Excessive provision in DeFi has exhausted itself

Despite the fact that decentralized financing successfully eliminates intermediaries from the equation, the industry still has something to work on. Although the current total value locked in Ethereum DeFi is $100 billion, this is just a stepping stone, but it is still extremely important to serve people outside the world of cryptocurrencies.

In its current form, decentralized financing is intended mainly for those who understand cryptocurrency and blockchain. The average man in the street has no idea about these concepts, let alone show interest in exploring new opportunities.

In order to reach a wide distribution, DeFi lending must undergo drastic changes. Using excessive collateral is difficult, as these are incredibly volatile assets. Unfortunately, volatility and lending do not interact so well, forcing users to over-secure their loans with a large margin. In some cases, it is required to provide a deposit of up to 750% of the loan amount. This huge amount limits the funds that need to be received.

It is not difficult to understand why such requirements hinder the development of DeFi. Requiring users to provide such a large amount of capital to obtain a loan is not the best approach. Financial services should be democratically accessible to everyone, and this is exactly what DeFi should do. Unfortunately, this is not the case at all in the current conditions.

One way to avoid excessive collateral is to use stable assets. Over the past few years, stablecoins have become a major product in the world of cryptocurrencies. However, stablecoins are not the most attractive option for crypto lending, since they lack volatility. For credit institutions, there is a very fine line between sharp price changes and insufficient fluctuations.

Cancellation of excessive security requirements

While it may seem dangerous to exclude excessive collateral from the equation, imagine that users should have decentralized access to credit. Moreover, they should choose the cash flow that is convenient for them, but at the same time they should not face any strict requirements for collateral. The problem of capital inefficiency should be solved at an early stage in order to make this aspect viable in the future.

Allowing participants to create credit markets is the right way. As long as users own the underlying tokenized yield stream, they can view the effectiveness of the cash flow without making additional collateral. It creates a fair and transparent ecosystem for all users, rather than creating artificial “paid channels” to access this data.

The future of DeFi still looks bright, even if some aspects of the industry are too inefficient. The initial popularity of over-collateralized lending led to the idea that this is how it should be. However, this is just a step towards unlocking the true potential of DeFi lending. A future without high collateral requirements, not to mention excessive collateral.

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