Undercollateralized lending

Undercollateralized lending flips DeFi's dominant standard. On protocols like Aave or Compound the borrower posts more value than they take (LTV ratios of 50 to 80%), and a default is settled by automatic liquidation of the collateral. Not here. The borrower is usually a legal entity, a market maker, a quant fund or a credit firm, that clears KYB and prior vetting. The surplus collateral is replaced by trust grounded in track record and identity, which brings this credit closer to the traditional banking model.

The model's key piece is the credit manager or pool delegate: a professional third party who negotiates principal, interest rate and tenor, assesses solvency and handles defaults through contractual means, since there is no price-based liquidation. It matters because over-collateralization locks up capital and confines credit to speculative use. Undercollateralized credit opens productive financing (working capital, SMEs) and is one of the routes through which regulated entities borrow on-chain, closely tied to the rise of RWA.

TrueFi executed the first undercollateralized loan in DeFi after launching in 2020, using a lender voting mechanism to approve each loan. Goldfinch targets emerging markets, extending credit lines to real-world lending businesses vetted by a network of auditors. Maple Finance works with crypto-native borrowers and, as sound risk-management practice, introduced first-loss capital posted by the delegate, stricter collateral and a public dashboard of ratios.