We've launched 🚀🚀🚀
Building the first ever protocol to offer you true unsecured lending.
— Teller Finance (@useteller) July 16, 2020
Stemming out of a16z’s crypto school, Teller is the brainchild of the Zero Collateral project we covered a few months back. Now, the project has rebranded, revamped, and relaunched an innovative approach to undercollateralized lending on the back of $1M in funding from notable crypto funds like Framework Ventures and Parafi.
As illustrated in the project’s whitepaper:
“Teller is an algorithmic credit risk protocol, built to enable the creation of decentralized lending markets that can offer unsecured loans. The protocol’s unique cloud-based infrastructure can connect to, and privately compute credit and banking data to generate individual loan terms based on a users’ creditworthiness.”
What emerges is a new primitive which favors those with strong credit in legacy markets to act as a state of truth for loans issued on Ethereum.
How Does it Work?
Teller leverages a distributed cloud network and Credit Risk Algorithms (CRAs) to pull real-world credit scores which shape different loan requests. Interest rates on Teller vary relative to a borrower’s likelihood to pay back the loan, in tandem with the level of collateralization required. In an attempt to bridge the gap between DeFi and CeFi, borrowers who default on Teller loans may also have their credit score affected as well.
Underpinning this unique design if a familiar framework of asset pools backed by liquidity providers. These pools, called Autonomous Teller Markets (ATMs) issue suppliers tTokens – or interest-earning representations of the collateral locked within the protocol. ATMs are non-custodial and given the riskier nature of undercollateralized lending, are likely to offer some of the highest APYs on the market.
To start, governance of the Teller protocol will be handled internally by the core team and key stakeholders. Over time, Teller will look to gradually decentralized ownership of key parameters to its community in what many can only assume to be a Teller governance token. While there was no mention of validators needing to post a bond to host a node, we can only assume that with the gradual decentralization of the protocol will come tokenized incentives to add value.
Undercollateralized Lending Heats Up
Now that DeFi has found product-market fit in the form of collateralized lending, it’s fascinating to see how new protocols are stepping up to the plate to tackle the trickest form of lending to date. Given crypto’s pseudo-anonymous standards, protocols like Teller are looking to pull from legacy markets to offer insight around trust that are currently non-existent on the Ethereum blockchain. Over time, we can only imagine that these credit scores will inevitably live on-chain, but for now this approach is exciting to say the least.
Teller aims to bring unsecured lending to Open Finance.
CREDIT RISK: assessed from traditional credit&banking data
DEFAULTS: discouraged with debt collectors to affect credit reports
— Julien Thevenard (@JulienThevenard) July 16, 2020
Teller’s launch comes shortly after Aave’s announcement of Credit Delegation, a different form of lending in which trusted parties can enter in agreements to borrow against another counterparties collateral. While these designs drastically vary, it’s worth highlighting that new forms of decentralized lending are being pioneered every day – a sure sign that DeFi is set to take things to the next level in 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.