DeFi may set off a wave of unsecured loans
Editor's Note: This article comes fromEthereum enthusiasts (ID: ethfans)Editor's Note: This article comes from
Ethereum enthusiasts (ID: ethfans)
Ethereum enthusiasts (ID: ethfans)
, Author: Stani Kulechov, translation & proofreading: Min Min & A Jian, reprinted by Odaily with authorization.
The unsecured loan (unsecured loan) realized through credit authorization means that the lender uses the idle credit line of the DeFi liquidity provider to make a loan without providing additional collateral.
For liquidity providers, unsecured loans are a way to increase passive income, earning money by charging loan interest rates. Lenders can make loans without providing collateral by only paying a higher loan interest rate.
Now it's DeFi's turn.
In July, Aave officially announced the credit authorization loan service. This is the first meaningful attempt in the DeFi field to launch unsecured loan products so far.
Before going any further, let’s talk about why DeFi needs unsecured loans.
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The concept of decentralized finance is very clear, which is to build a better financial ecosystem that is open to people all over the world.
For the core values of DeFi, the community has reached a very clear consensus: no KYC review, no whitelist, everyone abides by the same set of rules, no geo-blocking, no credit score, and no paperwork.
Furthermore, DeFi should be open-source and non-custodial: as the owner of funds, you can dispose of your funds whenever and wherever you want.
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Credit can improve the efficiency of DeFi's capital use
However, although many depositors have deposited assets in the lending agreement, they do not want to use them for loans. This has resulted in a large amount of locked value being left idle in the lending agreement. In other words, there is a lot of borrowing capacity in most lending protocols that goes unused — a very inefficient use of funds.
This is the problem to be solved by credit authorization.
In order to improve the efficiency of capital use, Aave has launched the credit authorization function, that is, those depositors who have idle borrowing capacity can authorize their credit line to people they trust, so as to earn extra income.
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Credit authorization combines smart contract functionality with peer-to-peer trust. If DeFi's liquidity providers authorize credit lines to individuals instead of smart contracts through credit authorization, this introduces trust. In a credit authorization, it is important that the lender trusts that the loan will be repaid.
⚠️ Wait a minute! Isn't trust bad? ? ?
Minimizing trust at the base layer is great, but at a higher level, trust is a great trait to have for efficient use of funds!
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Using OpenLaw to Ensure Credit Authorization-Based Loans Are Paid
In the case of Karen and Chad, in order to ensure that Chad repays the loan, they use OpenLaw to ensure that the transaction is legally binding.
OpenLaw is an interesting tool that allows Karen and Chad to come to an agreement and execute the smart contract code directly from the Ethereum wallet.
Each credit authorization will create a smart contract-based credit authorization vault (Credit Delegation Vault).
With OpenLaw, all of these parameters can be selected through a programmable fiat agreement between Karen and Chad, allowing Chad to withdraw funds freely.
The credit-based authorization library acts as a "credit card". Take the example of Karen and Chad, Karen deposits a fund in Aave, obtains the corresponding credit line, and authorizes her own credit line to Chad. That is, Chad's loan is backed by Karen's deposit.
This way, Chad doesn't need to post collateral and is happy to pay Karen an additional interest. To achieve a win-win situation!
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Peer-to-peer and peer-to-peer protocols
Credit authorization can obtain liquidity in two ways:
Peer-to-peer trust: Deposit users can authorize credit lines to people they trust through credit authorization. This person could be a business partner, friend, trader, or even someone who has earned our Bankless badge.
Smart Contract Trust: Stakers can also authorize lines of credit to smart contracts with predefined functions to programmatically enforce certain limits.
yEarn enables depositors on Aave to delegate Dai credits to yVault with pre-defined functionality. In this way, the credit risk generated by activities such as liquidity mining can be reduced programmatically.
Welcome to our article about yEarn to learn more about the yEarn protocol.
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Aave has completed its first credit authorization: the decentralized exchange DeversiFi has successfully drawn a credit line through Aave's credit loan mechanism. Similarly, we can see that as interest rates fall, the traditional financial industry will obtain credit from the DeFi field at lower interest rates in the future. DeFi will become another competitive funding source.
what does it all mean
It is conceivable that social reputation-based credit scoring projects such as Tellor and Union may use DeFi protocols such as Aave's credit authorization to obtain liquidity.
what does it all mean
are you ready?
