I spent half of a morning browsing through several DeFi lending protocols and all I could think of was how none of what was being offered was a “consumer-facing” product.
At first, it seemed like a bad reality but on second thoughts, I can see why it should never be considered as the current lending system already proves to not be suitable for average Joes.
What we've basically built and named “Decentralized Lending” is an institutional-scale lending solution that is extremely high risk. I can't say there's much of an incentive for borrowers but it certainly has its perks for market makers.
With the unfortunate recent events surrounding providers like a Thorchain(which attempted a sort of unsecured loan solution), which I was totally shocked to hear about their insolvency and $200 million debt, I guess I never really paid attention to its savings and lending offerings as much as I did it's cross-chain swap solution, DeFi lending absolutely carries too much risks for the average person.
The average person is looking for solutions that enables them to get by every day to day expenses and if at any point they wish to make a major purchase like maybe buying a house or a car, they are certainly not having “over-collateralized loans” as their first line of thought on how to finance that.
DeFi loans for the most part are over-collateralized, often marketed as low risks but they've proven to be the exact opposite. As opposed to what the majority of users exploring these platforms see, the entire DeFi lending space is just a giant liquidation business for market makers to make quick profits closing under-collateralized positions as market swings.
DeFi borrowers are dealing with an almost certain liquidation on an over-collateralized loan, so it isn't worth it for the average person.
Credit-based loans on DeFi, not an option
Traditionally, credit-based loans are what the average person leverages to get by as it's practically “unsecured loans” solely based on individual credit scores.
Credit-based loans are loans where the approval and terms (such as interest rates and borrowing limits) are determined by the borrower's creditworthiness. Lenders assess the borrower's credit score, income, repayment history, and debt-to-income ratio before issuing the loan.
Essentially, if you have a decent amount of money flowing through your bank, you should have a pretty decent credit score to access unsecured loans. This is the ultimate consumer service even though it's mostly slavery due to the systemic flaws of not just the lending platforms but the broader financial system making it difficult for smooth repayments.
On one hand, lenders most of the time will attempt to choke you with high interest on short term loans coupled with ungodly penalties for defaulting.
On the other hand, rising inflation causing an increase in cost of living and limited access to income opportunities limits comfortable repayments. This is why approximately over 46 million Americans are in debt.
Evidently, there's a huge market that could appreciate a better lending solution and generally a better economic system that would not have them trapped in debt slavery.
That said, any attempt, however, at a credit-based loan solution atop of crypto will require a layer of centralization and that kills the role of privacy in DeFi.
DeFi has to figure out offering an economic environment that's more vastly beneficial so that people don't have to result to financing things to get by. Bad debt is usually those acquired to settle basic needs and that is something that's crippling the world.
Good debt on the other hand is more of an informed investment because it generally involves collateralization and that introduces a unique layer of risks and rewards that encourages proper market study.
Unfortunately, DeFi currently is run by market makers whose aim at all times is to take your money, either by pumping markets to liquidate shorts or by dumping it to redeem under-collateralized loans and make a bank doing it.
Posted Using INLEO