The Future of Decentralized Credit: Goldfinch Protocol
mattbartlett.substack.com
Over-collateralization (OC) is the provision of collateral that is worth more than enough to cover potential losses in cases of default. Why is this a bad thing? In traditional financial OC is usually implemented as a way to reduce risk to the lender and a borrower may use OC in order to get better terms for a loan. In the case of cryptocurrency, DeFi projects like Aave and Compound may use OC to reduce risk to the potential investor. On the surface this may seem like a great practice, but it implies a troubling reality that lurks beneath the surface: The tokens used to generate yield could collapse in value. Volatility, hacks and project failures are all common occurrences in crypto. In reality, most crypto projects have no revenue or assets backing up the value of their tokens.
The Future of Decentralized Credit: Goldfinch Protocol
The Future of Decentralized Credit: Goldfinch…
The Future of Decentralized Credit: Goldfinch Protocol
Over-collateralization (OC) is the provision of collateral that is worth more than enough to cover potential losses in cases of default. Why is this a bad thing? In traditional financial OC is usually implemented as a way to reduce risk to the lender and a borrower may use OC in order to get better terms for a loan. In the case of cryptocurrency, DeFi projects like Aave and Compound may use OC to reduce risk to the potential investor. On the surface this may seem like a great practice, but it implies a troubling reality that lurks beneath the surface: The tokens used to generate yield could collapse in value. Volatility, hacks and project failures are all common occurrences in crypto. In reality, most crypto projects have no revenue or assets backing up the value of their tokens.