Ethereum-based lending platform Aave has launched an ‘undercollateralized lending’ service which allows users to take out loans without having to deposit collateral.
Instead, depositors can delegate their credit lines to other users, generating a legal agreement which allows lending to take place.
The legal element of the transaction is being handled by OpenLaw – a digital contracting firm that develops blockchain-based legal agreements.
Describing the new service in a Twitter thread, Aave’s founder and chief executive Stani Kulechov explained that that someone named ‘Karen’ could make a deposit in USD, before delegating her credit line to someone named ‘Chad’. This would then allow ‘Chad’ to withdraw Ethereum from the Aave protocol without having to put any collateral down.
Both ‘Karen’ and ‘Chad’ would sign on to a legal agreement which stipulates the terms of the loan, including agreed interest rates, and the total term time. As long as both the depositer and the borrower are located in the same jurisdiction, this legal agreement would allow ‘Karen’ to take ‘Chad’ to court in the event of a default.
This service would make it possible for anyone to borrow cryptocurrency via Aave’s platform, without having to deposit their own collateral.
Until earlier this year, Aave was the parent company behind crypto-backed peer-to-peer platform ETHLend.
ETHLend allowed borrowers to request loan amounts and post other digital currencies as collateral, while paying interest on the loans.
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