One of the biggest questions in crypto is how do you enable undercollateralized lending?

In normal TradFi markets, its possible to deposit some collateral, like cash, and then borrow out another asset with leverage, for instance Bitcoin. What makes this loan possible is that the borrower's identity is know, their accounts are KYC'd and if a margin call needs to be made, the lender knows who to call. If the trade is liquidated, the lender can pursue the loan value in court and the borrower would be liable to return the funds.

Three Arrows Capital, FTX, Genesis, all fall into this category of lenders who borrowed billions, invested over-leveraged into Widowmaker trades and eventually blew up. Now the liquidators for are digging through the rubble of their companies for funds to be returned to creditors.

A few protocols have tried threading the needle with undercollateralized lending on-chain with CeFi/DeFi hybrids, but also met similar fates in 2022.

Maple Finance was the first, allowing on-chain degens to lend money to different market makers and other big funds. They almost blew up in 2022 when FTX/3AC collapsed. While they didn't have direct exposure to either of those entities, Orthogonal Trading did and eventually defaulted on $36m in loans. Maple has since switched to an RWA focus and their TVL has grown to $75m this year.

Other CeFi/crypto platforms like Clearpool, TrueFi, Atlendis and others also fell victim to the fallout as well. The line-of-credit they all extend to their counterparties had mispriced and mismanaged risk metrics that put hundreds of millions of dollars of lender funds in a bad spot once the borrowers blew up.

In DeFi this type of structure impossible.

All a protocol "sees" from their users are psuedo-anonymized addresses firing off arbitrary call data to contracts. The lender and borrower's identities are shrouded, and if SHTF a protocol can only fire off semi-threatening message-inscribed transactions.

To lend undercollateralized in DeFi, certain security measures and withdrawal limits must be set to prevent absconding of lender funds. Gearbox was the first to build out this model, founded by IvanGBI, that allows for undercollateralized lending. They sequester user funds within "credit accounts" which is a quasi-escrow account that limits borrower interactions to a specific set of approved contracts.

Sentiment is another protocol where users "mint" accounts separate from their own wallets that hold both the deposited collateral and borrowed assets. These accounts are limited in what DeFi contracts they can interact with and all interactions must be pre-approved by the protocol.

In each case, undercollateralized lending is possible, but only within a walled garden of approved actions and assets.

While both projects have seen some success, their long term viability has been heavily tied to DeFi yields continuing to remain high and demand for leveraged yield farming.

Gearbox TVL dried up over the past year as leveraged yield farming demand slowed due to Curve's price dropping and general dissatisfaction with ETH based farming. This is why Gearbox pivoted late last year to add a perpetuals platform on top of their lending facility to capture higher transaction fees and volume.

Blueberry Protocol

Blueberry on first glance is "American Gearbox." It's a money market protocol that allows for undercollateralized lending to allow investors to lever up their farming or trading positions. We made the reference to Gearbox, as Blueberry retains custody of borrower and lender assets within their own platform and does not allow them to be withdrawn.

So if you want to go leverage farm Curve with 5x leverage, you would deposit one asset, and then borrow more of another and the entire process would be handled by the execution system built by Blueberry. Assets can only be deposited into pre-approved strategies, limiting risk to the borrowers.

Instead of "credit accounts," Blueberry uses an NFT system like Sentiment to mint user accounts. Blueberry users then collateralize these NFTs and are able to make pre-approved trades within DeFi.

Inside of these NFT's Blueberry will allow its users up to 50x leverage for the following strategies:

• Yield farming (Curve, Convex, Balancer, etc.)
• Yield arbitrage
• Money market lending
• Spot trading (via Paraswap)
• Concentrated liquidity strategies

At first glance, Blueberry should face the same issues as their competitors, a cyclicality of deposits and usage based on farming sentiment. But that's not the case. Blueberry is being launched in tandem with their sister protocol Bloom, which brings treasury rates on-chain for use in their money market.

"In Bloom"

Bloom is a new RWA platform that enables commercial loans to investment companies that purchase T-Bills and other short term assets. Bloom is doing this to address two major challenges.

First, it provides access to higher yields from U.S. Treasury Bills, this yield is more predictable than DeFi money market yields, and is highly competitive, offering rates between 4-5% currently.

