Decentralized finance holds tremendous potential for bringing alternative financial services and products to people who need it the most. But unfortunately, decentralized lending is still subject to overcollateralization requirements. Hashstack, through its Open Protocol, aims to change that narrative for the better.
Making Decentralized Lending More Accessible
The concept of using cryptocurrencies to acquire a loan is very appealing among DeFi enthusiasts. Most of these loans are approved automatically, assuming one has the necessary collateral. That is where things get a bit hairy, as the current collateralization requirements in decentralized finance are very high. More specifically, users will almost always have to put up more collateral than the amount of money they want to borrow.
Despite the popularity of Liquity, Compound, MakerDAO, and others, these collateral requirements have not gotten much lower. It is not uncommon to put up 150% of the borrowed amount as collateral, or in some cases, even more. Rates of up to 300% have also existed, which introduced a bigger buffer for users providing liquidity to extend loans but makes it nearly impossible for people to get excited about decentralized lending.
The current collateral requirements are akin to trying to borrow $50,0000 from a bank and provide a $75,000 guarantee. It is not appealing to do so. Moreover, if one can provide such a guarantee or collateral, there’d hardly be a need for a loan of a lesser amount either. Bringing down the collateralization requirements is crucial for the DeFi sector. Thankfully, Hashstack Finance and its Open Protocol provide the alternative many people have been waiting for.
Undercollateralized Loans Are Coming
The main draw of Hashstack’s Open Protocol is its introduction to undercollateralized loans. More specifically, DeFi users can achieve a collateral-to-loan ratio of up to 1:3, creating many exciting opportunities. Like other lending solutions, the protocol is autonomous and will help users borrow the money they need with far lower collateral requirements. For example, users can borrow up to $300 with $100 as collateral. Additionally, up to 70% of the collateral can be withdrawn while using the remainder of the borrowed amount as in-platform trading capital. Loans will become accessible instantly, accelerating the growth and appeal of decentralized finance.
Hashstack Finance founder Vinay adds:
“Today, if you want to borrow $100 on Compound, or Aave, or even MakerDAO, you are required to provide a collateral of at least $142. This breaks the primary intent behind loan procurement, and has restrictive use-cases for the borrower. In comparison, through Hashstack’s Open protocol you would be able to borrow the same $100 with collateral as little as $33.33. This 4.25x value-add against every established market player today, is a remarkable milestone for the defi ecosystem in general and will drive further adoption.”
Moreover, the Hashstack solution is compatible with existing and future DeFi solutions, including Pancakeswap. A bonus is giving users the option to explore in-app swaps to convert borrowed tokens into other coins within the same ecosystem. Open Protocol currently supports Binance Smart Chain, Ethereum, and Avalanche C-chain assets.
Open Protocol is currently live on the testnet and is slated for a full release in the coming weeks. In the initial phase, the protocol will support liquid currencies such as Bitcoin, USDT, USDC, Binance Coin, and Hashstack’s governance token HASH. Support for other currencies will roll out over time.
Closing Thoughts
Decentralized finance has potential, especially where lending and borrowing are concerned. However, forcing users to put up more collateral than they can borrow is not appealing to most people. Instead, the shift to undercollateralized loans is a necessary one. Loans should be accessible to those with little or no cryptocurrency in their portfolio, and Hashstack Finance has cracked that code.
Solving market efficiencies is an integral step toward boosting global DeFi adoption. However, catering to existing crypto enthusiasts is not the way to go in this industry. Undercollateralized loans can be a massive catalyst to get more people into the cryptocurrency industry and, by extension, decentralized finance.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
