- Aave Protocol, a DeFi lending platform, announces its new “no-collateral” lending platform
- Aims to increase the overall liquidity in financial lending across decentralized finance platforms.
A tweet by the Founder and CEO of Aave Protocol, Stani Kulechov, explains the new Credit Delegation (CD) platform in detail. This new credit facility allows Aave protocol depositors to delegate their credit lines to peers, who can then borrow from Aave Protocol even when under-collateralized.
The current DeFi lending space employs an over-collateralized structure whereby borrowers must deposit substantially more than they source from the protocols. However, the new system, as explained, will allow borrowing without depositing collateral (albeit at a higher interest rate).
The OpenLaw partnership to foster enforceability
In a bid to ensure trust in the system, Aave has partnered with OpenLaw, a ConsenSys backed firm dealing with the development of blockchain-based contracts, to create a formal agreement between the borrowing and lending parties – ensuring the enforceability of the loan.
Once in place, the lender sets up the credit line specifying the amount of credit and repayment schedule and interest – enabling the CD smart contract. The borrower will now be able to access the credit line and repay according to the schedule set out.
This allows the borrower to access extra lines of credit without the need for collateral. At the same time, the lender earns more interest on the credit line provided for the under a collateralized loan. Aave protocol (the intermediary) bears the risk of borrowers’ insolvency.
Is this the future of DeFi?
According to Stani, the CD system presents a new gateway for scaling loan services across the traditional finance markets allowing anyone to source and lend money into the DeFi space. While the DeFi liquidity spectrum is still narrow, Stani believes the new CD system has the capability of sucking up all the debt liquidity across traditional finance markets, providing a transparent and easily auditable platform.
“Besides building legal agreement functionality with @OpenLawOfficial, various credit scoring systems, and the community can build additional features for credit delegators. The future of DeFi is interoperable with all finance,” Kulechov said.
Aave is on a trajectory to bring DeFi use cases to real-world users after the protocol adds BTC and Tether stablecoin, USDT, as collateral. The company also released a cryptocurrency payment application in February 2019, allowing users to pay their utility bills without a fuss.