does not expect further loan originations in the immediate term and are prioritizing ample pool liquidity to ensure any lenders who wish to withdraw are able to do so. As a result, I am relabelling this as VIP-XX while we await confirmation of its timeline to go live. Most likely we can expect to complete review of the new PCV deposit and go live in January.

1 Like

This didn’t age very well. We will not be proceeding with a Maple Finance integration, but will be including a more detailed analysis and retrospective in this thread once the dust settles and all facts have come to light. I still believe that bringing the massive unsecured lending market onchain will be an improvement in transparency and risk management compared to TradFi, but plenty to learn here.