Undercollateralized Prime Brokerage: Trustless Lending for DeFi
Undercollateralized lending is a cornerstone of the financial system. Access to capital-efficient loans facilitates everything from retail home mortgages to institutions taking on complex levered strategies. Yet to date, undercollateralized lending remains woefully underdeveloped in DeFi, preventing users from experiencing the full power of credit on-chain. Without credit bureaus or on-chain identity solutions, it is challenging to “overcollateralize” an undercollateralized loan on a blockchain. Genuine attempts at tackling the challenge have been built, but the space is still very niche.
The most promising solutions to fully on-chain undercollateralized lending center around programmatically constraining borrowers’ on-chain actions. Known as “prime brokerage” lending, these solutions make capital-efficient loans accessible to everyone in the world with a blockchain address. The key unlock is that when a lender knows exactly what a borrower can do with the funds, the borrower is de-risked. A borrower engaging through a prime broker cannot abscond with lender funds or swap into an obscure token. As a result, there is no need for credit scores or identities (beyond making sure funds aren’t being lent out to an OFAC-sanctioned individual, of course).
Today there are two major architectures for conducting prime brokerage lending on-chain — the manage-wallet and the contract-to-contract lending architecture. The managed-wallet architecture offers borrowers a wallet-like contract they can interact with that has access to levered lender funds. Through this managed wallet, borrowers can take a fixed set of actions, such as swapping lender funds for Eth on Uniswap. The contract-to-contract lending architecture offers lenders total risk isolation across strategies. Lenders deposit into a token vault, and borrowers put up collateral in said vault with the protocol, then deploying lender funds into a single strategy. This architecture allows for total risk isolation — any new strategy has no impact on the risk (or cost of capital) in an existing strategy. While these solutions highlight different fundamental problems, there is an opportunity to build something that draws on all of their diverse strengths.
It is with deep admiration for both aforementioned architectures that we came up with GoldLink. GoldLink offers lenders total control over their risk profile and leverages that to give borrowers sophisticated strategies broadly along the risk curve. All of this is done with true risk isolation and no capital fragmentation. GoldLink brings a brand new architecture and equally fresh perspective to undercollateralized prime brokerage. We can’t wait to share more soon.