This is a fairly new niche in DeFi. However, a few lending protocols offer this now. Time to dig in and see what’s cooking in DeFi yield.
What Is a New Form of Collateralized Lending In DeFi?
Undercollateralized (UC) and uncollateralized lending (UCL) protocols. These are the new kids on the DeFi lending block. Typically, DeFi uses overcollateralized lending. In the following twitter thread from Spencernoon.eth, you will see more about this crypto lending services:
Stable yields on top lending protocols are down to less than 2%…but 10%+ yields are far from dead.
Here's where the yield party went ????
— spencernoon.eth (@spencernoon) May 27, 2022
Spencernoon.eth is an active Crypto Twitter person, dove deep into this with a thread, dedicated to this topic. He is a respected investor and General Partner at Variant.fund. Furthermore, he is also part of a free weekly newsletter for on-chain alpha leaks. That is Ournetwork
It’s important to let you know that the DeFi lending market is to reach $1 trillion in value, according to a Polygontech blog. DeFi will reach this milestone with two approaches.
- It’s unique peer-to-peer lending.
- Pairing with institutional lending. This will stimulate steady growth.
However, UC (undercollateralized lending) is causing restrictions. As a result, DeFi adoption is in the waiting room.
Source: Polygon tech blog
Who Are the New Kids on The DeFi Block?
We will look more in-depth at four new protocols. Their biggest issue to solve is identity and reputation from a borrower. How can they lend UC or UCL to an anon Twitter person and knowing they still get their loan back? That’s not an easy task when dealing with on-chain logistics. One possible solution is to complete KYC off-chain.
An interesting add-on is that we also see some PMF (Product-Market Fit). PMF is a very important marketing strategy. In a nutshell, it means that a new product enters the market as a dress rehearsal. As a result, this will show how well the market accepts it.
So, let’s have a look at four protocols that offer UC and UCL loans. How they do it and to whom.
- Clearpool—Currently they have $800 million in outstanding loans.
- —$450 in outstanding loans.
- Maple Finance—$100 million in outstanding loans.
- Goldfinch Finance—Also $100 million in outstanding loans.
Compared to other protocols, their outstanding loans are not that big. However, it’s a start, and they all offer UC or UCL loans. That does make them stand out.
The picture below shows how Maple works.
Source: Maple Github
Moreover, now, the first three, Maple, TrueFi and Clearpool have something in common. They all lend to credible crypto institutions like.
- Alameda Research
- Amber Group
- FBG Capital
- Framework Labs
- Jane Street
- JST Digital
- Symbolic Capital
- Wintermute
The reason being? The UCL they offer has better DeFi yield rates than what they get outside of crypto!
There is also a reason why they offer these loans only to institutions and not to retailers. That reason is fairly simple. Currently, they don’t have the means to KYC thousands of retailers. This KYC happens off-chain. For example, offers such a service.
Other Institutions
Goldfinch approaches this with a different angle. Moreover, they lend to institutions in emerging markets. For example, they collateralize their loans differently. In addition, they use off-chain assets. Currently, they offer some of the most attractive yields. How about 10% to 34% DeFi yield and the GFI token is the reward?
Catering to Retail
A protocol that caters to retail is Gearbox Protocol. They boast a TVL of $17 million. Whitelisted protocols, like Uniswap, Curve, or , have 10x leverage. Also, they roll their product out slowly, but it should be available for testing very soon.
Source: Gearbox Protocol
In addition, some protocols cover their LPs with a form of insurance. They do this, for instance, by diverting a percentage of each pool’s interest to an insurance pool. This shows that they are working on ways to cover their LPs from forfeited loans.
Conclusion
On the other hand, we see many innovative ways to offer UC and UCL loans. Each protocol has a different way how they want to solve this riddle. Most importantly, DeFi lending changes with these protocols. Small loans, student loans, or mortgages can turn in the future to these protocols.
Moreover, there are still issues that they need to iron out. For example, scalability, regulation, or relying on off-chain KYC. However, they made a start, which is important.
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