Blockbooster: Unpacking the Limitations and Possibilities of On-Chain Native Credit Creation

Original Author: @BlazingKevin_, Blockbooster Researcher

On December 11, 2025, a16z crypto published its annual "Big Ideas 2026: Part 3." In the section on stablecoins written by Partner Sam Broner, the following points are worth discussing:

"A stablecoin that lacks a robust credit infrastructure looks like a narrow bank – one that only holds specific liquid assets considered extremely safe. A narrow bank is an effective product, but I don't believe it will be the long-term pillar of the on-chain economy."

Broner then offered his assessment:

"We are already seeing a new cohort of asset managers, curators, and protocols facilitating on-chain asset-backed loans collateralized by off-chain collateral. These loans are typically originated off-chain and then tokenized. I see little benefit in tokenization here... So, debt assets should be originated on-chain, not tokenized after being created off-chain."

Four months later, in March 2026, Sam Broner left a16z to found The Better Money Company. a16z crypto led a $10 million seed round, with Circle co-founder Sean Neville participating. However—what Broner himself is building is not the "on-chain native credit origination" he highlighted in his article, but a different track: a stablecoin clearinghouse for low-cost swaps between different compliant stablecoins. He has already signed partnerships with issuers and distribution channels like Paxos, Stripe's Bridge, and MoonPay.

The person most bullish on stablecoin infrastructure and the first to call out the "narrow bank ceiling," when deciding to build something himself, chose the clearing/interoperability layer over the credit origination layer. This is because the credit origination layer is too difficult, with no project mature enough for him, or someone of his caliber, to bet their time on. In other words, even those who understand this judgment best are still waiting for the "right time to enter" the credit layer.

This is exactly the topic of our discussion today: While the entire industry talks about "RWA tokenization," the next truly structural opportunity might be "on-chain native credit origination" – a direction repeatedly discussed yet one where no one has scaled successfully.

0. Defining "On-Chain Native"

There are two easily confused interpretations of "on-chain native credit origination." We are discussing the second one.

The first interpretation is procedural "on-chain native": The entire process, from loan origination and interest rate pricing to liquidation and disposal, happens entirely on-chain. In this sense, Aave, Compound, and Morpho are already fully on-chain native – loans are originated on-chain, rates are dynamically priced by algorithms based on capital utilization, and liquidations are automatically executed by smart contracts when collateral ratios are breached.

The second interpretation is credit assessment "on-chain native": Using a borrower's on-chain behavior, cash flow, and on-chain identity to underwrite credit, rather than relying on over-collateralization of crypto assets or traditional off-chain credit reports and financial statements. This is the truly immature part.

The fundamental difference lies in "the basis for lending." Aave's model is "over-collateralization" – to borrow $100, you must first deposit $150 worth of ETH. This is essentially not credit, but pawnbroking. It doesn't create new purchasing power; it merely unlocks liquidity from existing assets. A borrower must already be wealthy to borrow.

True credit origination is "lending based on a judgment of future solvency" – a bank lends you money for a house based on your income, credit history, and repayment ability. This type of credit creates new purchasing power and is the core engine of the money multiplier and economic growth in a modern economy.

A common misunderstanding needs clarification: "Isn't Aave's algorithmic interest rate a form of on-chain underwriting?" No. Aave's algorithm prices the interest rate based on capital utilization, not the borrower's risk. When more money is borrowed from a pool, the rate goes up – this prices the pool's capital scarcity, applying equally to all borrowers. Aave gives the same rate to every borrower in the same pool because it doesn't differentiate between them. True underwriting, at its core, means giving different prices to borrowers with different risk profiles. A system that doesn't differentiate between borrowers, no matter how complex its interest rate algorithm, is not underwriting.

1. Current State

Regarding this direction, there are products on the market currently, with 5 to 10 teams seriously attempting it. However, their combined TVL is a fraction of a single Aave USDC pool. For example:

• 3Jane: This is arguably the closest attempt to "on-chain native credit underwriting." It uses zkTLS technology to pull a borrower's off-chain bank data (via Plaid integration) and on-chain asset profile. A real-time underwriting algorithm called 3CA calculates a "Jane Score" credit score and then extends unsecured USDC credit lines – the borrower doesn't need to deposit any crypto collateral. Defaults are handled through a real legal chain: bad debts are bundled and auctioned to US collection agencies, with recovered funds distributed between the agency and lenders.
• Its $5.2 million seed round in June 2025 was led by Paradigm, with participation from Coinbase Ventures, Wintermute, and Robot Ventures – Circle co-founder Jeremy Allaire was also an angel investor. 3Jane launched its mainnet in early November 2025, with an initial cap of approximately $50 million, initially restricted to US residents with total assets exceeding $150,000.

However, even as the most hyped project in this track, backed by Paradigm and endorsed by Delphi, its actual TVL is minuscule (around several hundred thousand dollars in its early stages).

