Bridging Onchain Debt Markets

Transcript

Everybody, my name is Benjamin and I'm the founder of Cap. Cap is a private credit platform backed by Franklin Templeton. And as Nelson mentioned, we last year won the uh Token 2049 startup competition. And so that was a year ago and thank you to the organizers for inviting us again this year. A lot has changed over the year. We've processed $6 billion in loan volume and we've reached 500 million in peak deposits, already lending to a lot of companies. So, very much uh ongoing.

Uh and now we sit in DeFi in a very pivotal time. Because for the last 6 years in DeFi, we've been building products and infrastructure to make finance more transparent and more verifiable. But nobody's really using these platforms at all. The real world is not using DeFi. And if we want DeFi to survive, we must connect these rails to uh real economic activity. And that's what we're going to talk about today, how Cap is focusing on the debt side of that, connecting on-chain debt markets to real financial activity in the real economy.

And the way we're going to do that is through private credit. So, private credit is um you know, when funds lend directly to companies and these uh debt transactions are not publicly traded. So, the opposite would be public debt where companies issue bonds that they can be traded in exchanges. Now, this uh model, while it has grown a lot since 2008, it does have some major drawbacks. The principal one being double pledging of collateral. That happens when borrowers pledge the same collateral to multiple lenders. And then when they default, the lenders are caught fighting over the same collateral. Just last year, JP Morgan, Apollo, and Blue Owl lost hundreds of millions of dollars because of

high-skill fraud at Tricolor and um First Brands. And so, this is definitely an opportunity, but it does have some drawbacks. So, let's look at how private credit works. So, obviously you have your investors that want to earn yield on the dollar, and so they deposit those dollars with funds. And now the funds get to allocate that capital to the economy via loans. Now, what's great about this model is that funds are deploying the capital into the real economy. Why is that important? Because in any time, there's always going to be an industry that's willing to borrow. There will always be a source of yield. It's not a circular The problem though, it is a black box,

and it relies a lot on trust. For example, fund managers tell their depositors what their yield is, and borrowers tell their lenders, you know, what the value of their collateral is. And finally, the whole system is gated by humans and legal agreements, which can be corrupted. So, taking a look at private credit, they achieve one part of what we have here in the grid, which is they are able to connect to the real world. That's a sustainable source of yield. However, in in terms of verifiability, they're still a black box. They're not verifiable at all, and like I mentioned earlier, that does lead to some issues.

So, how can we fix that? How can we improve private credit to make it a bit more verifiable? Well, luckily crypto has built some important plumbing, right, that already works and can improve private credit. For example, stablecoins are table stakes now. After the genius act, companies all around the world are using stablecoins and are very comfortable using stablecoins. Then you have RWAs. The RWA craze is continuing, and there will be a lot of assets on chain, like gold, like private credit, etc. And just by having these assets on chain, we completely remove the problem of double pledging.

But here's the problem. These uh this plumbing is great, but the real world is still not using them. The real world is still not borrowing from our from our lending markets. And so, a lot of uh what happens today is that the same whales, the same institutions that were borrowing from the blockchain uh 5 years ago are the same ones that were fighting over today. We have not added really any or any uh important number of uh borrowers on the blockchain, which is sort of built a new plumbing. And you can see it in the numbers.

Every time Bitcoin goes down, it takes DeFi with it. We're completely tied to Bitcoin for the activity inside of DeFi. And it shouldn't be like this. If DeFi really was the future of the finance uh financial system in the world, then it wouldn't matter what the price of Bitcoin was. Because in any market condition, we would be able to provide some value to the economy. But it's certainly not the case. And so, here's what we have today. DeFi is very verifiable. It's transparent. It works great, but nobody's using it. And um it's a very dangerous position to be in. Because the longer we're there, the long the more likely it is that DeFi will not play a part in the future of financial markets. And so, we have to find something that can um actually be

used in the real world. And that's what we're trying to do at Cap. Maintain the verifiability that we already have on the blockchain, but bring it to the real world so that it can also be sustainable. And so, here's a high level of what we do. We uh maintain all this um kind of verifiability, all this on-chain infrastructure, but now we're using it to lend to real-world companies. Why haven't these companies borrowed on chain so far? The reason is that their collaterals are not compatible with a blockchain. Blockchain lenders want liquid collaterals that are fungible and are easy to liquidate and price.

