```html Blockbooster: Interpreting the Limitations and Possibilities of On-Chain Native Credit Creation

Original Author: @BlazingKevin_, Blockbooster Researcher

On December 11 last year, a16z crypto released its annual "Big Ideas 2026: Part 3". In the stablecoin section written by partner Sam Broner, the following points are worth discussing:

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

Broner then offers 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 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 Circle co-founder Sean Neville also participating. But—what Broner is building himself isn't 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. Signed partners include issuers and distribution channels like Paxos, Stripe's Bridge, and MoonPay.

The person who most advocated for stablecoin infrastructure and first warned of the "narrow bank ceiling," when building himself, chose the clearing/interoperability layer over the credit origination layer. This is because the credit origination layer is too difficult; no project is mature enough for him or peers of his caliber to commit their time to it. In other words, even the person best equipped to make that judgment is still waiting for the credit layer's "ready-to-build moment."

This is our topic today: While the entire industry talks about "RWA tokenization," the next real structural opportunity may be "on-chain native credit origination"—a direction repeatedly discussed but one where no one has yet scaled successfully.

0. Defining "On-Chain Native"

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

The first interpretation is "on-chain native" in terms of process: loan origination, interest rate pricing, and liquidation disposal all happen entirely on-chain. In this sense, Aave, Compound, and Morpho are already fully on-chain native—loans originate on-chain, interest 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 "on-chain native" in terms of credit assessment: underwriting credit based on a borrower's on-chain behavior, cash flows, and on-chain identity, rather than relying on over-collateralized crypto assets or traditional off-chain credit reports and financial statements. This is the part that is truly immature.

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 pawnshop operations. It doesn't create any new purchasing power; it merely unlocks the liquidity of existing assets. A borrower must already have money to borrow.

True credit origination, conversely, is "lending based on a judgment of future solvency." When a bank lends you money to buy a house, it judges 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. Aave's algorithm prices interest based on capital utilization, not the borrower's risk. When more funds are borrowed from the pool, rates increase—this prices the pool's capital tightness, treating all borrowers equally. Aave offers the same rate to every borrower in a pool because it doesn't distinguish between them. True underwriting, by nature, means different prices for borrowers with different risks—this is the core of credit origination. A system that doesn't discriminate between borrowers isn't underwriting, no matter how complex its rate algorithm.

1. Current Status

On this front, there are products in the market today, with perhaps 5 to 10 teams seriously attempting it. However, their combined TVL doesn't even match a fraction of Aave's single 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 rating and then issues uncollateralized USDC credit lines—borrowers don't need to deposit any crypto collateral. Default handling follows a real legal chain: bad debts are bundled and auctioned 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 is also an angel investor. 3Jane launched its mainnet in early November 2025 with an initial cap of around $50 million, initially restricted to US residents with total assets exceeding $150,000.

Yet, even the most watched project in this track, backed by Paradigm and endorsed by Delphi, has a very small actual TVL (in the low hundreds of thousands of dollars range early on).

• Divine Research: Represents a completely opposite path to 3Jane. Divine is a San Francisco-based company, founded by Diego Estevez. Since December 2024, it has been issuing uncollateralized short-term USDC loans via a platform called Credit. By the second half of 2025, it had originated over 500,000 loans, served over 100,000 borrowers, and secured $6.6 million in funding.
• Its underwriting method is based on a gradual build-up of identity + repayment history: borrowers must first verify their unique identity via Worldcoin using Sam Altman's World ID (iris scan). They start with a very small credit limit (typically under $100). Each time a loan is repaid, the limit increases, up to around $1,000. It primarily serves populations ignored by traditional finance in developing countries (Argentina, Nigeria, Colombia, etc.)—in the founder's words, "high school teachers, fruit vendors... basically anyone with internet access." Interest rates range from 20%-30%.
