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

Original author: @BlazingKevin_, Blockbooster Researcher

On December 11 of last year, 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:

"Stablecoins lacking robust credit infrastructure look like narrow banks—only holding specific liquid assets deemed extremely safe. A narrow bank is a valid product, but I don't believe it will be the long-term backbone of the on-chain economy."

Broner then offered his assessment:

"We are already seeing a new cohort of asset managers, curators, and protocols beginning to facilitate 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 created off-chain and then tokenized."

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 participation from Circle co-founder Sean Neville. However—what Broner is building himself is not the "on-chain native credit origination" he highlighted in his article, but a different track: a stablecoin clearinghouse, enabling low-cost swaps between various compliant stablecoins, with signed partners including issuers and distribution channels like Paxos, Stripe's Bridge, and MoonPay.

The person who was most bullish on stablecoin infrastructure and first to call out the "narrow bank ceiling" chose, when it came to building, to focus on the clearing/interoperability layer rather than the credit origination layer. This is because the credit origination layer is too difficult; no project is mature enough for him or someone of his caliber to stake their time on it. In other words, even the person who best understands this thesis is still waiting for credit origination's "buildable moment."

This is the theme of our discussion today: While the entire industry talks about "RWA tokenization," the next truly structural opportunity may be "on-chain native credit origination"—a direction discussed repeatedly but yet to be scaled successfully by anyone.

0. Defining "On-Chain Native"

"On-chain native credit origination" has two easily confused interpretations. We will discuss the second one.

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

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

The fundamental difference lies in "on what basis do you lend." Aave's model is "over-collateralization"—to borrow $100, you must first deposit $150 worth of ETH. This is essentially not credit; it's a pawn shop. It doesn't create any new purchasing power; it merely unlocks the liquidity of existing assets. Borrowers must already have money to borrow.

True credit origination, on the other hand, 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 misconception needs clarification: "Isn't Aave's algorithmic interest rate a form of on-chain underwriting?" No, it isn't. Aave's algorithm prices interest rates based on capital utilization, not borrower risk. When money in a pool is borrowed more, rates go up—this prices the pool's capital scarcity, treating all borrowers equally. Aave offers the same rate to every borrower in the same pool because it doesn't differentiate who the borrower is. True underwriting, in essence, offers different prices to borrowers with different risks—this is the core of credit origination. No matter how complex the interest rate algorithm, a system that doesn't differentiate between borrowers isn't doing underwriting.

1. Current Status

Regarding this direction, there are products currently on the market, with 5 to 10 teams seriously attempting it. However, their combined TVL doesn't even come close to a single Aave USDC pool. For example:

• 3Jane: This is the closest current attempt to "on-chain native credit underwriting." It uses zkTLS technology to pull a borrower's off-chain bank data (via Plaid integration) alongside their on-chain asset profile. An underwriting algorithm called 3CA calculates a real-time "Jane Score" credit score, then issues an uncollateralized USDC credit line—borrowers don't need to deposit any crypto collateral. Defaults follow a real legal chain: bad debts are packaged and auctioned off to US collection agencies, with recovered funds distributed between the agency and the lender.
• 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 also participated as an angel investor. 3Jane launched its mainnet in early November 2025 with an initial cap of around $50 million, initially limited to US residents with total assets exceeding $150,000.

However, even this most-watched project in the space, backed by Paradigm and endorsed by Delphi, has a very small actual TVL (in the range of a few hundred thousand dollars in its early stages).

• Divine Research: Represents a completely opposite path to 3Jane. Based in San Francisco, founded by Diego Estevez, Divine has been issuing uncollateralized short-term USDC loans since December 2024 through a platform called Credit. By the second half of 2025, it had originated over 500,000 loans, served more than 100,000 borrowers, and completed a $6.6 million funding round.
• Its underwriting method is based on a progressive buildup of identity + repayment history: Borrowers must first perform an iris scan via Sam Altman's Worldcoin (using World ID) to anchor their unique identity. They start with a very small limit (typically under $100), and each time they repay, the limit increases, up to around $1,000. The target audience is primarily the financially underserved in developing countries (Argentina, Nigeria, Colombia, etc.)—in the founder's words, "high school teachers, fruit vendors... basically anyone with internet access." Interest rates are 20%-30%.
• Its first-loan default rate is indeed high, around 40%. But as borrowers accumulate a track record within the "repay-for-higher-limit" flywheel, the overall default rate has been reported to approach zero. The 40% figure is the cost of customer acquisition at the very frontend (covered by high interest and WLD tokens claimed by users), not the steady-state bad debt rate of the model.

