@AaveAave is starting native Credit Delegation (CD). Aave depositors can delegate their credit lines. For example, Karen deposits an asset such as USDT to @AaveAave and delegates her credit line to Chad, who draws funds such as ETH from Aave Protocol. pic.twitter.com/MwU1faThIi
— stani.eth ’Lean DeFi’ Kulechov 👻 (@StaniKulechov) July 7, 2020
With this new feature, any two parties can enter into a trusted agreement in which the depositor’s capital can be borrowed by the counterparty. Interest rates, loan terms, and covenants are baked into an OpenLaw agreement and hashed onchain, providing an immutable point of reference for all parties involved.
“Imagine a future where all debt liquidity is parked in DeFi, auditable by anyone. Since CD data is on-chain, credit exposure can be measured and mitigated. Aave will start the CD concept slowly by on-boarding delegators and borrowers that know each other’s businesses.”
As highlighted in the quote, Aave will rollout Credit Delegation with existing OTC lending actors – ultimately growing into a system in which any two parties can enter a peer to peer agreement with fixed terms in an entirely permissionless fashion.
“Credit Delegation will enable liquidity sourcing into traditional finance. Aave starts CD by allowing larger depositors to delegate their credit to borrowers they know. In the beginning, these delegators would be crypto funds while borrowers would be market makers and exchanges. Our mid-term goal is to enable liquidity sourcing into traditional finance, diversifying liquidity sources for money lenders.” Kulechov told DeFi Rate. “Imagine if part of the lending liquidity in traditional finance borrowed by consumers would come from DeFi. That would be groundbreaking!”
What’s to Know?
To leverage Credit Delegation, depositors supply capital to Aave and received aTokens in return. They then use these aTokens to open a Credit Delegation Vault with the parameters (like the desired interest rate) and amount of capital that can be borrowed.
Borrowers enter into an agreement with the depositor and lock in the terms via an OpenLaw agreement. After the borrower’s address is whitelisted by the depositor who owns the Vault, they can then withdraw capital directly from that Vault without having to post any assets as collateral.
Here’s an excellent visual of how this looks in practice.
The benefits of lending in this manner are two-fold. For depositors, the ability to set their own rates allows them to earn higher returns for taking on a higher degree of risk. For borrowers, capital can be accessed without having to post collateral, giving them more flexibility in the way that capital is used once withdrawn.
While there’s definitely a large degree of trust associated here, we can assume that the first set of Credit Delegation will be between parties with a strong social reputation, such as Andre from YEarn.
One of the first undercollateralized loans from @AaveAave
Borrower provided no collateral to borrow, purely based on social reputation.
More details to follow. pic.twitter.com/DfRvd6QrKN
— yearn.finance (@iearnfinance) July 4, 2020
The advent of Credit Delegation also introduces a path to more sophisticated onchain lending, including credit score and risk analysis which can better inform undercollateralized loans between parties that have never interacted with one another before.
Aave Continues to Innovate
With these new features, Aave continues to solidify itself as one of the most innovative protocols on the market. As one of the first to popularize Flash Loans, Aave quickly followed up on the hottest trend of Q1 with Money Market creation, best highlighted by the Uniswap Money Market which allows uses to post Uniswap LP tokens as collateral for loans.
Now, Aave continues to push the envelope with one of the first working solutions for undercollateralized lending – a topic that has long been touted in DeFi as one of the key tipping points which can attract an entirely new wave of users.
With the upcoming release of enhanced governance and fundamental protocol changes to spur growth and sustainability, Aave is set to enjoy it’s biggest year to date.
– governance token (vote on risk parameters/fees/token econ, etc)
– stake $LEND to earn inflationary rewards
– LP's will cover shortfall events (hack, liquidations, etc.). LEND slashed to cover deficit
– If LEND staked won't cover, will mint LEND (dilutive) https://t.co/3Va7gYw53I
— Ceteris Paribus (@ceterispar1bus) July 6, 2020
Cooper is the Editor of DeFi Rate and a contributor to leading DeFi outlets like the Defiant and Bankless. He is active in the DAO ecosystem through projects like MetaCartel and Raid Guild where he seeks to incubate governance models and grassroots community development. He is an ambassador of Set Protocol and the Director of Fitzner Blockchain Consulting where he authors a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.