Mar 17, 2022 - Economy

Many blockchains, one credit line: Investors back new DeFi protocol

Illustration of a blockchain forming a question mark.

Illustration: Gabriella Turrisi/Axios

Finance on blockchains keeps getting more refined, with an eye to really taking on the banks. Prime Protocol, a decentralized prime brokerage that will work on multiple blockchains at once, has raised $2.75 million in a round co-led by Arrington, Jump and Framework, with multiple angels also participating.

Why it matters: As crypto-powered credit services get more sophisticated, that should eventually put pressure on the traditional banking system to lower fees for users.

  • "I think the infrastructure we're building right now will be critical to replacing a lot of legacy financial systems that could benefit from being decentralized," Colton Conley, Prime Protocol's founder, told Axios in an interview.
  • Conley sees a future when tokens that represent real world assets can come on chain. When that happens, decentralized finance (DeFi) will begin encroaching on traditional banking territory.

Catch up quick: Basic borrowing on blockchains is surprisingly easy, but credit becomes fragmented as users start to use multiple chains.

  • It's kind of like if a company owned lots of property, but it was only allowed to spend money borrowed against any given property in the same state where the collateralized property is located.
  • Prime Protocol aims to refine DeFi a bit more, but crypto lending still has a long way to go before it can match the liquidity and flexibility of traditional finance.

Between the lines: Prime Protocol is a DeFi protocol that works, on a basic level, like the best known DeFi protocol of all: MakerDAO.

  • Users will deposit assets and can then take out loans against them, with the ability to leverage a portfolio up to 11x.
  • Those loans will actually mint a new stablecoin called PUSD. If this sounds strange, it's exactly how one of the oldest stablecoins, DAI, also works. Every DAI represents a debt against collateral entrusted to MakerDAO.

Stablecoins are designed so that they follow the price of government issued money, usually the dollar. Most other cryptocurrencies are notoriously volatile.

  • PUSD will be a collateralized stablecoin, not a fiat-backed one like Tether or USD Coin, the two most popular stablecoins.
  • Conley says PUSD's monetary policy will be more dynamic than prior collateralized stablecoins (such as DAI, the fifth largest). Its lending rates and supply will shift as needed, under rules controlled by PRIME holders.

Context: Prime Protocol is part of a larger trend in crypto to drive out all the centralized products.

  • Most people in crypto who borrow money now do so to lever up their trades. For most of the first decade of crypto’s existence, such trades all had to take place on centralized exchanges, such as Binance.
  • But a decentralized exchange called Uniswap proved its place in the market as of roughly early 2019. Decentralized exchanges are basically robots on the internet that run without human input on a day to day basis. They are booming.

Yes, but: One advantage for centralized exchanges, however, has been easy access to credit to make margin trades. Prime Protocol aims to make trading on margin much easier for users who want to stay decentralized.

Details: Prime Protocol makes two key changes for traders.

  • First, borrowing against assets on one chain to spend on another requires a lot of cumbersome steps and applications. With Prime, a user will be able to make a deposit on one chain and borrow on any other that has Prime running as well, all with one product.
  • Second, all collateral deposited in Prime will count toward one big credit line. Usually, blockchain credit projects create a distinct credit line for each asset a user deposits. With Prime, users can deposit many different kinds of assets and borrow against all of them at once.

The other side: Lots of entrepreneurs want to be on multiple blockchains at once right now.

  • In fact, yesterday, the largest DeFi money market, Aave, released its v3, which includes portals. Portals will also enable users to deposit on one chain and borrow on another, Aave founder Stani Kulechov confirmed to Axios.
  • Aave is a money market, though, so it can only lend assets that others have deposited. "Because we are issuing our own stablecoin, we don't really have any cost of capital," Conley said.
  • Similarly, in February, Primex Finance, which also wants to improve margin trading for decentralized exchange users, announced a $5.7 million seed round led by CoinFund and Stratos Technologies. Multi-chain lending is on its roadmap, too.

What's next: Prime Protocol will launch its testnet this summer with a mainnet launch shortly thereafter. It will work using a hub-and-spoke model where all its actions on various blockchains will be checked with a fast, cheap smart contract chain.

  • Conley is not yet disclosing which of those chains it will use, but, based on those conditions, it's a safe bet to rule out Ethereum, the largest and best known smart contract blockchain.

Participating in early DeFi protocols is always risky, but those who do so in Prime’s early days will be rewarded with NFT airdrops and liquidity provider incentives, Conley confirmed.

  • It’s also working on promotions via other blockchains as it expands its footprint to more and more chains.
  • Investors purchased equity that will later convert to the protocol's governance token, most likely named PRIME. Early participants will likely also get especially good deals on early PRIME distributions.

Bottom line: "What DeFi is doing is it's taking out the middlemen of a lot of large, bloated financial institutions that basically control how a lot of your finances work," Conley said.

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