Bringing Crypto Lending Back to People With Under-Collateralized Loans
As new lending protocols continue to attract money and NFT-backed loans become more popular, the DeFi lending and borrowing industry has grown significantly in volume. Long-awaited sub-collateralized and non-custodial loans are coming to DeFi. Hashstack Finance is testing Open Protocol, a first-ever DeFi lending protocol to offer noncustodial and secure undercollateralized lending. The open protocol is based on the Harmony blockchain, allowing borrowers to take out loans with a 1:3 collateral-to-loan ratio.
This implies that an individual can get up to $300 with just $100 as collateral. Users can extract 70% of the collateral, or $70 in this scenario while trading with $230 capital on the platform. According to Hashstack, DeFi loans are often over-collateralized, with borrowers providing a minimum of 42% additional collateral against the loan they want to take out.
Hashstack Finance founder Vinay said:
Today, if you want to borrow $100 from Compound, or Aave, or even MakerDAO, you need to provide collateral of at least $142. This breaks the main intent behind obtaining loans and has restrictive use cases for the borrower.
The protocol uses a three-pronged strategy to minimize crypto lending risk by:
- Clear partitioning of the APY and APR of deposits/loans with that of their minimum commitment period (MCP)
- Efficient use of assets through the diversification of available assets through loans and the provision of business capital
- Under-secured loans
Borrowers can use different techniques to exchange borrowed tokens for other primary or secondary coins without switching DApps. The open protocol has also linked assets from other chains, such as Ethereum and Avalanche C-Chain.
What is DeFi lending and how does it work?
DeFi lending services, like traditional peer-to-peer lending platforms, allow users to lend their assets to others. They receive interest payments in return. Since these platforms primarily engage in cryptocurrencies, they exclusively receive cryptocurrency interest payments. As DeFi platforms operate without intermediaries, monetary benefits are paid directly to users.
Decentralized lending is as simple as lending money to others by putting your hand in your pocket. However, the smart contract and the decentralized program represent your mediators and negotiators. For example: to grant a $10,000 loan using DApp, all you need to do is press a few buttons, and you’re done.
Because you have to choose any DApp that gives smart contract and borrowers, the overall process is very fast and simple. Users must choose the interest rate for the loan, enter it into the app, and approve the loan. The smart contract will streamline the whole lending and borrowing agreement once you find the borrower.
What is an undersecured loan?
Secured loans are familiar to anyone who has obtained a loan through a regular route or DeFi platforms. Any valuable asset that the lender accepts as collateral from the borrower is called collateral. A secured loan is a loan approved with the guarantee of a fully backed collateral. In other words, the guarantee goes beyond the principle of the loan.
On the other hand, an undersecured loan is not fully secured. If the loan was in default, the collateral would not support the principal. Even though the concept of undersecured loans may raise doubts and concerns, it is designed to protect the interests of both the borrower and the lender.
Since 2017, under-collateralized loans have been the hard-to-reach holy grail in DeFi. DeFi in its existing overcollateralized form, as evidenced by platforms such as Maker, Compound, and Aave, caters to circular use cases. The only parties willing to show 1.5 to 3 times leverage are cryptocurrency traders.
Under-collateralized lending could make decentralized credit markets more affordable for a wider range of use cases, bringing DeFi into the masses. Unsecured loans are a significant shift for the lending industry, as they rely primarily on just one of the conventional “five Cs” of credit, namely collateral. Unsecured loans are progressively leveraging dynamic solutions to the loan approval dilemma. In contrast, flash loans – i.e. very short-term unsecured loans, often depleted for seconds or minutes at a time – have undoubtedly drawn attention to crypto.
Although industry analysts were initially optimistic but worried about how on-chain lending might retain unsecured quality, the continued growth of unsecured protocols in 2022 has persuaded skeptics.
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