However, a lot of real-world companies don't really have that. Maybe they have tax credits that will last 8 months. Maybe they have collaterals that, because of regulation, uh cannot be tokenized. So, they simply just don't come to uh on-chain borrowing markets. And so, this is why we've introduced the underwriter. So, the underwriter is uh a company or a set of companies that have collaterals that are accepted, like Bitcoin, like ETH, etc. And what we task them with doing is assessing each one of our borrowers and then taking the risk of their off-chain collaterals.

And then placing their own collaterals on our platform on their behalf. Why do they do this? Because they want to earn yield on these collaterals that are not really uh what these uh borrowers want to borrow. We're talking about Bitcoin, ETH, whereas these borrowers want to borrow US dollars. So, to summarize, these underwriters are transforming the risk from off-chain collateral to liquid collateral in exchange for a fee. Now, if there's a default, this is where the collateral steps in. On-chain, we're able to liquidate this collateral that the underwriters placed, and then the underwriters can pursue the borrower for the off-chain collateral that they've already established beforehand.

Now, this is live. It's not just an idea. We are lending. We are sourcing deposits. So far, we've crossed $6 billion in volume and $500 million in deposits. Also, we have around 22 underwriters that come to our platform to underwrite credit and generate yield. And we have around 30 borrowers that are borrowing today, many of which have never borrowed from the blockchain before. I'll give you guys some examples so you can see how this works in practice. FlowTraders is a publicly traded company in the Netherlands. They do not borrow from the blockchain. They borrow from Citibank. But today, they're borrowing from us. They have a $30 million term loan from our platform.

So, when they came to us, they said they had a guarantee from their parent company, which is a fantastic collateral. They are a publicly traded and rated company. However, that's not very easy to tokenize and to borrow against because it's not liquid. I guarantee it's not very liquid. And so, we partnered with this other team called Lombard. Lombard is one of our underwriters, and they wanted yield on their Bitcoin. So, what they did was get into an agreement with Flow Traders to take the risk of that off-chain guarantee, and then they went to our platform and deposited Bitcoin on behalf of Flow Traders so that they could now borrow. And this is the first time they borrowed this size from the blockchain.

Like I said before, the other lenders are companies like Citibank. And it's not just financial services. If we want crypto and DeFi to have a place in the future, we have to expand outside of finance. So, I'm happy to announce that we've now financed our very first film. So, this film is film starred by Cole Sprouse. It's tier-one actors, and they came to our platform because they wanted a tax credit financing. Again, tax credits they redeem in a couple of months is not worth tokenizing. So, they came to a Bitcoin holder on our platform that wanted to earn yield on their on their Bitcoin, and now they're able to source stablecoins from our platform.

This film, the directors, they've never used stablecoins before. They've never borrowed from the blockchain, but now because of the system, they're able to come on chain. So, as you can see here, we are not the ones bringing on these borrowers on chains. We rely on underwriters to do diligence and underwrite each one of these loans and their collateral so they can come on chain and borrow from us. And the beauty of the system is that we can scale infinitely. Right? Because if we can have if everything's automated by code, we can onboard different underwriters with different sets of skills. Maybe some of them will focus on trading. Maybe some of them will focus on robotics. But, we don't have to have all that niche knowledge.

Why is that important? Because in the world of private credit, you win by having niche knowledge in smaller markets where you can get higher yield for not that much risk. Places where large lenders like the bulge bracket banks and the large private credit shops can't lend to. And so, by having an unlimited amount of underwriters, we can enter into an unlimited amount of niche marketplaces. And this is what we want DeFi to be. We want to connect to as many businesses as possible. Like I said before, crypto today doesn't look much different than crypto 5 years ago. We have not expanded the set of borrowers that are coming on chain. And so, this is how we think we can make that happen.

The opportunity is huge. There are $3 trillion of assets on chain that are not being put to use. They're being used for trading, speculation, and they could be connected to real-world markets so that we can provide sustainable long-term yield to the economy. So, this is what we're building. If you're interested in learning more, you can hit the QR code and and contact us or follow us on X. Thank you, guys.