In June last year, Singapore-based decentralised finance (DeFi) platform Cake DeFi started preparing for a public listing. The goal was to gain more customer and investor confidence within the traditional finance space, as the company expands its DeFi services and applications platform.

The company’s Public Company Accounting Oversight Board (PCAOB) audit took about six months. By the end of the year, rumours had spread that the company was planning to list. Interested parties such as special purpose acquisition companies (spacs) then started approaching Cake co-founders Dr Julian Hosp and U-Zyn Chua to suggest mergers and eventual public listing.

In an interview with The Edge Singapore, Hosp recalls how he and Chua whittled down the list of potential suitors to just one after a few rounds of meetings and negotiations. A term sheet valuing the deal at US$1.5 billion ($2.08 billion) was even signed.

However, at the end of March, two months after everything was signed and agreed on, Hosp and Chua got “really nervous” as they came to the conclusion that the current market sentiment is not the right one for a listing.

“We didn’t need the money, we are cashflow positive. We were only doing it for branding and trust. Even if we are a very good company, if the market tanks, we will tank as well — it is going to be a stamp on our company for the rest of its life. After thorough discussions, we decided to step out of the merger, which involved us paying a penalty,” Hosp says.

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Amid the continuing crypto winter, coupled with negative news within the space such as the Terra Luna collapse, Hosp says there is still no pressure for the company to pursue its IPO plans, although it is still in its pipeline. “At the moment, we are open to doing a full IPO or via spacs. It really just comes down to the market sentiment. We could be doing it in the next three months or a year, nothing is solid at this point,” he says.

While the overall crypto industry suffered through the brutal carnage, several listed ones got to put up with the additional ignominy of seeing their share prices crater very publicly. Coinbase, the first major cryptocurrency start-up to go public on a US stock market, for example, is trading almost 80% lower YTD, while Microstrategy, which holds a sizeable amount of bitcoin, is down 70% YTD as at June 21.

Hosp says for Cake, its eventual public listing date and stock exchange of choice would depend on several factors. For instance, the potential policy changes by regulators following the Terra Luna collapse as well as DeFi company Celsius Network’s funding issues, both of which heavily impacted its customer base.

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Cake was founded in 2019 by Hosp and Chua when the duo, who were former colleagues, reconnected and decided to start a venture together. At the time, Hosp was mulling over going back to medicine, but ultimately decided to explore DeFi following increasing interest in the space.

“U-Zyn told me people have been trading so much in crypto that many have lost significant amounts of money and are now looking to get stable returns via interest-yielding products. We started by offering staking services, as it is a very easy one to establish from a technical and regulatory point of view,” says Hosp.

He adds that the duo had to make a fundamental decision during its early days on whether it should be a principal (provider of goods) or an agent (arranger of the goods and services to be provided). The company chose the agent model, which proves to be a good decision following the news regarding Celsius Network’s issues, says Hosp.

“Principal is somewhat like a black box — the company sets up and produces its own thing, while those outside have no clue what the company is doing,” he says. “As long as the company produces the expected results, the customers feel that everything is alright. But when issues arise, there is a lot of confusion among the customers.”

Hosp adds: “That’s why we chose the agent model from the beginning. In theory, what we provide to the customers, they can do on their own; but 95% of them won’t. They want hand holding, support and convenience. We provide them great customer experience and only charge them a cut on their rewards. Moving forward, we think more companies are going the same route that we chose.”

Today, Cake’s products and services include crypto staking, lending, liquidity mining and borrowing. At the end of 1Q this year, Cake claims to have grown to almost a million customers and about US$1 billion in customer assets — although the figure has declined because of the crash. The company also announced that it has paid out over US$317 million in rewards as at 1QFY2022.

In Singapore, Cake holds an exemption under the Payment Services (Exemption for Specified Period) Regulations 2019 granted by the Monetary Authority of Singapore. The company recently received a cryptocurrency licence from the Registrar of Legal Entities of Lithuania, authorising the platform to conduct services for exchanging cryptocurrency as well as providing and administering cryptocurrency custodial wallets in the country.

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Hosp says Cake attracts customers who are focused on making long-term investments that are not swayed by market movements. They believe the market is going to recover over the next few years, comparing it with the previous dips the market experienced.

“This represents about 80% of our customers. The remaining 20%, especially the ones that are new in the crypto space, may be a bit nervous. They look at the dollar amount, see it going down by 50% over the past six months and wonder how sustainable their investments are. To help them, we have been doing a lot of educational blog-posts and making sure that they understand how DeFi works and the yield advantages — they would have lost a lot more if they didn’t receive the yield,” says Hosp.

Cake is still seeing constant increase in customer base and customer payout even in the bear market, says Hosp. At its peak, the company saw 20% customer growth per week — this has slowed to 2%. “Of course it is now way less, but we are still growing week over week. We think our customer base is very hooked on the products and that there’s very little incentive for them to completely quit. The number of customers that choose to withdraw everything is very small,” says Hosp.

Sensing the longer-term market potential, Cake has stuck more fingers in various other pieces of the pie. In March, Cake launched Cake DeFi Ventures (CDV), its venture capital arm, with US$100 million in earmarked capital. The venture fund looks to invest in tech start-ups in Web 3.0, gaming and fintech especially within the metaverse, non-fungible token (NFT), blockchain and esports industries that will bring synergistic value to its core business.

CDV’s first investment is in a tech, media and events start-up, The Edge Of Company, which has been building the community and ecosystem for the NFT and Web 3.0 space. Hosp says CDV is “close” to announcing its second investment in a DeFi project, but the firm has taken a slower approach due to the unfavourable market landscape, which echoes the overall venture capital landscape, says Hosp.

On the other hand, the private equity landscape is quite active, says Hosp. In fact, a few have spoken to Cake following the announcement that it had undergone a PCAOB audit and are interested in owning some of the company’s shares, taking Hosp by surprise.

“Obviously this has got a lot to do with our intention of wanting to go public under the right conditions. These funds know that we have three to four years of runway ahead of us and have checked with us whether our statements on our financials are factually true,” says Hosp. “There are three funds right now that are aggressively looking into investing in our company and we are currently negotiating a deal.”

Hosp adds: “Six months ago, we were worth US$3 billion. I know that we are not worth that now, but I also don’t think we should lose 90% of our value — so we have to meet somewhere in the middle.”

Reiterating that the company is in no dire need of funding, Hosp says he understands that the backing of a well-known private equity fund could be very beneficial to Cake, in both tangible and intangible ways. Thus, it is likely that the company would agree to be invested in by one of the interested funders.

At the current juncture, however, the focus is placed on strengthening Cake’s team with the right members, says Hosp. Acknowledging that there is a lot of fear in the crypto space when it comes to job security in a bear market, Hosp clarifies that the firm is currently doubling down on its hiring and investment in existing staff members to foster the “right culture” and building bonds.

“Many large crypto companies are firing people left and right. It is ridiculous to me, because these companies were the ones who had hundreds of millions of dollars in sponsorship deals,” says Hosp, without making direct reference to splashy deals made by the likes of Crypto.com, which stumped up US$700 million last November to have the naming rights to the iconic Los Angeles sports complex formerly known as the Staples Center.

“I can’t believe that they had to let go of their people today. Trust me, I had no idea how many times I had to say no to sponsorship requests and branding deals — and I’m glad I did so,” says Hosp.

Crypto company IPO not a piece of cake

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