While stablecoins and US Treasury RWAs have received a lot of attention, there is much less focus on Euro-denominated DeFi products. This is interesting, as a large cohort of crypto market participants are based in EU, especially as the US government has taken more action against both CeFi, and even DeFi providers.
In today’s edition, we’ll be briefing you on Florence Finance, a project bringing real-world yield to onchain Euro stablecoins.
Stay alert, stay informed ⬇
Crypto Market Update:
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News
- FTX Granted Permission to Sell $744M in Crypto Assets: A Delaware court allows FTX debtors to start selling Grayscale and Bitwise shares worth $744 million.
- Binance to End BUSD Support in December: Binance announces the discontinuation of its BUSD stablecoin from December 15, with automatic conversion to FDUSD after December 31.
- AntPool to Refund Record $3M Bitcoin Transaction Fee: Bitcoin mining pool AntPool agrees to refund a massive $3 million fee, pending verification of the transaction's owner.
- Record Crypto Losses in November: Over $343 million lost to crypto hacks and fraud in November, marking the highest monthly loss in 2023, with centralized finance platforms being the primary targets.
Project Updates
- KyberSwap Hacker Demands Total Control: In a surprising turn, the hacker behind the $47 million KyberSwap theft demands full company control, promising a complete overhaul of the decentralized exchange.
- IOTA Token Surges 43% with Abu Dhabi Foundation Launch: IOTA's native token soared by 43% following the announcement of its new development foundation in Abu Dhabi, backed by $100 million in tokens.
- Celo Developer Sets Timeline for Layer-2 Network Selection: Celo's primary developer outlines a mid-January deadline for choosing a technology provider for its new Ethereum-based layer-2 network.
- Hyperliquid Launches NFTI Index: Hyperliquid introduces NFTI, an index for blue-chip NFT collections, offering a simplified approach to trading in the NFT market.
Background & Origin of Florence Finance
Florence Finance is a protocol that connects DeFi to real-world lending.
The project’s Founder, Chiel Ruiter, has a decade of experience in TradFi.
He became interested in blockchain and crypto during the ICO boom, and started exploring the idea of creating a safe haven asset in crypto that offers a positive yield.
This led to the creation of Florence Finance, a tokenized version of a private lending debt fund.
How Florence Finance Works
Users can choose between the Caple or Junior vaults.
Caple and Junior vaults differ in their risk/reward profiles, yielding 7.25% and 9.50%, respectively.
Caple vaults see direct exposure to loans, while Junior vaults are indirectly exposed by using smaller, risker SME loans.
The Junior vault has an equity and interest cushion to compensate for the increased risk.
Naturally, Junior vaults can handle much less deposits than the Caple vault.
Users deposit FLR, the project’s asset which mirrors the price of the Euro.
FLR reflects the current EUR - USD exchange rate; it can be acquired on Camelot DEX
Funds are then channeled to lenders, with interest flowing back to depositors as onchain yield/rewards.
Importance of Credit Markets on Blockchain
While stablecoins have gained popularity for swapping into dollars, there is still limited liquidity for Euro-based stablecoins.
The use case for stablecoins is primarily settlement on exchanges and growing usage in the global south.
Credit markets onchain provide opportunities for European-based individuals to generate yield in Euros without being exposed to currency fluctuations.
Building out RWAs on blockchain brings different aspects and product market fits.
Florence facilitates financial interaction between DeFi and TradFi
Euro-Denominated Yield Generating Asset
Holding dollars can be risky due to currency fluctuations, whereas Euros offer more stability for European-based individuals.
There shouldn't be a significant difference in yield between Euros and other currencies.
Florence Finance aims to provide a Euro-denominated saving or yield-generating asset by leveraging credit sectors.
The Importance of Stable Places for Crypto
Many people in the crypto market tend to follow a barbell strategy, focusing on extreme risk or stablecoins.
Products that offer a middle ground by reducing debt risk have a harder time gaining traction.
Having a stable place to park funds is beneficial for crypto investors.
Private debt markets are being built for a world where crypto adoption has progressed beyond high-risk assets and towards more sensible financial behavior.
Challenges in the US Market
Selling equity tokens of houses was easier outside of the United States due to regulatory restrictions.
European customers showed interest in accessing American debt markets and receiving yield payments as stablecoins.
It is challenging to operate such projects within the US due to strict regulations.
Chiel says that Europe offers a sandbox environment that allows operating without extensive prospectus obligations if dealing with sophisticated investors (over €100,000).
Lending only to businesses also avoids banking regulations in Europe.
Compliance with KYC and AML requirements is still necessary when operating through normal banking rails.
Market Fit: Euro Stablecoins
Euro-backed stablecoins primarily target individuals in Europe or with European citizenship.
Despite expectations, Euro-stablecoins have struggled to gain significant traction compared to dollar stablecoins.
Major issuers like EURT and EURC have not gained attention, leaving smaller upstarts trying to capture market share.
Liquidity and trading volume primarily exists in dollar pairs, leading people to prefer dollar stablecoins.
Florence Finance stats
Stablecoins in the US
Stablecoins in the US have the freedom to run their own treasury and decide where to invest their funds.
They can choose to invest in short-term treasuries, longer-term treasuries, or even corporate papers.
Examples include Paxos, which is regulated by NDFS but still has more flexibility compared to European stablecoins.
Stablecoins in Europe under Mica
Chiel says that in Europe, stablecoin issuers are obligated to put all of their money with the Central Bank at an overnight rate.
This limits their ability to generate positive yields on their treasury.
He adds that Euro stablecoins faced challenges during a period when they couldn't generate enough yield.
The inability to go further out on either duration or risk curve hinders Euro stablecoin issuers from generating positive yields.
The current model of keeping all yield on underlying treasuries is not sustainable in the long term.
$agEUR and Tokenization
Chiel says that a private debt fund is tokenized in euro denomination.
The tokens accrue the underlying yield automatically, creating an equivalent of a euro-stablecoin with yield.
Florence Finance avoids using the term ‘stablecoin’ to avoid potential regulatory issues and the need to park money at the ECB.
Instead, they consider it as a proxy for funding small and medium-sized enterprises (SMEs).
Chiel says that Arbitrum partnered with Angle Protocol as Euros are not native to Arbitrum.
When the yield comes in, euros are exchanged for crypto euros and deposited into the treasury.
Target Audience and Future Development
Florence was initially built by crypto natives with liquidity on crypto who wanted a secure place to park their money.
It is acknowledged that currently, within the crypto-native community, liquidity is hard to come by.
The goal is to reach a point where Florence gains credibility and legitimacy through increased liquidity.
Once Florence achieves a certain level of size and liquidity (around 50 to 100m$), it can stand on its own feet.
Chiel expresses a desire for non-crypto people to be able to invest in Florence easily but acknowledges challenges related to on-chain operations and regulations.
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