Undercollateralized Loans – The Future of DeFi Lending?

Without a doubt, decentralized finance (DeFi) is showing solutions to improve the financial ecosystem. The traditional financial sector so far, with its decades-old financial products, has yet to make any significant improvements.

Cryptocurrencies and blockchain technology bring innovation in the financial industry. Cryptocurrencies generate pronounced growth and attract the main attention, which is accepted by everyone as a new asset class.

The journey of cryptocurrencies has taken a new turn as Decentralized Finance – DeFi offers innovative features.

Soon, DeFi will be eating away at traditional finance, dramatically expanding the global lending market.

Undercollateralized Loans – Under-mortgage loans

So what is borrowing under the mortgage? Why is it considered inevitable for customers? Let’s find out with Allinstation.

Collateral is what helps secure a loan from the borrower and serves as a guarantor for the lender.

A loan with collateral is a type of secured loan that allows the borrower to present an asset to borrow.

The amount borrowed depends on the value of the collateral. They pose no risk to lenders as they can easily liquidate assets in case the borrower defaults.

Conversely, under-mortgage loans are not fully mortgaged by assets, a great opportunity that allows people to get good loans without a mortgage.

Mortgage-backed loans give lenders safety and satisfaction.

However, in order for the decentralized financial sector to develop, credit loans are essential.

Therefore, it is impossible to ignore the need for unsecured loans and under collateralized loans.

DeFi and traditional finance

The credit market in the traditional financial sector is largely inaccessible to many people.

For beginners, you need to have a credit score or source of income to assess the bank’s credit appraisal.

This is also not to mention the lengthy and excessive processes involved in approving loans by traditional old-fashioned banks.

335 — *Bank vs. DeFi Loans by Mark Cuban*

Decentralized lending attempts to remove as many of these barriers as possible.

Allow anyone anywhere to secure a loan on platforms such as Aave (AAVE), Compound (COMP) or Maker (MKR).

However, with the first generation of decentralized lending protocols, there is no need for bank accounts as well as tedious credit checks as users need to overfocus their lending positions.

But there is also a problem that lies in the form of unreliable, overpaid loans – collateral.

Users with low/no banks are likely to be unable to afford the necessary cryptocurrency collateral (or even own many valuable assets) to get started.

For these segments, the cryptocurrency market needs to provide an alternative path – entering non-decentralized cryptocurrency loans.

The Rise of DeFi

DeFi is an ecosystem that provides financial services, driving decentralized networks to transform traditional financial services into more reliable and transparent ones.

DeFi offers the same services as those in the conventional financial sector but has made significant innovations and changes to these products.

DeFi retains the potential of centralized finance while providing more flexibility to customers.

Supported by the basic attributes of blockchain, such as decentralization, P2P public ledgers and integration of smart contracts.

DeFi has improved some traditional financial products and basic bugs, with an enhanced user experience.

DeFi offers more flexibility, improved trade suitability for consumers, along with improvements to technology parameters.

Profits and interest rates for services such as mortgage accounts and savings accounts are relatively good when compared to traditional centralized financial products.

The decentralized financial movement has generated marked growth in the cryptocurrency space, surpassing more than $14 billion in total value locked in protocols.

The increase in demand for DeFi is no surprise that investing in traditional financial funds yields negative or very low returns.

DeFi has made important strides in terms of specifications and financial profitability brought by the protocols to users.

DeFi is built on blockchain technology, so:

There is no need for intermediaries, i.e. banks, brokers, or agents. This helps reduce costs.
It operates intercontinentally, regardless of borders, so most people are accessible.
It does not require any standard conditions.

This makes DeFi a wide-ranging coverage service, accessible to everyone.

With a large number of users across the globe preferring the decentralized future of the financial industry, powered by DeFi, powered by blockchain.

Its initial achievements and acceptance have strengthened DeFi’s growth. The total number of DeFi users increased at an exponential rate, more than ten times higher than last year.

The success of DeFi itself speaks to the constant improvement and development in its services. The most recent feature added is Under collateralized Loans.

Peer-to-peer loans without formal collateral requirements.

The World of Undercollateralized Lending

This does not mean that mortgage loans are not useful, but on the contrary, they serve a completely different purpose from what the average borrower needs.

Excessive payment requirements for cryptocurrencies prevent the vast majority of borrowers around the world from participating.

By reducing or even eliminating the need for collateral, crypto loans can become more accessible to a wider audience.

This idea sounds like an unattainable holy grail but don’t dismiss it.

A non-securitized loan is a loan that is not fully mortgaged.

If the loan goes into default, the collateral (if any) will not be able to fully cover the principal.

In general, the decentralized lending market (including non-mortgage lending) can be categorized into 8 different categories as shown below:

Zero collateral protocol or EasyFi are the DeFi under-mortgage lending markets available on the Ethereum blockchain.

Borrowers only need to maintain collateral equivalent to the value of the loan minus the total interest paid from previous loans.

Concluding Words

Nowadays, it is difficult if you want to borrow a large amount of money and mainly due to the lack of collateral. The development of decentralized technology has the potential to replace centralized finance. Under-mortgage loans will enhance DeFi’s standing, with better performance, flexibility and aspects distinct from traditional finance.

DeFi is still relatively new and continues to grow. The DeFi ecosystem drives everything that goes on and exposes as well as corrects flaws in many traditional services.

Since its inception, DeFi-related products have helped a lot of people in need across the globe.

It is entirely reasonable to say that under-mortgage loans can enhance the derivative trading of cryptocurrencies. Bring help to those who don’t have any collateral on hand.

It’s clear that Under Collateralized Loans are the future of decentralized finance.

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