Cryptonative Credit (CNC) is when there are no legal entities and the full credit lifecycle from origination to repayment/liquidation are executed trustlessly onchain with programmatic and automated repayment and recourse mechanisms.
One example is our Spigot automatically takes a higher percentage of borrower revenue to repay debt or liquidate collateral with no delay or legal fees.
In contrast, TardFi bond and loan obligations are enforced in bankruptcy courts based on paper agreements between borrowers and lenders. Proceedings can take anywhere from 6 months to multiple years depending on the type of bankruptcy. After these months and years of waiting, you might get half your money back.
CNC is an emerging market with outsized growth forecast for the years ahead. When compared to global fixed income markets, today CNC is >80,000x smaller in market value than its TardFi equivalent ($125 trillion global credit markets vs $1.5 billion peak crypto credit)
Jump Trading has an amazing writeup about the need for onchain credit.
Table of Contents
Lending to onchain entities until now has always had drawbacks and tradeoffs. Onchain Lenders and Borrowers suffer from balancing between their risk and the cost of credit. Lenders mostly require Borrowers to post a lot of highly liquid assets as collateral in order to secure the debt. This represents a high opportunity cost of capital for Borrowers.
Also, because some onchain assets are very volatile, the loans using them as collateral can quickly become under-collateralized (i.e. the value of collateral falls) and subject to sudden automatic liquidation. This results in transaction costs and fees as collateral is liquidated which equates to an even higher cost of capital.
Options for cryptonative entities to raise capital are restricted because of these limitations and lack of key building blocks that make conventional unsecured or revenue-based credit market viable e.g. hedging rates.
Cryptonative entities have therefore mainly resorted to the relatively expensive method of selling native tokens (aka raising equity capital) or continuing to borrow at high opportunity costs from decentralized lending platforms that offer limited lending features.
CNC flips the script for onchain lending by allowing you to lend to businesses not their assets. Now Lenders can access transparent onchain financials to lend to mature cryptonative entities instead of to assets with capricious liquidity, unreliable price feeds, and volatile prices.
For growth stage DAOs with product market fit, on-chain revenue and strong communities, debt is a far superior capital efficient option to fund operations and acquisitions rather than selling tokens. The DeFi community is full of experienced participants who know this.