• Its first-time borrower default rate is indeed high, around 40%. However, as borrowers build a track record within this "repay-for-limit" flywheel, the overall default rate has reportedly dropped to near zero. The 40% is the cost of customer acquisition at the very front end (covered by high interest and WLD tokens users collect), not the steady-state bad debt rate of the model.

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

3Jane takes the "asset/income proof" route—using zkTLS to verify bank accounts and on-chain assets, targeting asset-rich borrowers (high-net-worth individuals, businesses), with default handling via the US legal debt collection system. Its limitation is that it primarily serves people who already have assets, still distant from the 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" route—first using iris scanning to ensure one borrowing identity per person, then slowly building credit through the "repay-for-limit" flywheel. It targets the long-tail population in developing countries lacking assets, truly touching inclusive credit. It has no collateral to recover and no effective cross-border legal recourse. The only consequence of default is "you can't borrow anymore with this iris"—which sounds weak, but the near-zero steady-state default rate shows the positive incentive of "repay to borrow more" works effectively for this long-tail group. Divine's real limitations aren't on the deterrence side but two-fold: the credit built is only valid within the Divine ecosystem, and its entire Sybil-resistance mechanism 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 core question of "why lend" under the most difficult setting of being "on-chain, facing a pseudonymous borrower." Instead, each introduces a crutch from outside that setting. 3Jane bypasses it by "proving you have money" (which is essentially disguised collateral). Divine uses World ID to anchor identity and the gradual "repay-for-limit" flywheel to squeeze credit out of behavior bit by bit. In other words, the hardest version—"judging based on on-chain behavior whether an unknown borrower who can easily change addresses will repay in the future"—hasn't been directly solved by either path. Their cleverness lies precisely in finding their own crutches to lend money without needing to solve that core problem directly.

Other players include: Wildcat Finance (bilateral private credit matching on-chain, lenders and borrowers negotiate terms directly, protocol acts only as matching engine and smart contract executor, lenders coordinate recovery directly upon default); Clearpool, TrueFi (varying degrees of uncollateralized/under-collateralized institutional lending attempts); Union Protocol (social-graph-based credit); Accountable (verifiable credit disclosure for off-chain assets). The TVL of these protocols mostly ranges from hundreds of thousands to millions of dollars, with some institution-focused ones being slightly larger.

You might wonder: Why are these small teams doing this while the largest DeFi lending protocols—Aave, Morpho, Compound—aren't building 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 for over-collateralized loans are automatic and predictable. Losses from defaults on uncollateralized loans are real bad debts. Governance token holders cannot bear this credit tail risk—a massive default could cripple the entire protocol.
• Second, regulatory arbitrage space. Over-collateralization has a clear legal narrative of "not security, not traditional lending" (essentially collateral swaps). Uncollateralized lending immediately falls under consumer credit regulation. So, the business models and risk structures of these giants make them unable and unwilling to do this—which ironically provides a structural window for new teams that giants cannot easily enter.

Next, let's address the question: Where is the actual demand? If it's just a "theoretical should exist," it's a story looking for a problem. However, real on-chain credit demand is already distributed across several specific scenarios: market makers and quant teams need working capital without locking up equivalent collateral; on-chain native merchants, RWA asset originators, and crypto projects need invoice financing and prepayments; and a large number of small and medium borrowers are directly excluded by the over-collateralized model—they don't have extra crypto assets to pledge but have real cash flow.

In other words, the over-collateralized model serves "those who already have money and want to unlock liquidity." The demand that is being filtered out here is precisely "those with cash flow but lacking collateral"—and this is the true market for credit origination. This demand has been screened 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," you 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 Treasuries, central bank reserves) and makes no loans at all. Deposits in a narrow bank are 100% backed by safe assets, theoretically preventing runs or bankruptcy. It sounds safe, but it has never become mainstream historically—because it has a fatal commercial ceiling: it doesn't create credit, thus no money multiplier, and its profit model is extremely limited.

