Bringing Undercollaterilzed Lending to the Masses
HashStack has received $1 million in seed investment after releasing the Open Protocol testnet. Moonrock Capital, GHAF Capital Partners, MarketAcross and Chainridge Capital were among the investors in the round.
Hashstack is the first DeFi lending platform to give loans with little collateral. As you may be aware, there is a fundamental issue in the DeFi financing landscape: over-collateralization. You must put up at least $142 in collateral if you wish to borrow $100. The protocol solves the problem by allowing loans with up to 3x collateral. To get a $100 loan, you need to put down $33.33 as security instead of $142.
According to the company, Hashstack may be connected with other DeFi systems, such as Pancakeswap, to simplify in-app market swaps and boost loan usage. Borrowers may use this technique to exchange loaned tokens for other primary or secondary currencies without turning DApps. Assets from other chains, such as Ethereum and Avalanche C-Chain, are likewise bridged using the open protocol.
DeFi Lending: What is it and How Does It Work?
Like conventional peer–to–peer lending platforms, DeFi lending services allow users to loan their assets to others. They are compensated with interest payments. These platforms are exclusively concerned with cryptocurrencies. They only collect bitcoin interest payments. The monetary gains are paid directly to the users because DeFi structures operate without intermediates.
Anyone who has gotten a loan from a traditional lender or a DeFi platform is acquainted with collateralized loans. As the name implies, collateral is anything of value that the borrower pledges as security in exchange for a loan. It is a type of loan secured by collateral that is wholly supported. In other words, the collateral is worth more than the loan’s principal. On the other hand, undercollateralized loans don’t have all of their assets collateralized. The collateral would not support the principle that the loan was defaulted on.
Decentralized lending is as simple as putting your hand in your wallet and lending money to others. The smart contract and decentralized software, on the other hand, operate as your mediators and negotiators. For example, to make a $1,000,000 loan with DApp, all you have to do is press a few buttons, and you’re done.
The process is swift and simple since you must pick any DApp application that provides a smart contract and borrowers. The user must choose the interest rate on loan, enter it into the app, and the loan must be approved. Once you’ve located a borrower, the smart contract will expedite the whole loan and borrowing process.
Undercollateralized loans may raise questions and concerns, but their purpose is to protect both the borrower and the lender. The pinnacle of DeFi since 2017 has been overcollateralized lending. Platforms like Maker, Compound, and Aave demonstrate how DeFi may fulfil circular use cases in its current overcollateralized state. Only bitcoin traders are willing to maintain leverage of 1.5–3X.
Decentralized credit markets may become more inexpensive for a broader range of use cases if they are undercollateralized, making DeFi more accessible to the general public. As a significant shift in the lending business, uncollateralized lending relies on only one of the “five Cs” of credit, collateral. Dynamic loan approval solutions are increasingly being leveraged by uncollateralized lending. With flash loans, which are short-term loans that are uncollateralized and often only out for a few seconds or minutes at a time, the spotlight is clearly on them.
Sceptics who doubted that on-chain lending could maintain quality without collateral have been convinced by the ongoing rise of uncollateralized protocols in 2022.
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Image credits: Victor He and Swapnil Bapat.
Disclaimer: The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence, asking the right questions, and equipping readers with better opinions to make informed decisions. The writer holds Bitcoin, Ethereum, Cardano, Solana and Cosmos. The writer has a vested interest in the story.