Under Collateralized loan and Decentralized Finance: A Perfect Match
Decentralized Finance is not just the use of smart contracts to cut off the traditional intermediaries of financial systems.
Rather, DeFi is a triumph- that is, the triumph of technology over legacy systems. It's the coming together of ingenuity, fairness and advanced web concepts to fight for the masses.
For the first time, the huge barriers hindering access to financial products such as lending, savings, and wealth management have been convincingly taken out of the way.
Affordable loan services, robust insurance programs, and decentralized banking as a catalyst for driving financial inclusion are some of the ways it has transformed finance.
However, it is the lending aspect that probably deserves more attention. Why? It is an economic balancer as it provides a mutually beneficial solution between those who have no capital and the ones who do.
On that note, many experts believe lending is one of the strategic sectors where DeFi can significantly revolutionalize the global economy.
Lending in DeFi: overcollaterize loan program as a major drawback
The current lending models on most DeFi networks are built on value propositions that compete better than the traditional options.
However, the criteria for accessing most DeFi lending services are heavily tilted towards the more affluent sections of the space.
The reference here is to the use of overcollaterize loan as the basis for borrowing which has been one of the major economic barriers the banking industry failed to remove.
In simpler terms, the concept describes a situation where a loan facility is approved on the basis that the collateral offered is worth more than the amount requested.
The result is that a huge chunk of low-earning individuals find themselves inevitably excluded from the DeFi ecosystem.
This goes against the founding principle of decentralized finance- to orchestrate a level playing field where people of all classes have equal access to secured and optimized financial products.
Undercollateralized loan to unleash the power of DeFi
To secure the future of DeFi lending, a structure that harnesses the use of uncollateralized loan issuance must be pursued.
Already, some projects have realized this, and are already leading the park.
For example, last year, the famous DeFi giant, Aave, announced its decision to ditch the prevalent lending model, and introduce instead a peer-to-peer system where lenders can make funds available to capital-deficient borrowers using the concept of credit delegation.
However, the major problem with such an arrangement is the inherent risk on the part of the credit delegator.
Why should the loan giver be the source of funds and at the same time bear every liability if the agreement is breached?.
On the other hand, Lendefi, another DeFi project seeking to introduce the concept of undercollateralized lending, has recognized the vulnerabilities that come with a credit delegation approach without extra security measures.
Lendefi seeks to open a new paradigm instead.
In a nutshell, Lendefi is building a protocol that makes undercollateralized lending risk-free for all parties.
Rather than securing loans with the assets of the lender (the lending model of similar protocols), loans and timely repayments are insured through liquidity pools such as Pancakeswap.
Even on a surface-level assessment, that is a more sustainable approach.
Also, one other aspect that might play in the favor of Lendefi Finance is its decision to move away from the costly Ethereum network to the Binance Smart Chain.
To wrap it up, Decentralized Finance is still at a very nascent stage but it already holds a huge promise, especially for the 1.7 billion unbanked population of the world. All that is required now is the continuous scaling of the space to increase accessibility.
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