The core value of modern banks lies precisely in "fractional reserves + credit origination." You deposit $100, the bank holds a fraction as reserves and lends the rest. The lent money becomes someone else's deposit, which can be lent again... This process creates purchasing power far exceeding the original deposit (the money multiplier), and it is the financial engine of modern economic growth. Narrow banks voluntarily abandon this engine, relegating themselves to a peripheral role in the financial system, not a pillar.

Whether on-chain credit origination can truly generate a money multiplier depends on a premise: can the lent stablecoins be deposited back into the protocol, becoming new sources of lending? If yes (similar to the supply→borrow→re-supply cycle on Aave), it does produce a money-multiplier-like effect. If borrowers primarily use the stablecoins for off-chain consumption, removing the funds from the on-chain credit system, the money multiplier effect is limited. Strictly speaking, on-chain credit origination is a necessary condition for a money multiplier, but the extent of the multiplier depends on the rate of capital returning to the on-chain economy.

Now look at the stablecoin system—it is a giant narrow bank. USDC and USDT absorb "deposits" (user assets), while their reserves are 100% short-term Treasuries and cash; they make no loans and create no credit. The entire "deposit" scale of the stablecoin market—around $240 billion in mid-2025, exceeding $320 billion by mid-2026—all sits in safe assets, generating no money multiplier.

Avoiding a common misconception: "no money multiplier" does not mean "not profitable." Quite the opposite, issuers are extremely profitable—they keep the interest income from the Treasury reserves. The GENIUS Act and CLARITY Act prohibit paying interest to holders, not preventing issuers from earning the spread. So the issue isn't that "no one profits from it," but rather: This profit is locked at the issuer level, neither distributed to users nor entering the multiplier cycle of credit origination. Value is captured, not amplified.

Therefore, for the stablecoin system to break through the narrow bank ceiling and truly become an "on-chain banking system," the only path is to create credit outside the issuer—meaning at the DeFi protocol layer. Yet, the current credit at the DeFi protocol layer isn't real credit origination; it's just pawnshop operations.

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

3. Why Is It Still Stuck?

If on-chain native credit origination is a structural necessity, why have only 5-10 teams attempted it for over a year, failing to scale TVL significantly?

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

Engineer Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company in 1956, but the consumer-facing FICO score wasn't launched until 1989. It wasn't fully adopted industry-wide as the lending standard until the mid-1990s, after Fannie Mae and Freddie Mac adopted it. Thirty-three years from founding to the score's birth, and roughly 40 years to industry-wide adoption.

The maturation of the credit infrastructure layer happens in "decades," not "years." The FICO score was the first to make 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, and mortgages all scaled following FICO's standardization. FICO wasn't a feature of consumer credit; it was the prerequisite for its scaling.

What on-chain credit lacks is precisely this "FICO moment"—a widely accepted, trustable mechanism, a reusable "on-chain credit score" across protocols.

Without this standardized credit layer, every on-chain native credit protocol is forced to build its underwriting system from scratch: 3Jane creates 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 involve Worldcoin and Gitcoin Passport. Each protocol reinvents the wheel, with no standard reusable by others. It's like the pre-FICO US—every banker had their own subjective judgment, making scaling impossible.

All current attempts at on-chain native credit are stuck in a chicken-and-egg loop: true on-chain credit assessment needs rich on-chain credit history, but most real borrowers' economic activity is still off-chain. There isn't enough on-chain behavioral data to support underwriting. So protocols are forced either to rely on off-chain data or to restrict lending to "the wealthy whose assets are already on-chain." Neither path reaches the long-tail borrowers who truly need credit origination.

But the FICO analogy diagnoses a deeper bottleneck. FICO's success wasn't just standardizing credit scoring; it also standardized the consequences of default—once you default, your FICO score is visible industry-wide, affecting your ability to borrow from any institution. This "cross-institutional transmissibility of default consequences" is the true source of FICO's deterrence: not one bank punishing you, but the entire financial system.

On-chain credit has yet to establish this "cross-protocol transmission": the penalty for defaulting on one protocol doesn't transfer