Lending & Borrowing is an extremely important piece in the Defi (Decentralized Finance) market. It plays an important role in the survival of an ecosystem. It is a place that pulls a huge amount of money from the traditional financial market (TradFi) to the DeFi market. In this article, let’s explore the difference between Uncollateralized Lending and Credit Protocol.
What is Uncollateralized Lending?
Uncollateralized Lending is a piece of the puzzle in the Lending & Borrowing segment aimed at users who are individuals and organizations in the traditional financial market.
Individuals or organizations using the Uncollateralized Lending platform can access loans without collateral. Similar to when you borrow money through current loan apps, you only need to KYC your identity to be able to borrow an amount of money that suits your needs. However, you have to pay a higher interest rate than normal.
A typical project in the Uncollateralized Lending segment is TrueFi (TRU).
What is Credit Protocol?
Credit Protocol aka Under-Collateralized Lending is a form of loan with collateral that is worth less than the loan asset. Take a simple example when you have a motorbike worth 10 million VND and you mortgage that car to borrow 20 million VND, that is called Under-Collateralized Lending.
Typical projects in the Credit Protocol segment are: GoldFinch, Credix Protocol…
You can read a detailed article about Credit Protocol here.
Similarities Between Uncollateralized Lending and Credit Protocol
- Loans are exchanged through smart contracts: Both Uncollateralized Lending and Credit Protocol allow loans to be exchanged via smart contracts on the Blockchain.
- Transparency: Both are highly reliable, because loans are protected by smart contracts on Blockchain, ensuring transparency and clarity.
The Difference Between Uncollateralized Lending and Credit Protocol
|
Header
|
Characteristic |
Uncollateralized Lending |
Credit Protocol |
|---|---|---|---|
|
first |
Assurance |
No collateral is required for the loan |
The collateral is worth less than the loan |
|
2 |
Calculate risk |
High risk because there is no collateral for the loan |
Lower risk because there is a portion of collateral |
|
3 |
Verification process |
Does not require an asset verification process, ensuring flexibility and reducing costs |
Strict verification process, ensuring the accuracy of collateral information |
|
4 |
Popularity |
There are not many Defi projects working on this field |
There are many projects, receiving a lot of attention from large funds |
Benefits and Drawbacks of Uncollateralized Lending and Credit Protocol
Uncollateralized Lending
Benefit:
- Easier financial access: With Uncollateralized Lending, borrowers do not need to own any collateral to borrow money. This reduces the barrier to financial access for individuals or businesses that do not have many assets to mortgage.
- No loss of assets: Uncollateralized Lending helps avoid losing assets in case of inability to repay debt. This helps borrowers protect their assets and minimize risks.
- Save time and costs: Uncollateralized Lending does not require the borrower to provide information about collateral assets and appraise their value. This helps reduce the time and cost of applying for and borrowing money.
Limit:
- Higher risk: Since Uncollateralized Protocol does not require any collateral, the risk for the lender is higher. This can lead to higher interest rates for borrowers.
- Lower liquidity: Uncollateralized Protocol may result in lower liquidity for lenders. In case the borrower fails to repay the loan, the lender may have difficulty recovering the loan amount.
- Not suitable for loan purposes: Uncollateralized Protocol is not suitable for large or long-term loans. This is because the lack of collateral can make it more difficult to recover the loan in case the borrower defaults.
Credit Protocol
Benefit:
- Decentralization: Credit Protocol is a decentralized protocol, meaning it does not require the intervention of any third party, such as a traditional bank.
- Exchange capabilities: Credit Protocol allows digital assets to be exchanged easily, quickly and securely.
- Cost savings: Because there is no third-party intervention, Credit Protocol helps reduce transaction costs and increase access to user capital.
Limit:
- High risk: As with any form of lending, Credit Protocol also carries a high level of risk, such as the risk of capital loss or bankruptcy risk.
- Hard to guess: Loans and lending of digital assets through Credit Protocol can be unpredictable and difficult to calculate, especially since the prices of these assets can change constantly.
- Limited development: Credit Protocol is still in the development stage and has not been widely adopted. As a result, risk assessment and management can be difficult and take time to become more effective.
Summary
In short, Credit Protocol and Uncollateralized Protocol are two different operating methods in the DeFi (Decentralized Finance) field. Credit Protocol allows borrowers to mortgage assets to receive loans, while Uncollateralized Protocol does not require any collateral and borrowers will have to ensure loan repayment by maintaining a high level of security. good credit.
While Credit Protocol offers more security to lenders by guaranteeing loan repayment using collateral, Uncollateralized Protocol offers more flexibility to borrowers.
