Since emerging, decentralized finance (DeFi) has revolutionized finance by providing accessibility and control. Crypto lending is one of the most critical use cases in DeFi, enabling crypto holders to lend and borrow assets without intermediaries, thus democratizing access to financial services.
Challenges faced by DeFi
The privileged position of lending protocols in DeFi is underlined by the three most prominent players in this subsector: Aave, JustLend and Compound. Together, these platforms boast over $12 billion in total value locked (TVL) — about 23% of DeFi’s overall TVL of $50 billion as of mid-July 2023. These numbers demonstrate the immense potential and interest in decentralized lending.
Nevertheless, DeFi lending still faces critical challenges. The two main concerns are overcollateralization and the high risk of liquidation. These problems seem imminent due to the innovative nature of DeFi lending, which bypasses the traditional system at the cost of sacrificing its safeguards.
How overcollateralization and liquidation risk disadvantaged borrowers
In DeFi, lenders can take advantage of yield opportunities to seek generous returns, which makes the sector attractive. However, the flip side is not so bright for borrowers. They have to pledge a higher value of collateral than the loan amount they receive, which exposes them to more significant risks.
This approach results from the decentralized and noncustodial nature of DeFi lending, which lacks traditional financial assessments such as credit scores or proof of income to assess a potential borrower’s risk profile. Finally, DeFi loans are overcollateralized — borrowers may only get 50% or 60% of the value of the assets they’ve locked up as collateral.
Futures and perpetual contracts provide users the ability to obtain more of the collateral threshold, but the downside is that traders don’t receive ownership of the assets.
While overcollateralization is understandably a protective measure, it doesn’t eliminate the risk of liquidation, especially given the high volatility of crypto assets. If the price of a digital currency locked as collateral drops below a set threshold, the lending protocol can automatically trigger a liquidation event, resulting in a potential loss for the borrower.
Crypto lending continues to play an essential role in DeFi, but the industry needs to develop more robust and borrower-friendly models. By addressing these issues, the DeFi sector can become an environment where borrowers feel safer and more secure about their collateral, further driving the growth of the decentralized lending space.
This layer-1 protocol introduces new practices to attract borrowers
The challenges within DeFi lending have been significant, driving the need for innovative solutions, some of which are available today. Nolus Protocol, built as a layer-1 ecosystem on Cosmos SDK, recently introduced its flagship product, DeFi Lease, which reduces the risk of liquidation and overcollateralization.
Nolus’ lending product locks in the price of a chosen asset, helping borrowers capitalize on market potential without the immediate need for repayment.
According to Nolus’ team, the DeFi lending protocol disrupts traditional DeFi norms by offering financing up to 150% on the initial investment, significantly reducing overcollateralization by at least three-fold compared to the market average. At the same time, Nolus significantly reduces liquidation rates compared to the market, resulting in a significant decrease in the price of the locked asset during potential downturns. The product offers partial liquidations to keep the users’ loan-to-value (LTV) ratio within safe levels.
Besides these features, Nolus also maintains competitive borrowing costs. It ensures affordability with a fixed interest rate set at the time of contract creation and negligible transaction costs. Coupled with the simplicity of the user interface, streamlined onboarding processes and retained ownership, Nolus’ DeFi Lease serves as a comprehensive solution to borrowers’ pain points.
To ensure liquidity, Nolus has access to most decentralized exchanges (DEXs) on Cosmos, enabling it to offer an in-house token swap solution. Lenders can only deposit stablecoins. The concept revolves around using stablecoins as the primary funding method for liquidity in the Nolus pools, serving both lenders and borrowers.
Source: Nolus
While Nolus’ crypto-lending product changes the game for borrowers, it aims to meet the needs of all parties involved. Nolus co-founder Ivan Kostov explained:
“The Nolus Protocol money market is created in such a way to incentivize all stakeholders within the ecosystem — from borrowers taking the DeFi Lease to lenders providing stablecoins in a decentralized manner, to stakers guaranteeing the stability of the app-chain and to regular crypto users swapping and buying assets in a cross-chain environment. All done with technology extracted as far away from the end-user as possible, thus driving adoption in the industry.”
Thanks to Nolus’ DeFi Lease, users can use their equity to borrow more crypto funds while knowing that the liquidation risk is significantly reduced to a minimum.
With its unique business model and user-friendly interface, Nolus Protocol can attract more retail and institutional investors to DeFi, helping to make decentralization a mainstream use case. With its core technology, Nolus aims to become truly cross-chain, allowing users from any blockchain and wallet to use the decentralized noncustodial money market, further expanding its reach and accessibility to a wider audience.
Learn more about Nolus
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