Friktion launches institutional credit product for DeFi market

As the crypto credit markets continue to mature with the addition of more sophisticated institutional participants, this new product will allow Friktion to capitalize on this burgeoning market opportunity by leveraging its strong reputation and institutional-grade infrastructure.

Friktion Institutional Credit addresses a huge market gap in the crypto lending space

The total crypto lending market is still in its infancy stages, making up merely <0.005% of the global debt market which is valued at $123 trillion (as of June 2022). The current solutions offered by both centralized (”CeFi”) and decentralized (”DeFi”) platforms present inherent trade-offs.

CeFi lending platforms provided capital efficiency by underwriting undercollateralized loans to borrowers. However, risk management standards vary between platforms and may be less transparent, which in some cases have led to large write-offs and bankruptcy filings of these platforms.

On the other hand, DeFi lending protocols democratized access to credit to anyone with an Internet connection and a wallet address. The biggest trade off with major protocols today is that loans are overcollateralized, which is less appealing for institutional participants seeking capital efficiency.

In an environment where DeFi lending yields remain compressed under 3% APY (overcollateralized), there is growing market demand seeking higher risk-adjusted yields in the credit space (undercollateralized) with institutional-grade structures.

Ken Chia, Head of Friktion Institutional: “It is evident that there is a growing demand for institutional crypto credit. In order for the market to mature, however, there needs to be a more sophisticated solution that offers a robust yet transparent infrastructure for institutions – with an emphasis on lender seniority, clear credit underwriting standards and risk management.”

Introducing a new primitive for fixed rate, fixed term undercollateralized lending

Friktion Credit is a fixed rate, fixed term undercollateralized lending product that is being offered to institutional clients, with a robust risk management process in place. By structuring the lending product in this manner, Friktion will be creating DeFi’s first yield curve while allowing lenders to gain capital efficiency by cross-collateralizing positions with other Friktion yield strategies.

Key Features of Friktion Credit:

• Enhanced lender protection: loan pools are tranched and priced by the market (similar to Collateralized Loan Obligations, or CLOs, in traditional finance), with junior tranches receiving higher returns in return for providing default protection to senior lenders
• Borrower diversification: loan pools may consist of multiple borrowers to reduce counterparty risks
• Risk management: transparent and real-time risk reporting of borrowers’ on-exchange and on-chain positions
• Security: Institutional grade KYC/AML policies in partnership with Fireblocks, Copper, and Multisig (Snowflake) support from Day 1

Next for Friktion Institutional

Friktion expansion into the credit markets via undercollateralized lending will help to further unlock full-stack portfolio management within DeFi, complementing Friktion’s current suite of products to enable users to build portfolios that can generate returns across market cycles.

Uddhav Marwaha, CEO of Friktion: “Institutional crypto credit markets require clear price discovery, depth across maturities, and transparent risk management to scale. Friktion Institutional introduces a new asset class to Friktion and a powerful framework for undercollateralized lending to build DeFi’s first yield curve.”