Crypto lending reinvented: This solution can reduce liquidation and overcollateralization risks
Crypto lending remains one of the most important use cases in decentralized finance (DeFi). The three largest DeFi lending protocols — Aave, JustLend and Compound — collectively hold over $12 billion in total value locked (TVL), or 23% of the total TVL in DeFi.
Despite their popularity, DeFi lending platforms haven’t solved the most ardent problems, which are overcollateralization, high liquidation risk and actual asset ownership.
In DeFi, lenders can have access to a wide variety of yield opportunities and passive income streams. On the other hand, borrowers are exposed to more risk because they have to pledge a higher value of collateral than the amount borrowed. This happens because DeFi lending is decentralized and noncustodial, meaning that there are no traditional evaluations like credit scores or income certificates to determine a safe loan amount. Therefore, DeFi loans are overcollateralized. For example, borrowers can get 50% or 75% of the amount they put up as collateral.
Despite overcollateralization, the risk of liquidation remains high due to the volatility of crypto assets. For example, if the price of the assets used as collateral drops below a certain threshold, the protocol automatically liquidates them.
While crypto lending remains an essential part of the DeFi ecosystem, the market needs better models to help borrowers feel safer about their collateral.
Some DeFi protocols try to solve the common challenges of lending platforms, and layer-1 chain protocol Nolus proposes a different approach that favors both lenders and borrowers.
The Nolus protocol is built on the Cosmos SDK. It addresses some of the major inefficiencies of the crypto and DeFi money markets, including overcollateralized lending, high risk of
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