An article to understand the DeFi lending agreement Aave unsecured credit

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc), Compilation: Overnight Porridge, released with authorization.

Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc)

, Compilation: Overnight Porridge, released with authorization.

On July 8th, the Ethereum lending protocol Aave announced the launch of a new feature called Credit Delegation, which allows users to provide peer-to-peer loans without collateral requirements, which is of great significance for the large-scale expansion of DeFi. meaning, but it also introduces new risks.

In response, Aave CEO Stani Kulechov took to Twitter to explain how the feature works:

Depositors can delegate their line of credit, for example, Karen deposits a sum of USDT to Aave and delegates her line of credit to Chad, who can withdraw funds such as ETH from the Aave protocol.

Karen and Chad agree on the terms of the loan, such as repayment, interest rate, and covenant, and the signing process of this agreement is executed through OpenLaw, which ensures the enforceability of the loan, just like the agreement signed with DocuSign.

After the agreement takes effect, Karen creates the CD vault smart contract, which allows Karen to set the credit limit and currency according to the agreement, and Chad can withdraw the loan through the borrow() function and repay the loan through the repeat() function. This open line of credit gave Chad flexibility.

With the entrusted loan, Karen could theoretically get a higher interest rate on the owed mortgage when depositing with Aave, and Chad could borrow money from Aave without collateral.

How to control Laolai risk?

We know that in the traditional lending industry, it is very common for borrowers to deliberately refuse to repay after taking out unsecured loans. Such people are also called "laolai".

Therefore, some people have questioned the new features released by Aave. For example, Crypto Kenneth commented:

"If Chad is a badass and not ready to pay back the money, how do you punish him? Without full identification and actual enforcement of the agreement, Chad can easily borrow funds and run away."

In this regard, Stani Kulechov explained:

"You don't want to entrust your credit to someone you don't know. You only entrust it to Chad whom you know well."

The implication is that Aave's credit authorization feature is suitable for unsecured lending between acquaintances. Essentially, this type of lending requires the client to fully understand the borrower, or to be able to judge the credit risk of the borrower.

Regarding the risks of new functions, DeFi Dude also raised his doubts:

"Is there a way to limit the line of credit? If I entrust my line of credit to Chad, but don't want him to use all of my available line of credit, is that possible? Does the line of credit he draws affect my liquidation price?"

In this regard, Stani Kulechov explained:

“Yes, you can (1) limit the amount you want to authorize, (2) set the currencies you want Chad to be able to withdraw, and (3) turn off credit so that Chad cannot withdraw any available delegated credit. And the amount he can withdraw can only be within Aave’s loan-to-value ratio.”

What Unsecured Lending Means for DeFi Expansion

At present, most DeFi lending protocols adopt a hyper-collateralization mechanism. For example, I can only borrow DAI worth less than $7,000 when I mortgage $10,000 worth of ETH, which greatly limits the possible use of blockchain lending case. The peer-to-peer intermediary method adopted by Aave can theoretically bypass this limitation, allowing the agreement to recover the borrower's loan outside the blockchain.

But the current plan it adopts means that it is not suitable for lending between non-acquaintances, and more suitable for lending between institutions. In this regard, DeFi investor Stefano ₿ernardi also expressed his views :

"Can more people contribute to Karen's CDV? Or can people pool funds together through Aragon DAO and use proxy to open CDV?"