Alphaverse: On-Chain Loans 2.0
The topic of on-chain loans is widely discussed in the crypto community. Aave, arguably one of the most famous DeFi protocols, is a beloved investment by many retail players.
Yet, the topic appears to be poorly understood. After all, why would anyone borrow some money by giving up control of twice as much?
The ugly truth about crypto loans is that they’re merely a tool for gamblers to bet more. It’s not something that can help small businesses get off the ground, at least for now.
Companies like Maple and Goldfinch are trying to bridge the gap between crypto and traditional, undercollateralized loans. In other words, loans for people who need more money than they have. However, it’s a very risky endeavor because borrowers may default on their loans.
Does this mean loans are merely a fancy form of leverage? No necessarily, thanks to projects like Seamless. Today you will learn about a rare innovation in DeFi and how you can potentially benefit from it.
On-Chain Loans 2.0
The road to on-chain unsecured loans that resemble traditional ones is long, and it has to start somewhere. The Seamless Protocol team came up with an interesting idea of generating loans between smart contracts.
The crux of the concept is to have a closed environment where the money borrowed is used for a specific DeFi strategy (i.e., managing a liquidity pool or buying and staking yield-generating assets). Assuming the strategy is profitable, the borrower contract can take more money than it supplies as collateral because there’s a trackable ability to repay.
If the strategy starts to perform poorly, the lending contract can automatically yank some of the lent capital from the borrower, resulting in risk reduction. If the strategy later starts performing well again, the borrower can take the yanked amount (or more) back.
This borrow-repayment cycle is automated, making these lending environments, called Integrated Liquidity Markets (ILMs), always up to date with the risk environment of the broader market. Hence, users who lend their money through an ILM can provide under-collateralized loans with peace of mind.
ILMs are a very powerful concept, and it has been tested with GMX’s GLP token for several months. The team plans to test everything, slowly launching more ILMs in the current version of the product that’s recently been deployed on Base. If these ILMs succeed, Seamless should attract significant interest from the market’s participants.
The project is currently distributing OG points to those who help test the product. Although the team hasn’t directly promised anything like an airdrop, it’s reasonable to expect some benefits for OG point farmers.
The process of farming points is straightforward and relatively low-risk at this stage. The team forked Aave contracts (extensively tested by the broader market), plus you can farm with stablecoins to escape volatility.
The team created a comprehensive guide to OG point farming, so, if you’re interested, follow this link. You’re early, the project just started and it seems that the farming period will take several months from now.
That’s it for today.