Will unsecured lending be the next development direction of DeFi?

拔丝地瓜

特邀专栏作者

2020-08-16 15:54 (UTC+8)

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Why on earth should I take out a loan if I already have money?

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Why on earth should I take out a loan if I already have money?

Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from

Crypto Valley Live (ID: cryptovalley)

, Author: Ryan Sean Adams, translation: Li Hanbo, reproduced by Odaily with authorization.

A big problem with borrowing in DeFi is the need for over-collateralized loans. This is how mortgages work in the real world, but it's not how most people think about loans.

Maker, Compound, Aave — all of these protocols require users to lock up more funds than they can actually borrow.

This is why unsecured DeFi lending is a huge opportunity. But there is a problem. How to eliminate KYC, credit scoring, and all the cumbersome and inefficient processes of traditional finance?

The race is on for unsecured lending solutions in DeFi, and we'll cover them as they emerge.

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Unsecured loans will enter Defi

Credit-entrusted unsecured loans are loans with little collateral, taking advantage of the idle borrowing capacity of DeFi liquidity providers.

For liquidity providers, unsecured loans provide a way to increase passive income by earning a premium on borrowing rates. Borrowers accept this higher interest rate in return for a loan without putting up collateral.

Now, they are coming to DeFi.

In July, Aave announced the addition of credit loans to the protocol through the example of Karen and Chad entrusted loans-the first meaningful unsecured loan attempt in DeFi so far.

Before we talk about it further, let's talk about why DeFi needs this.

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The spirit of decentralized finance is very clear, to build a better financial ecosystem. A system that anyone in the world can use.

Everyone has a clear consensus on the core values of DeFi: no KYC, no whitelist, the same rules for everyone, no geo-locking, no credit scoring, and no paperwork.

Furthermore, DeFi should be open-source and non-custodial: you are the master of your money, and you are free to use it when you want.

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Credit makes DeFi capital more efficient

Traditionally in DeFi, users deposit stablecoins or other assets to earn interest. In the early years of DeFi, we have seen interest rates on crypto dollars such as Dai offer significantly higher yields than traditional banks.

This is what credit authorization does.

To improve capital efficiency, Aave has introduced credit delegation, whereby depositors with unused borrowing capacity can delegate credit lines to people they trust to earn additional interest.

Let's take a deeper look at how it works.

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How to perform credit authorization in Aave

Credit entrustment adopts the combination of smart contract function and point-to-point trust. In addition to entrusting credit to smart contracts, trust is introduced when using credit entrustment to obtain liquidity from DeFi. The most important thing in credit is the belief that the loan will be repaid.

⚠️Wait! But, is 'trust' bad?

Trust minimization at the base layer is great, but at higher layers, trust can be a positive attribute that leads to greater capital efficiency!

Use OpenLaw to ensure credit-based loans are repaid.

In Karen and Chad's case, to ensure that Chad repaid the loan, OpenLaw was used as a legal wrapper to ensure the deal was legally binding. (RSA - remember we created a DAO using OpenLaw in Tactic #31).

OpenLaw is an interesting tool because it allows Karen and Chad to enter into agreements and also execute smart contract code directly through their Ethereum wallets.

Each credit entrustment creates a credit entrustment vault based on a smart contract.

This vault is a debt wrapper built on top of Aave. Each vault allows users to set different delegation parameters, including which currency the borrower can withdraw, the interest rate formula, and most importantly, the credit limit.

Peer-to-peer and peer-to-peer protocols

With OpenLaw, all of these parameters are selected through a programmable legal agreement set up by Karen and Chad, leaving Chad free to simply withdraw funds.

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Peer-to-peer and peer-to-peer protocols

There are two sources of liquidity for credit entrustment.

Smart contract trust. Credit can also be delegated to a smart contract with predefined functions that can programmatically enforce certain constraints.

Example: smart contract credit delegation using earn

Smart contract-based credit delegation is working with yEarn, which intends to utilize yVaults, yEarn allows LEND depositors in Aave to delegate Dai into these yVaults with predetermined functions. This can programmatically limit the credit risk of certain actions, such as farming governance tokens.

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CeFi's Credit Authorization

Aave conducted its first credit delegation, allowing decentralized exchange DeversiFi to draw credit from Aave through a credit delegation mechanism.

what does that mean?

We can imagine that credit scoring projects like Teller or Union can use Aave’s credit entrustment and other DeFi protocols to obtain liquidity if they want to connect loans with social reputation.