Part 2: Maple.Finance SWOT

$1.5B in loans originated in just over 1 year since launch, that’s $9.9m in fees generated. They must be doing something right. Let’s start with strengths…

Strengths

First Mover Advantage. For every study claiming first movers have a clear advantage there is another that is equally convincing debunking all of the benefits. Where those arguments hold less weight though is within financial products where liquidity is a factor and even less within marketplaces when the power of network effects have already taken hold. The first to market receives the bulk of the media attention as the new thing, attracts the early supporters that become the cornerstone of a community and in decentralized finance that community looks like deep liquidity.

This is true within over-collateralized lending where AAVE ($7.3B TVL) and Compound ($3.9B TVL) leveraged their first mover advantage into brand recognition which led to continued growth and market share. There is no clearer place to see this than the leaderboard of lenders by TVL - where the next 20 protocols combined equal less than 50% of Compound’s total value locked. If Maple continues to press it’s first mover advantage in the under-collateralized space it could hope for a similar distribution of market share come the inevitable copy cats — Lenders becoming familiar with the process and Pool Delegates having a steady stream of incoming liquidity makes for a very sticky marketplace.

Strong Backers. In any industry it will always be within a start-ups fundraising goals to align themselves with the best investors and advisors they can attract. Beyond the injection of capital, the quality of advice steepens the learning curve in the early days and introductions help attract the first users.

Maple has found all of this in some of most well known names in crypto - including Framework Ventures (AUM of $1.4B), Stani Kulechov (founder of AAVE) and in Alameda Research - who also act as a Pool Delegate. These high profile investors add validation by putting their money where their mouth is or even beyond that in Alameda’s case by becoming an active user as a Pool Delegate. Having such a recognised name take on this important role provides comfort to new Lenders and also attracts new potential Pool Delegates — something that would have taken longer to achieve for a new product with no track record.

Pool Delegates play an integral part in Maple’s ecosystem and likely consume the most resources to source and onboard. When the investors in the protocol are also performing key roles it has them pot committed to the project and improves retention.

Leadership. Maple is set up as a DAO. Where DAO’s have gone wrong in the past has been to behave like a democracy from the outset for every decision, assuming collective intelligence to be the superior judgement. A better use case is often a DAO as a framework that enables good ideas to win and bad ideas to lose and also limiting the decisions it can decide on to just key areas. Maple does this by limiting governance participation to protocol level changes, fees and treasury while steering through the choppy operational waters of a start up in a more centralised fashion.

Launching in the middle of the pandemic lock downs to then growing a geographically distributed team requires a completely different management style than one with the team in the same location. It becomes a question of systems — the recruitment process, onboarding and training, internal communication, crisis management, accountability in every vertical of the core functions all need to be developed out fast.

KPIs used to be all the rage until OKRs took over as the preferred framework for modern companies to measure their performance and progress. Somewhere in between there is the idea of creating “servant leaders” of your team, which while less marketable in name does suit for a distributed team. Implemented well it removes micro managing and empowers team members to take extreme ownership and responsibility over their domain. Application of modern management practices like this keeps everyone aware of the mission and eyes on the North Star.

With some luck we’ve seen the worst of Covid lockdowns but it looks like WFH is here to stay — at least to some degree. Companies continue to receive push back from workers who are reluctant to return to the office after proving how effective they work under more flexible conditions. If the trend of companies playing hard ball continues we will see talent seek other styles of work environments where Maple is positioned well to pick that talent up.

External Communication. Over the last few years of up only where a financial system awash with cheap money had investors upping their risk tolerance by an order of magnitude and where due diligence was shaded by FOMO led to the loudest promise maker in the room reaping the rewards for little more than being optimistic. Stimmy checks chasing dopamine saw cults form around get-rich-overnight ideas - either in the form of the monogrammed moon boys of Dubai, Frog Nation or Lunatics which all contributed to the drowning out of the sensible ideas and pulling capital away from the more realistic.

The hangover of this cheap money is now looking like an incoming and protracted recession where frothy projects will get weeded out, due diligence trumps FOMO again and professionals with more sober external communication are the ones who get rewarded by being operationally competitive.

