With Aave’s credit delegation service, unsecured borrowing is possible in DeFi. But it won’t replace your credit card.
To earn interest on cryptocurrencies and borrow against them, Aave developed a credit delegation in early July. This service allows those with a lot of collateral but no desire to borrow to delegate their credit line to a trusted third party. The delegator gets a portion of the interest for essentially co-signing a loan to the responsible third party, boosting their return.
This is a big deal for DeFi financing, which has always relied solely on one of the four Cs of credit: collateral. That’s to be expected when lending money to strangers online. Credit delegation is a step toward basing loan choices on the borrower’s income, savings, or repayment history.
The shift comes at a time when DeFi is hot. According to DeFiPulse, Aave alone staked over $1 billion in crypto on Aug. 15. Currently, this new economy is backed by almost $7 billion in digital assets. Only four initiatives (MakerDAO, Compound, Aave, and Curve) have bet over $1 billion.
We are locking a lot of capital into DeFi, said Aave CEO Stani Kulechov.
On Aave, Kulechov estimates that 75% of consumers aren’t using credit lines. They only earn interest on deposits (and governance tokens).
Traditional financial institutions are looking to borrow stablecoins to convert into fiat for analog-world lending or smart contracts set up to conduct specific strategies.
The idea is that users with capital returns on Aave can raise those returns by sharing their credit lines.
Backs a Loan Without Collateral
The law and the contract.
You can get access to OpenLaw contracts through Aave. These contracts let the person who has a credit line set up terms that their partner will agree with. They can go to arbitration or the courts if they don’t pay on their end of the deal.
It’s up to the person who owns the collateral to decide which specific rules they want to make of the people they give their money to. The good thing about OpenLaw is that it shows the contract terms right in the smart contract that governs the relationship.
Kulechov said that he thinks the OpenLaw contract shows what could be done with it. After all, you can decide how to do it.
The Deals are Set Up This Way
For Deversifi, an exchange, the Aave team has done one so far. Kulechov explained why an exchange would need to borrow money: They make the market.
Aave hasn’t said who gave Deversifi credit.
Kulechov said that what we see now in credit delegation is only a minimum viable product that can be used. Kulechov said, now we match the people who give and the people who borrow. In other words, it’s Aave who spreads the word about the project to people who have a lot of money and then finds the right people to work with.
People can’t do this hands-on process all the time, though.
So, Where is It Going?
This is where tokenomics, or in this case, Aavenomics, comes in. This is where it comes in.
People who own AAVE, Aave’s governance token, are supposed to start scaling credit delegation as Aave goes more decentralized. Users would set up pools approved by the holders of the AAVE. They would look for businesses that needed liquidity and see reasonable credit risks.
If they looked at those pools, delegators could decide if they should give them money or not. People who wanted to put their money into a pool of collateral would always have to decide whether or not they wanted to give up their credit and whether or not the risk profile of that pool was appealing.
Kulechov thinks DeFi could be a great source of money for things that don’t use crypto.
So even online lenders who are giving money to people in the real world might borrow stablecoins on Aave and convert them to fiat to lend them money. This is because Kulechov thinks that DeFi will beat the interest rates on the liquidity sources they usually use, such as private placements and bonds.
This hasn’t been tried yet, but it’s what Aave wants to do with credit delegation in the future.
Delegators Avoid Default
Most of the time, banks do this by carefully screening the people they let use their credit lines, or underwriting, as bankers call it.
But another project that could be important is Opium, which said Saturday that it had made a credit default swap (CDS) on the Aave protocol. A CDS is a contract that protects the buyer if a third party doesn’t pay back a loan. The seller gets a premium in exchange for making the buyer whole if the loan doesn’t work out.
This is still a work in progress, but the goal is that RealT would be able to tokenize the value of your home. Then, people who own AAVE could vote on whether or not to accept home equity tokens as collateral on Aave.
As a result, people with home equity could have a small way to earn a small amount of money. When MakerDAO users took out personal loans for real-world needs last year, the interest rates rose when the system was first used. This is why it’s so important to ensure that this doesn’t happen to you!
However, Aave has ways to lend money at stable interest rates.
When Aave first started, it was called EthLend. In November 2017, it had a $17 million ICO. The team hasn’t said when version 2 would be out.
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