Problem Statements
Overcollateralized lending protocols are become the norm in Defi today as seen with new lending protocols launching across new chains or a lot of existing Defi applications venturing into lending space. Everyone is focused on creating an overcollaterlized design because everyone wants a good buffer of collateral to manage liquidations so that they don’t have any bad debt in their system. Bad debt leads to token dilutions which isn’t preferred by the community and also impacts the long-term sustainability of the project.
This overcollaterlized designs has also been the norm for stablecoin protocols as peg stability issues can lead to protocol failures.
Capital Inefficient
We havn’t seen any innovation in a long time in the overcollalteralized CDP (Collateralised Debt Position) design in an on-chain and decentralised setting. The current designs are capitally inefficient due to their overcollateralized nature and not suitable for the next phase of user adoption.
High Liquidations
Due to the volatile nature of the space, their are a lot of protocols whose business models are reliant on capturing revenues through this liquidations which during recently during a high volatile period amounted to around $1 bn. This leads to bad user experience and also limits the extension of use cases towards businesses which also wants exposure to this growing crypto and Defi space and utilise the credit generated in their businesses. Currently, businesses like these who have periodic cash flows cannot take credit against their crypto assets due to the fear of getting liquidated in the midst of getting their next cash flow.
Limitations in fully decentralised supply sources
There needs to more mechanisms for stablecoin supply generation apart from relying solely on leverage. As this mechanism can introduce limited supply constraints as mentioned above and can also affect supply during bearish time period when the demand for credit is low specially if the yields on real world assets like T-bills are higher than what is offered by lending protocols. We believe their are multiple mechanisms of generating this pure decentralised supply like by catering to users looking for volatility hedging, credit risk protection, high duration stablecoin lending by catering to businesses with periodic cash flows, flexible bonds with perpetual maturity etc.
Enabling unsecured/undercollaterlized lending is still a distant dream
It is not possible currently to enable undercollaterlized lending in a fully on-chain pseudonomous manner. There is a need of new type of credit protection markets and incentive mechanisms to push past the boundaries of Defi to enable real life use cases which are not just centered on enabling leverage demand but instead can fulfill plethora of use-cases for normal everyday users.
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