Aave Issues First Credit Delegation Loan

Aave, a DeFi lending protocol, declared today. It granted the first credit delegation loan to the decentralized exchange Derversifi

By · Aug 7, 2020 . 6min read

Aave News

Aave, a DeFi lending protocol, declared today that it grants decentralized exchange, Derversifi the first credit delegation loan. The credit line uses collateral offered by other Aave users attempting to obtain supplementary returns. 

Additionally, the agreement was facilitated by decentralized contract service, OpenLaw. It is instrumental in setting out terms and recording digital signatures. It further stated that PeckShield has audited the smart-contract code for credit delegation. Thus it informs that credit the delegation is still tentative. Therefore, users should continue with caution. 

 Aave tweeted about the same from its official account.

How Credit Delegation Loan Works

In credit delegation loan depositor can supply assets such as USDT to Aave, just like they usually would. However, rather than drawing upon their deposits themselves, they delegate their credit to a borrower. This allows a borrower to borrow from Aave without any collateral. The uncollateralized loan agreement is negotiated between the delegator and the borrower. The OpenLaw legal agreements secures the enforceability of the agreement and governs it.

Significance of Credit Delegation Loans

Overcollateralized lending is capital inefficient, whereas Uncollateralized lending has been one of the key missing pieces to DeFi lending. Assuming it works, it can significantly scale DeFi lending and could underpin many novel lending arrangements, leveraging Aave as a global source of capital.

On the surface, uncollateralized lending may introduce systemic risk to the protocol. But under the hood, each uncollateralized loan continues overcollateralized by the system. It is the credit delegator who understands the credit risk for the uncollateralized loans they issue.

Credit Delegation Loan Transaction on Aave Platform

The transaction represents the first step towards initiating DeFi loans to millions of users. It also enables users without collateral of their own to participate. It has the potential to expand the market. The transaction utilizes Credit Delegation Vault with a Credit Delegation Proxy. Anyone with aTokens (Aave Tokens) in their wallet can delegate their credit. The code is preliminary but audited by PeckShield. Credit Delegation might be a way to source liquidity from Aave Protocol. Additionally, it provides DeFi and into traditional finance without demanding borrower side collateral. 

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