Crypto, Compliance, and Credit • Letter #96

Hedgehog Admin -

Hi, Colton Dillion here, cofounder of Hedgehog, the crypto robo-adviser that makes it easy to keep your portfolio diversified while managing it all in one place.

Hedgehog is a startup, so when I go to sleep at 3am I take off several hats: a CTO beanie, a Compliance Officer trilby, the CFO visor, and our Registered Investment Adviser Representative (or registered rep) sweatband. I know that’s a lot of fashion for one guy but to put it simply, I'm responsible for all the infrastructure at Hedgehog: technical, regulatory, and financial.

On the topic of regulation, check out our discussion last week.

Hedgehog is inspired by modern portfolio theory, the investment philosophy behind finance game-changers like the index fund and the collateralized debt obligation. I know that seems like a mixed history, but synthetic fertilizers too have been used for deeds both gustatory and distasteful. We believe that crypto is no different, with a checkered history that unites the best of today's innovations with the most critical of yesterday's hard-won wisdom. Here at Hedgehog we are focused on that overlap.

Four Cs of Credit

The Four Cs of Credit are Character, Capacity, Capital and Collateral. But wait, sometimes it’s Five Cs — according to Investopedia, “The five Cs of credit are character, capacity, capital, collateral, and conditions.” And sometimes Character is swapped out for Credit History but that’s really just too straightforward (you see, finance is often about making things seem unfriendly so people will continue to pay you 2 and 20). The principles are similar regardless.

Here is what each C means, whichever ones you choose:

  • Character is an assessment of whether you can be trusted to make payments on time. Presumably the bank consults Santa to confirm that you’re not on the Naughty List.
  • Credit History is whether you have a demonstrated track record of making payments on time.
  • Capacity is your ability to repay the debt, based on factors like your income and existing financial commitments.
  • Capital is what you own that can be used to repay the debt, AKA how much money (or sufficiently liquid, valuable assets) you have on hand.
  • Collateral is what you’re willing to pledge as a guarantee of repayment. Liquidity matters here too.
  • Conditions refers to the overall context of the loan, from specific details like the down payment, interest rate, and intended purpose, to macro concerns like the current economic climate or trends within a given industry.

Lenders assess all of these Cs to decide whether you’re a good risk or a bad one. Obviously they want to get their money back, plus a little extra. (Or a lot extra…) But there are many types of loans, and how much each C matters is different for a mortgage versus, say, a crypto flash loan.

The point of the Four — or Five — Cs is to establish a consistent framework for evaluating opportunities to extend credit. The more you know.

These basics are especially critical when you’re evaluating peer-to-peer lending protocols like AAVE, YFI, CAKE, OHM, or others. Are the smart contracts involved taking into account these 5 C’s? Might be a good idea to check it out before you grab some tokens. We’re certainly doing our research for the upcoming Yield Farming stack available in Hedgehog v2.

Quick hits:

NFT-collateralized lending: Decrypt reports all the details on this new 1 billion dollar industry. The latest data powered by Dune Analytics highlights how NFTs like BAYC or Doodles are being used to unlock value without selling your JPEGs. If you want to know more about Dune Analytics you can read our coverage of them from Jacek and Jon.

DeFi exploit leads to 2 Million lost, 0VIX is the latest protocol hit by a Flash-Loan exploit. The funds were bridged from Polygon to Ethereum in the form of USDC before being swapped for ETH.

Consensus 2023 highlight reel catches all the excitement. This annual event was presented by CoinDesk in Austin, TX from April 26th to 28th. The gathering brings together all of the latest in crypto, blockchain and metaverse in the longest running Web3 event. If you happened to be there, you may just have run into myself and Colin.

Giveaway

Answer the question of the week for a chance to win three of these prizes:

  • insulated stainless steel water bottle with Hedgehog logo
  • official Hedgehog team baseball cap
  • snazzy Hedgehog socks
  • cozy Hedgehog hoodie
  • comfy Hedgehog baseball tee

What is your proudest crypto moment? Reply to this email with your opinion and you'll be entered in the giveaway. I’m proud that I was an early enough adopter of Stellar that they gifted me 5000 lumens to play with.

Keep hedging,
Colton

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