Teller, a blockchain project for decentralized lending incubated by A16Z’s crypto startup school, today announced a $1 million seed raise led by Framework Ventures, followed by Parafi Capital and Maven11 Capital, to build the first-ever algorithmic credit risk protocol for decentralized finance (DeFi). The protocol will be the first to bridge the traditional finance and DeFi worlds by aggregating data from legacy credit scoring systems, like Equifax, into decentralized lending markets.
DeFi protocols have recently skyrocketed in popularity among crypto enthusiasts. To date, these applications have banked more than $2 billion worth of cryptocurrency, with roughly $1.2 billion attributed to overcollateralized lending applications. Applications like Aave, Compound, and MakerDAO, have used ‘yield farming,’ an interest rate growth hacking strategy, to popularize their overcollateralized systems. However, these systems have limited appeal to mainstream audiences seeking real-world loans and lending solutions.
“Yield farming is a way for many DeFi protocols to temporarily bootstrap liquidity and generate a convection of interest among crypto traders,” said Ryan Berkun, Teller co-founder. “But true success for DeFi requires entering mainstream appeal; we need to stop building in a vacuum. In a trustless environment, unsecured loans are tough to architect but necessary for the evolution of DeFi. Currently proposed solutions of ‘shared credit lines’ only dilute risk, rather than create true user accountability.”
“We need solutions that offer seamless transitions between traditional finance and Defi,” said Michael Anderson, co-founder of Framework Ventures. “Credit scores are the mainstay of the lending world, and interoperability with existing systems will allow us to iteratively phase-out centralized credit scoring rather than make a sudden and risky transition to trustless lending.”
The majority of DeFi applications and protocols today rely on collateralization ratios ranging from 150% to 300% to mitigate risk for the lending and borrowing of crypto assets. Developers use over-collateralized systems to protect crypto lenders from asset volatility and loan default in a space with no identity or credit checks.
The Teller Protocol will reduce lending risks for crypto holders and allow anyone to launch decentralized lending markets that can offer unsecured cryptocurrency loans. Ultimately, this will lower the barrier to entry for mainstream consumers, who in 2019 accounted for over $140 billion worth of personal loans in the U.S. alone.
Teller will act as a middleware protocol for the DeFi industry, enabling the development of lending markets that interoperate with centralized financial data providers via a unique cloud-based infrastructure composed of a distributed node network. By leveraging this network, where selected nodes perform cloud operations, Teller will seamlessly aggregate an individual’s existing financial information and utilize the protocol’s open-sourced, credit risk algorithms to assess their creditworthiness and offer unique loan terms.
Teller Finance Components
Teller Protocol – a protocol that will let developers create unsecured lending markets on the Ethereum blockchain that can interoperate with centralized data providers and credit bureaus to calculate consumer credit risk for loans.
Teller Cloud – a distributed cloud network of independent protocol nodes. Each node can connect with other major cloud providers (e.g. Amazon Web Services or Google Cloud Platform) and offer both database and lambda support.
Credit Risk Algorithms
Teller Protocol will provide developers tools to propose and deploy credit risk algorithms (CRAs) that score borrowers based on their default likelihood.
Developers will be able to use CRAs to help borrowers reduce the amount of collateral they require for a loan. Or, they will be able to offer borrowers an option to immediately gain better lending terms and reduce or eliminate collateral requirements through voluntary credit history and other know-your-customer (KYC) submissions.
Autonomous Teller Markets
Teller Protocol will hold all lent capital in ethereum smart contracts called Autonomous Teller Markets (ATMs). Liquidity providers (LP) will supply lending capital to Teller’s ATMs in exchange for a percentage of loan interest payments made by borrowers.
LPs will be able to receive an algorithmic interest-accumulating token called a t-token as a receipt for their supplied liquidity to Teller ATMs.
All assets within a Teller ATM will have an underlying supply interest rate (APR). T-tokens will represent accrual of interest, translating into redeemable compound interest over time.
Teller is on a mission to disrupt the $215 trillion debt market. In DeFi, the decentralized loan market has grown tremendously. Nearly $2 billion worth of funds on Ethereum is currently locked in DeFi smart contracts. However, the current market is limited to overcollateralized loans. Teller is introducing the first undercollateralized DeFi lending protocol that can offer true credit risk analysis.