The current DeFi lending is mainly in the form of digital currency asset mortgages, and the lack of credit loans based on user credit authorization has greatly restricted the product form, user scale and business development of DeFi lending. Lending platforms including Aave, Zero Collateral, and Wing.Finance have all made relevant attempts, but the relevant product forms are not purely unsecured loans based on credit evaluation, but low-secured loans based on credit evaluation Or secured loans. This is mainly because the current DeFi world lacks a pure chain credit system and a legally recognized debt settlement system.
Report
Digital currency lending market
According to the statistics of DeBank, a third-party DeFi data agency, the scale of DeFi loans has reached 2 billion US dollars, which is 14.92 times faster than the scale of loans on September 30, 2019. The top lending platforms are Aave, Compound, etc. The lending forms are mainly mortgage loans, that is, users need to over mortgage the digital currency in their hands, which greatly limits the liquidity of assets.
In the traditional financial market, credit loans do not account for a low proportion of commercial loans. Credit loans such as credit cards and consumer loans have already penetrated every aspect of everyday life. Take the United States as an example. In 2020, the size of the mortgage market in the United States will be 11.05 trillion U.S. dollars, and the scale of credit loans will be 4.11 trillion U.S. dollars, which is about 37.2% of the size of mortgage loans.
Therefore, the DeFi world needs to change the form of lending that only uses mortgage loans to provide users with non-mortgage loans to serve users with a good performance history and love digital assets, and to lower the threshold for users to enter DeFi lending products.
The core threshold of DeFi credit loan products
Credit system
For the development of traditional credit loan business, a complete user credit investigation system is very important. It can record users’ historical default and performance information, and help loan platforms determine users’ default risks. In the field of digital currency, which is mainly anonymous, there is no credit system to record user credit performance, and the lending platform cannot identify user default risks, which leads to the majority of DeFi loans being mortgage loans.
Settlement system
The main function of the credit investigation system is to control in advance, that is, in the loan application stage, the lending platform identifies whether or not to mortgage, mortgage interest, default risk, etc. based on the user’s historical performance/default information.
However, only the credit information system has a limited role, and an enforceable default debt settlement system is needed. That is, the lending platform can use the judicial system to perform the rights of creditors and require the debtor to liquidate other assets to repay creditors and compensate creditors for their losses.
However, the current DeFi field lacks an effective debt settlement system, which makes it impossible for credit loan products to require mandatory performance after users default, which also increases the difficulty of designing digital currency credit loan products.
DeFi credit loan product introduction
Aave
As the current DeFi lending platform with the largest lending scale, Aave has always focused on mortgage loans and announced in July 2020 that it will launch credit loan products in the future. It allows credit delegation between users (Credit Delegation), that is, user A can authorize their loan credit to user B, so that user B can apply for unsecured loans. But once user B defaults, the system will liquidate user A’s mortgage assets.
The design logic of Aave’s credit loan product is more similar to that of secured loans in traditional finance, that is, if a user does not have mortgage assets but wants to apply for a loan, he must find a guarantor who is willing to guarantee his debt and pay the guarantee fee.
At the same time, the guarantee terms between the two parties will be generated by the legal smart contract platform OpenLaw to generate a final legal contract, which will be recognized by the local legal agency. Once the guaranteed party breaches the contract, the guarantor can resort to the law to protect its economic interests.
Zero Collateral
The Zero Collateral project was officially launched in January 2020. The main direction is non-pledged loans. The lender needs to ensure that the value of the pledged digital currency is equal to the loan amount minus the total interest paid for all previous loans. With the increase in the number of loans, the value of the pledged goods required for the loan will eventually drop to zero. Simply put, the better the performance credit, the lower the pledged assets users need.
At present, the main loan asset supported by the platform is DAI. For example, users need to deposit a certain amount of DAI first, and then the platform uses Mint zDAI as a deposit certificate, and at the same time lends AI from the market according to the amount of DAI. The repayment period of each loan is 72,800 Block, about 30 days, the annualized interest is 4%-12%.
The agreement stipulates that each wallet can only have one active loan at most. After the principal and interest are paid off, the user can apply for another loan. And after the repayment is complete, the upper limit of the new loan will be increased by 50% of the historical cumulative repayment interest amount. For example, if the first loan is 1 DAI and the interest repayment is 0.12 DAI, then the maximum amount of the user’s next loan will be increased from the previous 1 DAI to 1.06 DAI.
Wing.Finance
The Wing project is a DeFi loan project launched in September 2020. It is based on the Ontology ONT public chain instead of the ETH public chain. In the design of loan products, Wing will introduce a credit evaluation mechanism to reduce the pledge rate of user assets, and gradually realize no mortgage.
The Wing credit mechanism uses the digital identity system of the ONT ontology chain to collect users’ real KYC information and complete the judgment of user performance risks.
The platform will gradually determine the user’s asset mortgage rate based on the user’s historical performance information. If the loan performance on the Wing platform is good, the user will be required to have less mortgage assets.
According to the disclosure of the Wing project white paper, the V1 version of the product will not retain the user’s personal information, but the following authorization is required:
Personal real name authentication;
Twitter account authentication;
Wing credit score certification;
Conclusion
Credit lending is the next important direction for the development of DeFi lending platforms, and the two thresholds that lie in front of the major lending platforms are: the credit investigation system and the settlement system. However, Aave, Zero Collateral, and Wing have all made relevant attempts and explorations. Among them, the essence of Aave is to guarantee loans, and Zero Collateral is to gradually reduce the pledge rate through credit accumulation, and WING introduces the KYC information based on the real world of users. Credit information system.
However, it should be noted that the credit information system introduced by Wing requires users’ real KYC information, which may be incompatible with the anonymous DeFi world, and some DeFi users resist. Aave and Zero Collateral cannot be regarded as true credit loan products.
In general, DeFi credit loan products are still in the early stages of the market, and it is still unclear who will stand out in the future.
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