tl;dr: how creditworthiness might be assessed in the future. Maple Finance and TrueFi.

Just like there’s little doubt in my mind that Bitcoin becomes the global reserve currency, there’s also little doubt in my mind that “DeFi will eat CeFi.”

Decentralized finance will ultimately be able to provide lower cost, more secure services to customers than our currently existing model of centralized finance.

One of the key components to a well-operating and efficient capital market, however, are ways for people to borrow money on credit.

How “Lending” in DeFi Works Today

Today, there are “lending protocols” such as Maker, Compound, Aave, or Cream, but when you think about it, they aren’t offering loans in the way we might normally associate with that function.

In order to “borrow” in any of these protocols, it is necessary to put up collateral that is usually 1.5x the size of the loan.

So, if you want to borrow $100, you need to collateralized with $150. Not really a loan and certainly not a great way to give credit to people who don’t have money…which is a key element of bringing DeFi to the masses who really need it.

How Lending Will Work Tomorrow

Into this void (partially) comes a new service, Maple Finance which aims to remove the need for excessive collateral by offloading the risk assessment to the members of its community.

Similar to how Nexus Mutual offloads risk assessment in the insurance business to its members, Maple Finance members, who are token holders, are the ones who “back” a company’s creditworthiness with their own money.

If that company defaults, then it is the individual token holders who “vouched” for the borrower who bear the loss.

I say “company” because Maple Finance, which has a great overview document, focuses on corporate debt.

Meanwhile, TrueFi brings the same innovation to individuals.

For those of you who remember Prosper in its early incarnation (before the regulators got to it), TrueFi will look similar.

Here, any TRU token holder can review loan applications (currently limited to vetted borrowers) and then decide upon the creditworthiness of that individual, staking their TRU tokens against the loan in the form of a “Prediction Bet”

If the loan is paid back, the TRU stakers who predicted “Yes” gain more TRU. Similarly, the “No” votes benefit proportionally if the loan isn’t paid back. I believe that the prediction bets also impact the interest rate, but not 100% sure on that one.

Transitioning to New Business Models

The point here is this.

We’re seeing the emergence of new crypto-based markets for assessing creditworthiness.

So places like Equifax and TransUnion which now provide those services (and are honeypots of personal data) while extracting rents eventually get replaced by communities of risk assessors that have skin in the game.

As these markets mature, availability of uncollateralized loans will increase, which gives more people a chance to establish good credit track records.

Will there be cheaters and new problems? Of course. But I think these markets will, eventually, deliver better services, more securely, at lower cost.