Perhaps Maple is the ice cold glass of water needed for the incoming downturn to be considered as a safe haven to park capital.

Transparency. Blockchain is all about transparency, start ups are all about secrets. Maple holds regular community calls, publishes revenue and expenditure statements and there are no pixelated cartoon characters on the websites Team section. This helps to build trust with investors in the $MPL token, Lenders providing liquidity and also other stakeholders.

Weaknesses

The Pareto Principle. Or the 80:20 rule where 80% of the consequences (revenue) come from 20% of the causes (Pool Delegates in Maple’s case). While not exact — currently 60% of the value is managed by 2 out of 7 Pool Delegates operating within Maple. In the early stages a concentration like this can be expected and isn’t necessary a bad thing either on the condition that the Pool Delegates don’t jump ship. It only becomes a problem when other options become available where Pool Delegates could leverage their weight into negotiating better terms under the threat of moving to a competitor. This is solved by growing fast as the higher fragmentation of Lenders and Pool Delegates provides more stability and revenue forecasting.

Bottle Necks. When a Lender wants to remove their capital they must give 10 days notice. At the end of this 10 day period a 48 hour window is provided where a Lender can action their redemption on a first come first serve basis.

The depegging of $UST and collapse of Luna sent shockwaves through the market— the uncertainty around what exposure different protocols had to $UST caused investors to panic. Luckily the Pool Delegates had limited exposure and Maple released announcements to provide assurances. Nonetheless the news created a spike in redemption requests from Lenders well beyond the mean.

Due to pools having an 85–95% capital utilisation rate (money being actively borrowed) meant Lenders found themselves completing the 10 day period only to find that during their 48 hour window there was no liquidity redeemable from their pool. This meant they had to repeat the process again and wait to obtain a new window.

With no material exposure to $UST meant the panic was unwarranted but served as a good fire drill for Maple and it’s Pool Delegates. While the bottle necks aren’t a systemic weakness it shows that managing the expectations of the Lenders will be important to keep them comfortable using the platform come the next crisis.

Opportunities

I can’t speak to the goals of Maple so to make this exercise simple let’s envisage a world where it wants to scale x1000. The question is what does that look like? What does it take to get there? And what can be done now to make that future more probable. The opportunities lie in the following categories:

• Crypto native
• Underserved borrowers
• Attracting lenders
• SaaS

Grants. In Q1 2022 Maple completed the acquihire of Avari, an under-collateralized lender on Solana, the terms of the deal are unknown outside it being a combination of tokens and cash. What is known though is with one deal Maple managed to remove a competitor, bring some big brains under its umbrella, increase its TAM and expedite the inevitable plan to go multi-chain. And while the deal was likely completed without a grant from The Solana Foundation there may be an opportunity to serve other L1s with low spend if funding came in the form of a grant — compounding Maples first mover advantage over different chains.

Fundraise. Within 12 months of being operational the protocol has moved way beyond proof of concept — it’s shown resilience in extreme market volatility, found the elusive product market fit and even turned a profit. Being clearly default alive provides a compelling case for raising big rounds in a market where VC’s are being much more conservative on how they allocate. Building a war chest now allows for more acquihires and acquisitions of other projects or companies that serve to support the main functions of Maple, particularly those who may have found themselves more susceptible to market conditions.

Changing of the old guard. If crypto and tradfi were two separate islands, those islands are slowly finding themselves closer together. The bridge that connects them will be regulation, and while some projects will resist and go underground others will embrace the change for the clarity it brings. This shift will open up huge opportunity where Maple is positioned well to act as translator.

In previous lives the founders and much of the team started their careers in tradfi. Obtaining qualifications and certifications that would be familiar to the person they might be negotiating with: MBA’s CFA’s and Series 7’s can be found all over the team. This allows for the same language to be spoken. Fast forward five years from now and Ethereum will be 12 years old which is enough time to go from intern to decision maker within a firm and where crypto can no longer be dismissed as a flash in the pan.

This future could look like neobanks offering high interest options to their clientele, insurance companies depositing their float, high street banks becoming Pool Delegates or financial advisors and wealth managers directing retail portfolios towards sustainable yield.

