Cream Overview- The Kingmaker of Crypto Capital Efficiency
2/1/21
Price: $294
Market Cap: $145mm
FDV: $847mm
TVL: $536mm
Overview
Cream.Finance is a decentralized borrow & lending protocol that launched in September 2020. Cream’s first initial product launch was a Peer to Peer borrow and lending platform for DeFi governance tokens (similar to AAVE, but with different collateral types). Cream has demonstrated a successful track record of shipping innovative products that are currently missing from the DeFi ecosystem. Cream recently launched two initiatives that have me excited, their Iron Bank initiative and their initiative to add SUSHI and UNI LP tokens as collateral. Cream is a protocol focused on improving capital efficiency in the Crypto/DeFi ecosystem.
Iron Bank
CREAM’s Iron Bank is a protocol to protocol lending platform. The key feature of CREAM’s Iron Bank is zero-collateral lending (ZCL). ZCL works by whitelisting a protocol, setting a credit limit and then said protocol can begin borrowing from CREAM V2 without needing to post collateral. This is a game changer. As protocols replace traditional enterprises, naturally corporate credit will be disrupted. In corporate credit, companies are able to borrow without posting collateral. These are called “unsecured” bonds/loans. The beauty of unsecured bonds is they increase capital efficiency. For every $1 of collateral you are required to post, that is one less dollar you could be using in a productive manner. Unsecured bonds allow corporations to borrow on reputation, which allows them to use their capital in a more efficient manner. The Iron Bank brings this dynamic to Crypto. For every $1 less of collateral that a protocol like Yearn.finance is required to post to borrow, that is an additional dollar that can be used for something more productive like yield farming. In addition to increasing capital efficiency, the Iron Bank also creates a “liquidity backstop” for DeFi. In traditional finance there are financings called revolving credit facilities. These can be thought of as credit cards for corporations. One of the main purposes of revolving credit facilities in traditional finance is to serve as liquidity backstops in case a company needs access to cash fast. You may have seen recently a reference to Robinhood tapping their revolver for $2 billion due to the $GME fiasco requiring them to post additional collateral with their clearinghouse. The Iron Bank has the potential to play a similar role of backstopping liquidity in DeFi by providing protocols a capital market they can easily & quickly tap in the event of an emergency. I believe the Iron Bank and ZCL will begin the build out of corporate debt in DeFi, dramatically increasing the capital efficiency of protocols approved to borrow from the Iron Bank, and potentially providing a liquidity backstop to the DeFi ecosystem.
Superfluid Collateral
CREAM recently announced the addition of Sushiswap and Uniswap LP tokens as collateral for borrowing and lending on CREAM. This made CREAM the first protocol to allow LP tokens to be posted as collateral. Once again CREAM is leading DeFi to increase capital efficiency. Yield Farmers will be able to access CREAM to borrow against their LP tokens or supply their LP tokens to gain additional yield. I expect allowing LP tokens to be collateral will help grow CREAM’s TVL as yield farmers will be able to access liquidity with their LP tokens for the first time. This is a pretty exciting innovation in regards to increasing capital efficiency as assets can now be allocated for multiple purposes simultaneously. This is another example of Crypto changing the way capital can be utilized versus traditional use cases.
Value Capture
CREAM holders earn fees via the reserve factor as more borrowers enter the CREAM market to borrow. As demand for borrowing on CREAM increases, CREAM holders will earn higher fees. ZCL will increase CREAM holders fees by increasing the amount that can be borrowed from the CREAM market.
Tokenomics
The original tokenomics for CREAM were as followed:
67,142.85 tokens from Liquidity mining rewards
50,000 tokens from YOLO Alpha Launch pool
17,142.85 tokens from Beta liquidity mining program
The max supply of CREAM tokens is 9,000,000 with the following breakdown:
10% Team - Vested over 2 years, 6 month cliff
10% Seed - Vested over 2 years, 6 month cliff
20% Liquidity Providers
60% Governance Allocation
It appears CREAM is currently in the process of updating their token economics to better distribute value to CREAM holders, so pay attention to any updates on the CREAM token.
Investment Highlights
Catch Up Trade Thesis
Long Tail vs Fat Tail Trade
Yearn Ecosystem Bet
Betting on Capital Efficiency
Betting on Corporate Debt for Protocols
Team
Memes
In @dgntec’s “Playing Cream”, he highlights the idea of the catch up trade we have seen between Sushiswap and Uniswap. Similarly to Sushi, CREAM plays the role of promising second fiddle to AAVE. @dgntec highlights the valuation gap between AAVE and CREAM and makes the case that a re-rating of CREAM is likely. I couldn’t agree more with the idea that CREAM is due to re-rate and I think the Iron Bank & Superfluid collateral initiatives serve as potential catalysts for the re-rating.
@redphonecrypto was the first I saw to highlight the idea of protocols serving a fat tail vs a long tail in his SNX vs UMA thread (see below). To shortly summarize, in most product markets there are two segments: the fat tail (deep & Popular) and the long tail (shallow & specific). This concept applies to the AAVE v CREAM dynamic. AAVE is seeking to conquer the fat tail by providing the deepest borrowing markets for the most popular assets. CREAM is seeking to conquer the long tail by providing access to more illiquid & less popular assets as collateral. While initially I think the AAVE v CREAM dynamic matched the SNX v UMA comparison well, I think it can be argued that CREAM is now also trying to conquer the fat tail of protocol to protocol lending (in addition to the long tail in peer to peer lending).
CREAM is a member of the Yearn.Finance ecosystem, which is a potential advantage. In Andre Cronje’s recent interview on the FTX podcast, he mentioned that in the Yearn Finance ecosystem, protocol developers essentially plan together in order to utilize multiple protocols to increase efficiency. Members of the Yearn Finance ecosystem benefit from the community aspect of the group. Instead of working alone and maintaining full control over your tech stack, the Yearn Finance ecosystem works together to utilize the services of multiple protocols to increase efficiency. As the Yearn finance ecosystem continues to grow and increase efficiency, it is possible that protocols that are members of the ecosystem will start to see a premium on their tokens vs non members.
Capital efficiency is a very powerful force. Increasing capital efficiency is not a linear development, it is curved (convexity!). Increasing capital efficiency, increases productivity levels massively. This is a force you always want to be betting on. In addition, those that can access the cheapest capital and use it the most efficiently tend to win (Apple being able to borrow at 50 bps over US treasury vs Mom & Pop being forced to pay 10% APR).
Protocol to Protocol borrowing & lending is a market that is currently missing from DeFi. Given that the corporate debt market is over 100x larger than the peer to peer debt market in traditional finance, it is likely you see a similar dynamic play out in Crypto. I think it is likely the Crypto protocol to protocol borrowing market eventually surpasses the crypto peer to peer borrowing market, especially as crypto protocols mature. As protocols mature, they will develop a credit reputation making it easier to borrow unsecurely. In addition, as protocols mature they will be more likely to finance their operations with debt rather than equity or “cash” from their treasury. Similarly to how you move from debit card to a credit card as you age (HS-College), as Crypto protocols mature, they will finance more of their needs with debt.
I’ve been impressed with the speed & quality of the products CREAM has shipped. In addition, I am a fan of the team’s goal of “building things in DeFi that don’t currently exist”. It seems the CREAM has found their niche within DeFi by focusing on improving capital efficiency in the ecosystem.
Crypto Rules Everything Around Me…… CREAM
*NONE OF THE ABOVE SHOULD BE CONSIDERED FINANCIAL ADVICE*
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