Erik Weijers, a year ago

Lending without collateral: the new growth market for defi?

The market for decentralized finance (defi) would be much larger if users could borrow the way they currently can with a bank. That is: without collateral - and that is currently the common way of borrowing within defi. But this is changing: more and more defi protocols are launching that explore the traditional way of borrowing, but of course in a decentralized form. Not only does this lower the threshold for borrowing, but also for becoming a 'bank'.

Although the amount of money borrowed in defi has exploded from 200 million dollars in early 2021 to 4 billion today, these numbers are child's play compared to traditional credit markets. Bottleneck of the growth of this defi loan market is that the loans are almost exclusively collateralized.

Collateralized lending: why?

Why do people even borrow with collateral in defi? For example, they are Bitcoin holders who need euros without wanting to sell their Bitcoin. They can get a loan with their Bitcoin as collateral. This is a form of lending that resembles the model of the old-fashioned pawn shop. You deposit your golden necklace there and borrow money. When you repay the money, you get the necklace back. Although this form of lending is very healthy, there is only a small market for it. Most people and companies want to borrow money without putting up collateral.

Anyone can become a bank

New defi projects, of which Goldfinch is a prominent example, have set up a lending model where they introduce a third party in addition to the borrower and lender. This is a group of users who assess the creditworthiness of the borrower. To ensure that this group makes the best possible assessment of creditworthiness, it must put money on the line itself. Assembling such a pool of good credit evaluators is the biggest challenge of such a system. Currently, it is Goldfinch's team that assesses the creditworthiness of prospective borrowers. In the future, this function will be decentralized: anyone can participate in the group that assesses the creditworthiness of companies. In exchange for this banking role, these credit raters will receive a higher interest rate.

How can borrowers benefit in this system? Much of the world is excluded from the traditional way of borrowing. It is not profitable for a bank to help a small business in a developing country that wants to borrow a few thousand dollars. For this reason, the aforementioned Goldfinch project has launched in developing countries. The goal is to eventually connect everyone in the world to this platform.

The institutional counterpart of Goldfinch is Maple Finance, which provides loans to crypto companies in particular - albeit with small collateral. Maple Finance's total value locked (TVL) is $650 million. Goldfinch has 77 million in its vaults. Another example of a project that has already made several hundred million in uncollateralized loans is Truefi.


By decentralizing the process of borrowing and lending and recording it on the blockchain, not only can anyone become a borrower but also a lender. Also, traditional borders would no longer be relevant. It would be a true revolution in the credit markets. We are far from there but off to a promising start.

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