Grey or complex. Different industries have different sets of challenges and constraints when it comes to financing — unpredictable licensing requirements, new technologies, long tail income strategies can push the risk beyond the acceptable from the viewpoint of a generic lender.

A solid business with strong prospects may face a higher degree of friction obtaining financing not because it lacks credit worthiness but because the industry specific nuances get overlooked by a traditional lender who does not have applicable domain experience. Less now, but go back to 2014 and try to get a loan or even a bank account for anything Bitcoin related or see the easy examples in the gambling, adult entertainment or the legal cannabis industry.

Underserved businesses aren’t just the fun stuff though. There could be a future for Maple where we see specialists in particular industries that also have the overlapping skills needed to be a Pool Delegate. Specialists could create a pool and use their experience to make good judgements on high quality borrowers in esoteric ventures that range from pay-as-you-go car insurance to olive oil harvesting equipment rental. Just plug in a third party fiat on/off ramp.

Stay SaaSy. The biggest immediate opportunity is something we’ve already had a few clues for recently. It doesn’t come from acting as a marketplace connecting yield hunting Lenders to niche borrowers it comes from being used as a SaaS product for Pool Delegates.

Celsius became a Maple Pool Delegate in Feb 2022 but instead of creating a pool to attract outside Lenders it used it’s own capital to lend to its existing book of borrowers. Similar to Genesis, one of the biggest lending and trading firms in crypto, who created their own pool with a deposit of $75,000,000 in June. Both are foregoing the option to take on new Lenders but instead using Maple as a toolkit to take their existing operations on-chain — presumably because it’s more efficient. The 0.66% origination fee means Maple will gross $495,000 from the Genesis deal alone plus future fees as borrowers repay loans and funds are lent out again.

For some context, this is small fry for Genesis — this is a firm that in the final three months of 2022 Genesis originated $50B in loans. So it begs the question whether the $75M is just a dipping of the toe in the water with many more billions to follow.

More CeFi lenders becoming Pool Delegates is the obvious next step then but who will be the first Tradfi lender to take the position and open the floodgates to the potential hundreds of billions?

Just spitballing. Maple scaled to x1000 from it’s current position could look like a SaaS product used by CeFi and Tradfi lenders using their own capital and network of borrowers. It could also look like a very broad decentralized bond marketplace — hundreds of Pool Delegates running their own pools with a huge variety in the type of borrowers being serviced.

Specialist Pool Delegates spanning different industries applying their own thesis on different borrower profiles and pool composition. Where they could spend time building a reputation to attract incoming lenders who can then choose a pool to match their risk appetite. A very hands off approach from Maple that involves providing just the rails and perhaps limiting their input to just formulating a risk rating methodology for each pool.

Threats

Code Exploit. The ever so popular code exploit from the anonymous hacker is an omnipresent threat in DeFi and despite bug bounties and code audits Maple certainly can’t avoid being a target. The attack vector wouldn’t be easy though as funds in pools are lent out and imagine fairly segregated — potentially limiting the amount of damage that could be done.

Fines. BlockFi, a CeFi lender, was fined $100M by the SEC for offering its yield bearing lending product without registering it first with regulators. While the business models of BlockFi and Maple differ significantly it is unclear whether regulators could in the future deem any of the activities Maple performs in breach.

EU Regulation. As noted in Opportunities it looks like Maple will mostly benefit from any regulation as it will bring clarity for potential clients within tradfi. That said there is a lot of uncertainly around what regulation might look like. Maple will likely adapt but other threats may appear more indirectly — particularly around how stablecoins will be viewed.

Copy Cats. Imitation is the sincerest form of flattery but competition isn’t great for business. It is unlikely a vampire style attack, a la Uniswap and Sushiswap, would be as effective against Maple but it would not be surprising to see a derivative of this strategy.

Whether from an upstart starting from scratch or from players already in the lending space is unknown but with Maple working with large CeFi lenders and backed by large under-collateralised lenders perhaps they have already prepared accordingly for this.

Would have loved to end this section on a high note but the acronym doesn’t allow for it.

NEXT:

• Team
• Investors and Funding
• Competition
• Tokenomics and Revenue
• Timeline
• Growth Case Study
• Links and Resources