Viewing 3Jane and Divine side-by-side reveals two paths for on-chain native credit and their respective limitations:

3Jane takes the "asset/income verification" path—using zkTLS to verify bank accounts and on-chain assets, targeting asset-rich borrowers (high-net-worth individuals, businesses), and relying on the US legal debt collection system in case of default. Its limitation is that it serves people who already have assets, distancing itself from true credit origination that creates purchasing power for the asset-poor. Furthermore, legal collection is only effective in mature jurisdictions like the US.

Divine takes the "identity proof + progressive trust" path—first using an iris scan to ensure one identity per borrower, then using the "repay-for-higher-limit" flywheel to slowly build credit. It targets the long-tail population in developing countries lacking assets, truly touching on inclusive credit. It has no collateral to recover and no effective cross-border legal recourse; the only consequence of default is "your iris can't borrow money here anymore." This might sound like a weak deterrent, but the near-zero steady-state default rate suggests that the positive incentive of "repay to borrow more" actually works for this long-tail borrower base. Divine's true limitations are not on the deterrent side but in two other aspects: the credit it builds is only valid within Divine's own platform, and its entire Sybil resistance capability is outsourced to World ID, an off-chain biometric identity, rather than natively solving the pseudonymity problem on-chain.

The comparison of these two paths points to a conclusion: Neither has solved the "on what basis do we lend" question under the most difficult setting—on-chain, facing a pseudonymous borrower. Instead, each introduces an external lever. 3Jane bypasses it by "proving you have money" (which is essentially disguised collateral); Divine uses World ID to anchor identity and then uses the progressive flywheel of "repay-for-higher-limit" to extract credit from behavior. In other words, the hardest version—"based solely on on-chain behavior, judging whether a stranger who can change addresses at will will repay in the future"—hasn't been solved head-on by either path. Their cleverness lies in finding a lever that allows them to lend money without having to solve the core problem directly.

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 default); Clearpool, TrueFi (various attempts at uncollateralized/low-collateralized institutional lending); Union Protocol (credit based on social relationships); Accountable (verifiable credit disclosures for off-chain assets). The TVL of these protocols mostly ranges from hundreds of thousands to a few million dollars, with some institutional-focused ones being larger.

You might wonder: Why are these small teams doing this, while the largest DeFi lending protocols—Aave, Morpho, Compound—are not pursuing uncollateralized credit themselves? They have the deepest liquidity, strongest brands, and most on-chain data. Logically, they are best positioned for on-chain native underwriting. There are two structural reasons why they don't:

• First, tail risk cannot be borne by token holders: Liquidations in over-collateralized systems are automatic and predictable. In contrast, default losses in uncollateralized credit are real bad debts. Governance token holders cannot bear this kind of credit tail risk—a single large-scale default could break the entire protocol.
• Second, regulatory arbitrage space: Over-collateralization has a clear legal narrative of "non-security, non-traditional lending" (essentially a collateral swap). Uncollateralized lending immediately enters the purview of consumer credit regulation. Therefore, the business models and risk structures of these giants prevent them from doing this, and they are unwilling to do it. This, paradoxically, opens a structural window that new teams can exploit, one that the giants cannot easily enter.

Next, let's answer another question: Where is the actual demand? If it's just "it should exist in theory," this is a story of finding a solution for a problem. But real on-chain credit demand is already distributed across several specific scenarios: market makers and quant teams need working capital without tying up equivalent collateral; on-chain native merchants, RWA asset originators, and crypto projects need accounts receivable financing and prepayments; and there's a large pool of small and medium-sized borrowers directly excluded by the over-collateralization model—they don't have spare crypto assets to pledge but possess real cash flow.

