Do unsecured credit lending protocols work in the DeFi world?
The market's concerns about this type of agreement are still focused on the borrower's ability to repay. In other words, it depends on whether the project can get back the money it has lent out - so that users are more willing to put their money into financial management, and so that the project can be turned around and earn fees.
Only by solving the above problems can such projects truly achieve sustainable development.
The solution is nothing more than the following two directions:
So when we look at this type of project, we need to focus on these two points. I mentioned them in my August and September outlooks $MPL $CPOOL, and I will write another article about these two projects next week.
Today, let’s talk about @humafinance, a project in the same track that just announced 38 million in financing information, and take a look at its solutions and new expansions on the product side.
Huma Finance recently completed a $38 million financing, including $10 million in equity investment and $28 million in income-based RWA. The financing was led by Distributed Global, with participation from Hashkey Capital, Folius Ventures, Stellar Development Foundation, and TIBAS Ventures, the venture capital arm of Turkey's largest private bank İşbank.
Huma Finance plans to use the funding to deploy its PayFi product on the Solana and Stellar chains.
Next, I will share my own understanding of the project in as concise a manner as possible.
Huma Finance v1 is an unsecured lending platform for businesses and individuals that focuses on the borrower's future potential income - that is, when a borrower borrows money, it mainly examines the borrower's future income cash flow.
To quote the official Mirror: “Income and earnings are the most important factors in underwriting because they are highly predictive of repayment ability.”
In order to better promote vertical business, Huma completed a merger with Arf this year. Arf is a liquidity and settlement platform focusing on cross-border payments, supported by Circle (also in cooperation with Solana and Stellar).
After the merger, Huma will be responsible for users’ deposits, while Arf will be responsible for lending to the Web2 world and collecting interest, forming a sustainable cycle. (We can see on its official website that the default rate is 0% so far)
Huma v2 is an extension of v1. Based on lending, Huma hopes to expand its business into the PayFi field.
What is PayFi?
"PayFi" was proposed by Lily Liu, the president of the Solana Foundation (also an investor in Huma Finance). PayFi refers to a new financial market created around the time value of money. The time value of money means that a certain amount of money currently held has a higher value than the same amount of money obtained in the future. This is because these currencies have the possibility of generating income, such as lending to earn interest, or depositing in US bonds to earn returns, and completing transaction transfers in a shorter time and at a lower cost.
Therefore, PayFi is also one of the sub-tracks of RWA. (This is probably also the reason why Huma Finance will consider deploying on Solana)
However, although it is an RWA, PayFi is different from the RWA assets that are well known in the market and are constructed through U.S. Treasury bond yields. PayFi's income often comes from areas such as transaction fees, cross-border payments and loan interest. For example, Arf will use Web3 liquidity to provide cross-border transfer services (which can be understood as bridge funds) for licensed financial institutions at the T1 and T2 levels in developed countries.
After the US rate cut, with more adoption, PayFi will likely become the mainstream segment leading the development of RWA. Huma is one of the first projects to enter the PayFi market, and has also been favored by VC/core circles that support PayFi (just look at the investor lineup).
At the same time, in order to become a core infrastructure provider in the PayFi field, Huma launched PayFi Stack to meet the needs of the PayFi track in terms of transactions, currency, custody, financing, compliance and application building.
On the product side, v2 implements a more complex product structure, such as adding features such as Senior Tranche, Junior Tranche, and First Loss Cover, which we will mention below. In short, this upgrade is a subdivision of functions to meet the needs of users with different needs.
The Pool of Huma v2 is divided into Senior Pool and Junior Pool. Senior Pool has a fixed rate of return, while Junior Pool has a floating rate of return. The floating rate of return of Junior Pool depends on the real-time income of the project.
The price of Junior Pool’s higher floating rate of return is that it needs to bear corresponding losses when bad debts occur. From a product perspective, I personally think that in the future, projects may need to subsidize Junior Pool’s deposit users through tokens or other forms of incentives - after all, Junior Pool is the security module of the product.
After we put the money into Huma Finance Arf Pool, these assets will be stored by Arf in a bankruptcy-remote SPV (special purpose entity, a legal entity created for specific or temporary purposes, mainly for risk isolation).
Arf Financial GmbH, as a service provider, provides services to SPV. Lending, cross-border payments, transaction settlement and risk management are carried out here. After a transaction is completed, SPV will return the money and profits in the Pool to the chain. Arf Financial GmbH does not have control over the corresponding Pool funds.
Here I would like to add two points:
1. Circle’s official website has a very detailed introduction to Arf: https://www.circle.com/en/case-studies/arf
Arf does a good job in risk control, but this also leads to some problems, such as the need for KYC before depositing, which is not friendly to many DeFi players. Also, I personally think that Huma Finance's UI/UX still has room for improvement.
2. Collaboration with Scroll
Currently, we can deposit USDC into Huma on Scroll, achieving three benefits with one stone - 10% + financial management income + Huma points + Scroll points.
7/ Last
Why have I been looking at this type of financial products recently? Because after I cleared my position some time ago, most of my assets were U, so I wanted to find a good place to invest these U.
From my personal point of view, before the market shows a potential upward trend, I will not go all in or increase leverage, and will at most do some short-term swing operations.
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TG Channel (previous market views are shared here): https://t.me/SleepinRain
Reading list: https://docs.google.com/spreadsheets/d/1JSmI-YDvbdxXJ1Tud2sK8mly33zh1VmcH8i5wUgSYs0/edit?usp=sharing
High-quality CT information flow: https://x.com/i/lists/1795371206344130752
