crypto

I actually think gearbox is actually a pretty good design for undercollateralized loans. There's a select few strong use cases in defi, and so integrating these into a closed system to allow for undercollateralized loans is great. 

One thing I've been thinking of is expanding this using IBC to make these undercollateralized loans more flexible. You can allow any user to use your undercolalteralized loans to any chain connected to you through ibc. If loans become unhealthy the protocol can send an ibc message to close out all their positions on the chain and return funds back to the lender.

Undercollateralized lending proliferation on chain is inevitable. I think 2 things need to happen to get there. 

1) We need a wedge product to prove to users that on chain borrowing can be cheaper and more efficient while proving to lenders that defaults don’t significantly change when the money transfer rails are changed. 

2) Someone needs to create a middle layer between liquidity providers and borrowers that underwrites the risk and manages lending. Unlike Aave’s and Morpho’s of the world, undercollatoralized protocols can’t scale vertically until there’s a way to delink off-chain management of debt from the lending marketplace itself.

Interesting insights! Building trust through a proof of concept will be crucial for the adoption of undercollateralized lending on chain. Developing a middle layer for risk management is definitely a key step towards scalability. Exciting developments ahead!