The Aave protocol incorporated the modality of delegated credits to grant loans without collateral. A private agreement with be sealed with a legal document that OpenLaw created.

Aave, an open-source Ethereum-based protocol that operates in the decentralized finance (DeFi) sector, now allows cryptocurrency loans without the need for collateral. On July 7th, the CEO of the firm Stani Kulechov announced the new service.

The specialized open source protocol is a market in which users can deposit their cryptocurrencies, without giving up custody, to generate passive income. At the same time, they may become lenders or borrowers, depending on their needs.

The DeFi platform, launched at the beginning of the year, offers interest rates for borrowers, in the so-called stable interest rate model. It also offers permanent loans that give users the freedom to obtain liquidity from their deposits without any repayment deadline or schedule.

Currently, this new feature allows the users of the protocol to deposit cryptocurrencies on the platform and then delegate their credit lines to other people. In turn, the latter will be able to acquire a loan without leaving collateral, Kulechov’s explanations.

Decentralized lending protocols generally require users to lodge a security that is substantially larger than what they are borrowing. However, this new modality allows lenders and borrowers to establish an agreement under the OpenLaw statutes, an initiative that uses Ethereum smart contracts to facilitate the entire process that involves a legal agreement.

Operation of the Protocol

Kulechov detailed the operation of the new unsecured loan service. For example, someone called Karen deposits a certain amount of Tether (USDT) on Aave so that, instead of applying for a loan for herself, she will be able to delegate that credit line to her friend Chad. In turn, the latter may withdraw Ether (ETH) from the protocol, without the need to deposit any collateral.

Karen and Chad will use the OpenLaw service to automatically create and manage a legal document in which they will record all the details of their agreement. For that reason, they will establish the conditions of the loan, as well as the interest rates, the repayment terms, and other elements necessary to sign a formal contract.

In the example, Karen, the borrower, could be an exchange, institution, company, or any other agency. By delegating her credit line, Karen will be able to set her interest rates, while making more returns by taking a higher degree of risk. On the other hand, Chad, the lender, will be able to obtain liquidity without having to lodge a security.

The system will also allow Karen to limit the amount that she wants to delegate, set the currencies that she wants Chad to be able to withdraw, and close the credit line so that Chad cannot deduct any available credit line.

According to Kulechov, in the future, all the debt liquidity could be parked in DeFi and anyone could audit it. The executive explained that, since the delegated credit (DC) data are on-chain, it is possible to measure and mitigate credit exposure.

Last February, Aave launched a type of loan, called flash loan, which allows users to withdraw money without the need for prior collateral. In other words, customers have access to instant loans without the need to deposit additional money.

By Willmen Blanco

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