InfiniFi - Onchain Fractional Reserve Banking: What You Need to Know
$3M Raise, Onchain Fractional Reserve Banking, & More
The current hot topic in crypto right now is the rampant fraud and obfuscation used to extract funds from retail and other investors. While this is a blemish on crypto’s reputation, the industry initially gained traction for its efforts to provide an alternative to the largest obfuscation in the global financial system; fractional reserve banking. Private sector banks and public sector organizations have collectively created a system where dollars are effectively rehypothecated over and over again.
However, compared to crypto, these financial staples are perhaps even less transparent. It’s unclear exactly what is done with a user’s funds when they are deposited into a bank or credit union, and there are often fees associated with the privilege of custodying money with a financial institution.
InfiniFi is looking to iterate upon the traditional banking system as well as what is currently broadly available in DeFi. The protocol aims to be the first onchain fractional reserve system, looking to build a product better than what most banks can offer with the possibilities enabled by blockchain and smart contracts. In today’s edition, we’ll discuss what InfiniFi has to offer, recent updates, and what users can expect from the protocol going forward…
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Background on InfiniFi
Stablecoins have been one of the hit successes of crypto, as evidenced by Tether’s immense profitability and the recognition of stablecoins from global leaders. However, a lot of the consumer-facing activity involving stablecoins today is focused more on payments and remittances. The concept of building a stablecoin-based application focused on deposit yield is more untapped, with these efforts being mostly targeted toward crypto natives.
InfiniFi’s standout offering is a fractional reserve token staking system, taking what is currently available in DeFi when it comes to earning a yield on dollars and unifying these offerings under one interface. Effectively, the protocol can provide what banks have traditionally been responsible for, minus all the fees. The fees are given back to the users; those who make deposits on InfiniFi will earn a yield.
Additionally, where despotis go to earn yield is made much more transparent; users can actually specify what DeFi protocols they want deposits allocated to, in accordance with their own risk tolerance. Naturally, users can earn more by locking up their deposits. Whether they choose to do so is up to them, deposits can remain liquid by default, though earning a lower rate.
DeFi protocols like Ethena and Pendle have emerged since the last cycle, making these kinds of options for earning yield on duration-based assets viable when they previously weren’t. The amount of options in DeFi today has significantly expanded the ability for DeFi deposit systems to outperform TradFi banks while maintaining flexibility around the availability of funds.
In a normal bank account, users can access CDs to earn more interest on their deposited funds that they don’t plan to use for some time. The same can now be done in DeFi, though with much greater returns. InfiniFi simplifies these offerings and puts them in a unified interface for users, abstracting the DeFi component and just using the core protocols behind this yield in the background.
InfiniFi’s offerings are pretty simple - users deposit stablecoins (including $USDT, $USDC, $FRAX & others) which can automatically be staked for a 13% APY - these funds can be withdrawn at any time. If users want to earn more yield, they can specify a lockup period they are comfortable with. Then, the protocol will handle the rest, delegating funds to Aave, Pendle, or Ethena based on user preferences.
This is what users see; in the background, deposited funds are used to mint iUSD. By default, the deposited funds will be used to earn yield on liquid money markets such as Aave. When users opt to lock up their capital in exchange for a higher yield, an ERC20 token is minted as a receipt token for this specific duration deposit. The protocol can then match deposits and liabilities based on duration preferences.
The key attribute to note here is that a portion of liquid deposits is also allocated to locked yields. This is what enables liquid depositors to earn a higher yield than they otherwise would, made possibly by pooling funds with other depositors, the fractional reserve aspect. Still, liquid depositors can immediately redeem their iUSD for their deposited collateral at any time, with one caveat.
Just as with traditional banking, not all users can withdraw their liquid funds at the same time. Normal operation of the protocol is dependent on the idea that only a few users at any given time will opt to completely withdraw their liquid staked funds. To counter this, the protocol will create a stability pool, used to buy iUSD during times when many users choose to withdraw liquid funds all at the same time.
This will ideally create a buffer against negative iUSD price impact, which would likely occur if users were unable to redeem their iUSD for their underlying collateral. This is an important consideration, as crypto is often subject to activity from depositors that would be unusual in real-world banks and financial institutions.
Overall, InfiniFi is a young project, only having just exited stealth mode last week. This coincided with the protocol’s announcement of a $3M raise, led by Electric Capital, with additional participation from New Form Capital, Baboon VC, Kraynos Capital, and some notable angel investors.
The project has a simple but potentially strong premise; use the existing opportunities in DeFi today to create a higher-yielding, more efficient form of fractional reserve banking onchain. Right now, the project is available via waitlist - you can sign up using the link below, and also share a referral link of your own to be rewarded for getting involved early.
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