• Divine Research: Represents a completely opposite route to 3Jane. Divine is a San Francisco-based company founded by Diego Estevez. Since December 2024, it has been issuing unsecured USDC short-term loans through a platform called Credit – by the second half of 2025, it had originated over 500,000 loans to more than 100,000 borrowers and completed $6.6 million in funding.
• Its underwriting method is based on progressive identity plus repayment history: Borrowers must first scan their iris using World ID from Sam Altman's Worldcoin to anchor a unique identity. They start with a very small credit limit (usually under $100), and with each successful repayment, the limit increases, up to around $1000. It targets populations in developing countries (Argentina, Nigeria, Colombia, etc.) who are underserved by traditional finance – in the founder's words, "high school teachers, fruit vendors... basically anyone with internet access." Interest rates are 20-30%.
• Its first-time borrower default rate is indeed high, around 40%. However, as borrowers build a record within this "repay for limit" flywheel, its overall default rate is reported to be near zero – the 40% is the cost of customer acquisition at the very front end (covered by high interest and users claiming WLD tokens), not the steady-state bad debt rate of this model.

Looking at 3Jane and Divine side-by-side reveals two routes for on-chain native credit, along with their respective limitations:

3Jane pursues the "asset/income proof" route – using zkTLS to verify bank accounts and on-chain assets, targeting asset-rich borrowers (high-net-worth individuals, businesses). Defaults lead to the US legal debt collection process. Its limitation is that it serves people who already have assets, still distant from the true credit creation of "creating purchasing power for the asset-poor." Also, legal collection is only effective in established jurisdictions like the US.

Divine pursues the "identity proof + progressive trust" route – using iris scans to ensure one identity per borrower, then using a "repay for limit" flywheel to gradually build credit. It targets the underbanked long-tail population in developing countries, truly touching upon inclusive credit. It has no collateral to recover and no effective cross-border legal recourse. The sole consequence of default is "you can't borrow money with this iris anymore" – which sounds weak, but the near-zero steady-state default rate suggests that the positive incentive of "repay to borrow more" works effectively for these long-tail borrowers. Divine's true limitations lie not in deterrence but in two points: first, the credit built is only valid within Divine; second, its entire sybil-resistance mechanism is outsourced to World ID, an off-chain biometric identity, rather than natively solving the pseudonymity problem on-chain.

Comparing these two routes points to a conclusion: Neither has solved the "basis for lending" in the most difficult setting – "on-chain, facing a pseudonymous borrower." Instead, each introduces a crutch from outside the setting. 3Jane bypasses it by "proving you are rich" (a form of disguised collateral). Divine anchors identity with World ID and uses the progressive "repay-for-limit" flywheel to extract credit from behavior. In other words, neither has directly tackled the hardest version – "judging based on on-chain behavior whether a borrower you don't know and can change addresses at any time will repay in the future." Their cleverness lies precisely in finding their respective crutches to lend money without needing to solve that core problem head-on.

Other players include: Wildcat Finance (on-chain matching for bilateral private credit, where lenders and borrowers negotiate terms directly, with the protocol acting only as a matching engine and smart contract executor; lenders coordinate recovery directly in case of defaults); Clearpool, TrueFi (various attempts at unsecured/low-collateral institutional lending); Union Protocol (social graph-based credit); Accountable (verifiable credit disclosure for off-chain assets). The TVL for most of these protocols ranges from hundreds of thousands to millions of dollars, with a few institutionally-focused ones being larger.

You might wonder: Why are these small teams working on this, while the largest DeFi lending protocols – Aave, Morpho, Compound – don't do unsecured lending themselves? They have the deepest liquidity, strongest brands, and most on-chain data. They are best positioned for on-chain native underwriting. Their inaction is due to two structural reasons:

• First, tail risk cannot be borne by token holders. Over-collateralized liquidations are automatic and predictable. Unsecured credit defaults are real bad debts that governance token holders cannot bear – a single large-scale default could break the protocol.
• Second, regulatory arbitrage space. Over-collateralization benefits from a clear legal narrative of being a "non-security, non-traditional lending" model (essentially a collateral swap). Unsecured lending immediately falls under consumer credit regulation. Therefore, it's the business model and risk structure of these giants that prevent them from doing it – creating a structural window for new teams that incumbents cannot easily enter.

Let's address another question: Where is the actual demand? If it's just "it should exist theoretically," it's a story of finding solutions for a problem. However, real on-chain credit demand is already distributed across several specific scenarios: market makers and quant funds need working capital turnover but don't want to lock up equivalent collateral; on-chain native merchants, RWA asset originators, and Crypto projects need accounts receivable financing and advances; and a large number of small to medium borrowers who are directly excluded by the over-collateralization model – they lack surplus crypto assets to pledge but have real cash flow.

In other words, the over-collateralization model serves "people who already have money and want to unlock liquidity." The excluded demand is precisely those "with cash flow but lacking collateral" – this is the true market for credit origination. This demand has been filtered out by the collateral requirements of existing models and has never been statistically captured.

2. Why Stablecoins "Need" to Solve This Problem

To understand why on-chain native credit origination is a "structural need," we first need to grasp the traditional monetary banking concept of a "narrow bank."

