Decentralized Undercollateralized Lending

Description

Undercollateralized lending remains a holy grails in crypto as it constitutes effectively 100% of the world’s $140 trillion traditional debt markets.

The lack of undercollateralized lending leaves DeFi mind-numbingly inefficient with capital. Borrowers must lock up capital representing over 150% of the value of the loan they desire. In traditional markets, borrowers only have to pony up roughly 60% in assets for the loan.

Undercollateralized loans have been tried in crypto, but only in CeFi markets. That reached ~$60B in 2022, but plummeted 90% the following year as participants like Celsius proved wildly inept and often outright fraudulent.

The essential technological unlocks to do this in a decentralized, transparent yet privacy-preserving way were ZKP broadly and zkTLS specifically.

ChainLink and Teller built a PoC and Accountable took this further by attempting to build a meshed network of borrowers and lenders so that participants can check with the others whether a borrower has undisclosed liabilities.

Other thoughts

• The company must onboard as many data sources and incentive mechanisms (bank statements, networks of other lenders, IRL audits, etc.) as possible to be able to profitably price risk at low rates to compete with centralized lenders
• It may benefit from network effects: the more major participants join the network, the more likely it is that a borrower’s liabilities are fully accounted for… the stronger the incentive not to lie or act irresponsibly… the more likely it is that future lending will occur on the platform.

Comparable Companies

• Accountable
• Teller & Chainlink

Further Reading

https://www.mackenziemorehead.com/putting-the-cryptography-back-in-crypto/