How DeCredit Is Solving The Issues Linked To Over-collateralization In The DeFi Space
Decentralized Finance has grown to incorporate a lot of features that will alter the way things are being done. It is breaking the barrier that exists in traditional finance like the barrier to entry, and much more. With one’s device, it is easy to invest in financial packages and programs like yield farming, lending pools, staking, and much more. These are all made possible with the coming of decentralized finance. Though these features may be groundbreaking, they are still laced with issues that users face daily. For instance, the lending and borrowing scene is filled with over-collateralization. A credit system doesn’t exist at the moment in the DeFi world. Before a user can borrow funds, they have to abide by the over-collateralization principle, meaning that their collateral has to be far higher in value than the borrowing amount. This is not efficient. There is the need for the replication of the credit system available in the traditional world to the decentralized space.
DeCredit offers Credit Oracles that are tailored to the needs of the clients. The aim of these credit nodes will allow blockchain users to carry out credit investigation and transmit it to the smart contract, where decisions can be made. A crucial functionality of the Credit Oracles that are available on DeCredit, is to offer blockchain platforms access to both on-chain and off-chain data sources.
Issues Linked To Over-collateralization
A great deal of lending protocols uses over-collateralization of loans, especially since there is a lack of an effective credit rating system that has been designed with the intricacies of the ecosystem in mind.
• It restricts credible users from accessing loans.
If a user is unable to provide collateral with a value that is above the borrowing amount, they can’t access a loan, which may not be effective sometimes. In the traditional finance world, people with high credit scores can access financing and lending facilities because they have proven themselves to be financially responsible. This expands the operations of the system, and if it is implemented in the DeFi space, it could drive massive adoption of its innovations.
• Insufficient liquidity
In finance, liquidity is pumped into an economy once revenue-generating transactions are done. An effective credit system allows people with good credit ratings to access lending and financing facilities, and in return, they pay back during the end of the term. Activities like that improve the cash circulation and liquidity in the economy. When an ecosystem is filled with mostly over-collateralized lending facilities, it could reduce the growth of liquidity in the space.
What is DeCredit doing to solve the above?
DeCredit is solving these issues by feeding off-chain credit records to decentralized finance protocols, thereby reducing the dependence on over-collateralization.
There are several solutions that loan ecosystems have refused to adopt because of their reliability. DeCredit is ushering in a verifiable approach.
Off-chain credit may break this deadlock, because these credit scores have been verified by credible institutions and have been widely adopted in traditional finance. Off-chain credit data as a supplement to on-chain credit is a good direction. The working mechanism of DeCredit is based on a decentralized and automatic operation of smart contracts. The price is fed by a collaborative oracle, while the creditworthiness and repayment ability of the borrower are effectively evaluated under the evaluation of the credit model algorithm. Given the corresponding level of loan-to-lending ratio, and after credit evaluation, the borrower obtains encrypted funds with a low mortgage rate in the stable currency from the liquidity pool.
With the coming of DeCredit, the blockchain space doesn’t have to worry about being restricted from the right data sources. The Credit Oracles offered in this ecosystem will act as a bridge between blockchain and the real world, while offering off-chain credit data to on-chain.