A narrow bank is a classic theoretical construct: it only accepts deposits and holds ultra-safe assets (short-term Treasuries, central bank reserves). It issues no loans whatsoever. A narrow bank's deposits are 100% backed by safe assets, theoretically never subject to runs or bankruptcy. It sounds safe, but it has never become mainstream historically – for a fatal commercial ceiling: it doesn't create credit, hence no money multiplier, and its business model profitability is extremely limited.

The core value of a modern bank lies precisely in "fractional reserves plus credit creation." You deposit $100, the bank keeps a fraction as reserves and lends the rest. The lent money becomes another person's deposit, lent out again... this process creates purchasing power far exceeding the original deposit (the money multiplier). This is the financial engine of modern economic growth. A narrow bank voluntarily abandons this engine, relegating itself to the periphery of the financial system, not its pillar.

Whether on-chain credit creation can truly generate a money multiplier depends on a prerequisite: can the lent-out stablecoins be deposited back into the protocol to become a new source of lending? If possible (similar to the supply→borrow→re-supply cycle on Aave), it does create a money multiplier-like effect. If borrowers primarily use the funds for off-chain consumption, taking the money out of the on-chain credit system, the multiplier effect is limited. Strictly speaking, on-chain credit creation is a necessary condition for a money multiplier, but the extent of the multiplication depends on the capital return rate of the on-chain economy.

Now look at the stablecoin system – it is a giant narrow bank. USDC and USDT absorb "deposits," with their reserves 100% in short-term Treasuries and cash. They issue no loans and create no credit. The entire stablecoin market's "deposit" scale – around $240 billion in mid-2025, exceeding $320 billion by mid-2026 – all sits in safe assets, generating no money multiplier.

Avoiding a misunderstanding: "no money multiplier" does not mean "not profitable." On the contrary, issuers are extremely profitable – they keep the interest from the Treasuries backing their reserves. The GENIUS Act + CLARITY Act prohibit paying interest to holders, but not issuers from earning the spread themselves. So, the stablecoin problem isn't "nobody profits," but rather: this profit is locked at the issuer layer, neither distributed to users nor entering the multiplier cycle of credit creation. Value is captured, not amplified.

Therefore, if the stablecoin system wants to break through the narrow bank ceiling and truly become an "on-chain banking system," the only way out is to create credit at the DeFi protocol layer,outside the issuer. However, the current credit at the DeFi protocol layer is not real credit creation; it's pawnbroking.

Thus, the logical loop closes: stablecoin issuers are legally prohibited from lending → credit creation can only happen at the protocol layer → the current over-collateralization model at the protocol layer doesn't create new purchasing power → the only logical way for the stablecoin system to break the narrow bank ceiling is to develop true on-chain native credit origination.

3. Why Is It Still Stalled?

If on-chain native credit origination is a structural inevitability, why have only 5-10 teams been trying for over a year, and why hasn't TVL scaled?

The answer is a chicken-and-egg dilemma. But a more precise historical analogy than "chicken and egg" is the US consumer credit market before FICO.

Engineers Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company in 1956. But the consumer FICO score wasn't officially launched until 1989. It wasn't until the mid-1990s, after adoption by the housing GSEs (Fannie Mae and Freddie Mac), that it became an industry standard for lending. That's 33 years from company founding to the score's creation, and about 40 years to industry-wide adoption.

The maturity of a credit infrastructure layer is measured in "decades," not "years." And it was the FICO score that first made credit calculable, reusable, and standardized across institutions. In the decades following FICO's popularization, the US consumer credit market truly exploded – credit cards, auto loans, mortgages all scaled in the wake of FICO standardization. FICO wasn't just a feature of consumer credit; it was the prerequisite for its scaling.

What on-chain credit is missing right now is precisely this "FICO moment" – a widely accepted, credibly designed, and cross-protocol reusable "on-chain credit score."

Without this standardized credit layer, every on-chain native credit protocol is forced to build an underwriting system from scratch: 3Jane builds its own 3CA algorithm and Jane Score; Spectral builds credit scores based on on-chain wallet behavior; Cred Protocol and Blockchain Bureau each develop their own on-chain credit models; identity layers are being attempted by Worldcoin and Gitcoin Passport. Every protocol is reinventing the wheel, with no standard reusable by others. It's like the US before FICO – every banker had their own subjective judgment, preventing scaling.

All current attempts at on-chain native credit are stuck in a chicken-and-egg loop: true on-chain credit evaluation requires rich on-chain credit history, but most real borrowers' economic activities are still off-chain. There isn't enough on-chain behavioral data to support underwriting. So, protocols are forced to either fall back on off-chain data or restrict lending to "people whose assets are already on-chain" (the wealthy). Neither path reaches the long-tail borrowers who need credit creation.

But the FICO analogy can diagnose an even deeper bottleneck. FICO's success wasn't just about standardizing a credit score; it also standardized the consequences of default – once you default, every institution in the industry sees your FICO score drop, affecting your ability to borrow anywhere. This "cross-institutional portability of default consequences" is the true source of FICO's deterrent power: not a penalty from one particular bank, but a penalty from the entire financial system.

On-chain credit