Thanks to CIP-68, we are excited to announce we will be the first lending platform to introduce the idea of Optional On-Chain Credit (OOC).
This will allow the Cardano DeFi community to leverage their credit history to have easier access to loans with less collateral.
Overall, this should add more flexibility and fluidity to the lending experience, which is hopefully another factor that can contribute to Cardano’s impending DeFi domination.
Current Lending Landscape
Most lending platforms are collateralized because it ensures to the lender that if their loan is not returned, lenders are reimbursed with the borrowers collateral.
It is popular and necessary to have collateral, especially when there is a lack of payment history, otherwise it is impossible to have a sense of the borrowers commitment to repaying the loan.
This collateral requirement, however, can be burdensome in a mature and robust lending market, because lenders may be willing to provide loans to borrowers who have an impeccable record of repaying loans on time.
Optional Onchain Credit
For a borrower with a good track record, less collateral would allow them to take out more loans and ultimately increase the amount of lending activity on Cardano.
To this effect, we are introducing Optional On-chain Credit, which functions as a freely mintable NFT which is soul-bound to a user’s wallet, meaning the NFT will always be associated with the wallet that mints it.
Ideally, an honest user can mint this NFT, and the NFT will now track history of the user’s OOC. If the user has displayed being an honest user over the years, a lender might feel more comfortable lending to the user with more favorable terms.
The same way a bank would be willing to lend more favorably to a borrower with a strong credit score, a CherryLender may be willing to offer more favorable terms to a borrower with strong OOC.
As the name implies, this is entirely optional, and if a borrower prefers, they can continue to lend with typical collateral rates.
How It Works
The credit score information will live at the reference UTxO associated with your NFT (as per CIP 68 standard). Because this information lives on the blockchain, its modification can be governed entirely via smart contracts.
This enables the optional credit score system to be entirely trustless, and the credit score information can only be modified in a transaction that provides proof that some relevant event occurred.
For instance, if you provide a loan to a borrower and they default on their loan, you can modify their credit score by initiating a transaction that includes proof that the user failed to pay back their loan, or that their loan was liquidated.
Each relevant event in the protocol leaves proof that can be used exactly for this reason (i.e. liquidations leave a liquidation proof token, and lenders claiming collateral after the loan deadline passed leaves a loan default proof token).
We’d like to thank Berry Ales for creating CIP-68, as this technological innovation creates a significant opportunity for CherryLenders to access traditional financial concepts in a completely decentralized environment.
Why It’s Important for CherryLend
This is a significant step in the evolution of CherryLend as it will allow the protocol to provide our users with flexible lending options when interacting with our platform.
Ultimately, we believe the projects that can offer the best-crafted incentives, coupled with a sleek user experience will be the winners of tomorrow.
In this article, we released the concept of Optional Onchain Credit.
Following this, we’ll continue to update the community on our development progress as we prepare to launch our testnet.
Join us in our mission to create efficient and robust financial tools that are built to roam beyond the reach of centralized authorities.
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