In other words, the over-collateralization model serves "people who already have money and want to free up liquidity." The demand left at the door is precisely "people with cash flow but lacking collateral"—this is the true market for credit origination. This demand has been filtered out by the collateral threshold of existing models and has never been counted.

2. Why Stablecoins "Need" to Solve This Problem

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

A narrow bank is a classic theoretical construct: it accepts deposits but only holds ultra-safe assets (short-term government bonds, central bank reserves) and makes no loans whatsoever. A narrow bank's deposits are 100% backed by safe assets, theoretically immune to bank runs or insolvency. This sounds safe, but it has never become mainstream historically—because it has a fatal commercial ceiling: it doesn't create credit, hence no money multiplier, and its profit potential is extremely limited.

The core value of a modern bank lies precisely in "fractional reserves + credit creation." You deposit $100, the bank keeps a fraction as reserves and lends the rest out; the lent money becomes someone else's deposit, which can be lent out again... This process creates purchasing power far exceeding the original deposit (the money multiplier), and is the financial engine of modern economic growth. A narrow bank voluntarily abandons this engine, so it can only be a marginal player in the financial system, not a pillar.

Whether on-chain credit origination can truly generate a money multiplier depends on a precondition: can the stablecoins lent out be deposited back into the protocol to become a new source of lending? If yes (similar to the supply→borrow→re-supply cycle on Aave), it would indeed create an effect analogous to the money multiplier. If borrowers primarily use the borrowed funds for off-chain consumption, moving the money out of the on-chain credit system, then the multiplier effect is limited. Strictly speaking, on-chain credit origination is a necessary condition for the money multiplier, but how much the multiplier amplifies also depends on the rate of capital flowback within the on-chain economy.

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

Avoiding a common misconception: "not generating a money multiplier" does not equal "not making money." On the contrary, issuers are extremely profitable—they keep the interest on the treasuries held in reserves. The GENIUS Act and CLARITY Act prohibit paying interest to holders, but not issuers from earning the spread themselves. So the problem with stablecoins isn't "nobody profits from them," but rather: this profit is locked up at the issuer level, neither distributed to users nor entering the multiplier cycle of credit origination. Value is captured, not amplified.

Therefore, if the stablecoin system wants to break through the narrow bank ceiling and truly become "the on-chain banking system," the only way out is to create credit outside the issuer—specifically, at the DeFi protocol layer. However, the current credit at the DeFi protocol layer isn't true credit origination; it's just a pawn shop.

This completes the logical loop: Stablecoin issuers are legally prohibited from lending → Credit origination can only happen at the protocol layer → The existing over-collateralization model at the protocol layer doesn't create new purchasing power → Therefore, the only logical path for the stablecoin system to break through the narrow bank ceiling is to develop true on-chain native credit origination.

3. Why Is It Stuck So Far?

If on-chain native credit origination is a structural necessity, why have only 5-10 teams tried for over a year without achieving significant scale in TVL?

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

Engineers Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company back in 1956. Yet, the consumer-facing FICO score wasn't officially launched until 1989, and it wasn't widely adopted as the industry lending standard until the mid-1990s when the housing GSEs (Fannie Mae, Freddie Mac) adopted it. From the company's founding to the score's creation was 33 years; to industry-wide adoption was approximately 40 years.

The maturation of the credit infrastructure layer is measured in "decades," not "years." It was the FICO score that first made credit computable, reusable, and standardized across institutions. In the decades following FICO's widespread adoption, the US consumer credit market truly exploded—credit cards, auto loans, and mortgages all scaled in the wake of FICO standardization. FICO wasn't a feature of consumer credit; it was a prerequisite for its scalability.

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

Without this standardized credit layer, every protocol attempting on-chain native credit is forced to build its own underwriting system from scratch: 3Jane built its 3CA algorithm and Jane Score; Spectral bases its score on on-chain wallet behavior; Cred Protocol and Blockchain Bureau each have their own on-chain credit models; in the identity layer, Worldcoin and Gitcoin Passport are making attempts. Each protocol is reinventing the wheel, lacking a standard to be reused by others. This is akin to 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 cycle: True on-chain credit assessment 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. Thus, protocols are forced either to rely on off-chain data or to restrict lending to "the wealthy whose assets are