Second, Bloom allows for users to get access to near T-Bill yields without KYC or other jurisdictional legal restrictions. As all of Blooms loans are between private and commercial entities as a business loan, the transaction is not considered a security. Users who lend do not get the "risk free rate" offered by the T-Bills the commercial company purchases. Instead, there is a spread between what users receive and what the current T-Bill rate is.

Blooms RWA assets are called TBYs. they are minted twice per month in a 3-day window. Each TBY has a 6 month term and the token can be redeemed for USDC after the redemption date. TBY's are composable, fully on-chain and transferable. TBY's are not tokenized T-Bills, but instead representations of the loan to the commercial entity who purchases the short term debt security.

The treasuries are held by "Backed," a bankruptcy remote RWA issuer. So if Backed ever goes under, the securities they hold will not be affected as they are held in a segregated bank account to mitigate counterparty risk.

TBY's of different expirations are wrappable into stTBY, a quasi-LSD for stablecoins. stTBY continuously redeems and then re-lends the underlying TBY's to provide long-term yield.

Bloom + Blueberry

Armed with RWA's Blueberry is able to offer leveraged "farming" of TBYs through integration with its money market. Users will be able to gain access to up to 20x leverage through the protocol, potentially increasing returns several times.

Blueberry's Launch Event

Blueberry is launching next week on Tuesday January 23, 2024. From their Medium:

During the first 60 days following protocol launch, just over 5% of the $BLB supply will be distributed to lenders as $bdBLB. Lenders can provide liquidity in exchange for bTokens that receive higher $bdBLB emissions for those first two months but are subject to a 1% withdrawal fee. TGE will take place at the end of this 60-day period, at which point the one-year vest on the accrued $bdBLB during the lockdrop will begin. 

You can earn Blueberry by depositing any of the collateral assets into their platform and then also using their vaults to take leverage on your collateral.

Lend

The easiest way to earn BLB would be to deposit any of the collateral assets used by Blueberry into their lending pools. When you deposit, for example, USDC, you will receive an ibUSDC interest bearing token. These tokens are similar to Compound or Aave's c-tokens and a-tokens. They accrue interest over time and you can withdrawal your collateral so long as there is enough funds un-utilized by the protocol to facilitate it.

Vaults/Earn

Another way to earn BLB will be through their leveraged vaults. They plan to have around 25 different strategies available at launch for Curve, Convex, Aura, Balancer, and Uniswap V3.

Additionally, Blueberry will have a spot trading option on the Earn page that will give BLB as a reward.

BLB token

Blueberry is introducing the BLB token to play a crucial role in decentralizing decision-making processes within the Blueberry ecosystem, focusing on new integrations, token rewards, and the future direction of Blueberry and its DAO. To fairly and gradually distribute BLB tokens, a lockdrop mechanism will be used, similar to Prisma Finance.

Token Distribution and Vesting:

• Contributors, investors, and advisors are subject to a minimum 2-year vesting schedule with a 1-year cliff. For the team and angels, who hold 27.5% of all tokens, the vesting period extends to 3 years.
• Community incentives are distributed in bdBLB, a vesting rewards token.

bdBLB Token:

• Emissions of BLB tokens are distributed as bdBLB to lenders every two weeks.
• bdBLB can be redeemed for BLB on a 1:1 basis after a one-year unlock period.
• Early unlocking incurs penalties, starting at 50% and decreasing linearly over a year. Penalties are split between an acceleration fee (paid in USDC and used for liquidity) and a redistribution penalty (reducing the BLB received by the user).
  The penalty for unlocking BLB offers users an interesting choice. Take the money now and lose a portion of the funds, or sit and wait until the timelock is up for full redemption. Lockdrops help align long term holders and supporters of the platform against mercenary farmers who immediately sell and take value away from the platform.

Conclusion

The landscape of undercollateralized lending in the crypto world has been marked by both innovation and challenges.

Despite the setbacks faced by various platforms in 2022/3, new protocols Blueberry show its resilience and adaptability, exploring novel approaches to mitigate risks associated with pseudonymous borrowing and lending.

Blueberry stands out with its unique NFT-based user account system and the integration of real-world assets (RWAs) through its sister protocol Bloom. By offering leveraged opportunities on Treasury Bill yields and other strategies, Blueberry aims to bring stability and higher returns to its users.

We're excited to see the roll out of Blueberry and the continued growth of Bloom.