Aave — an open-source and non-custodial lending protocol, is introducing Credit Delegation (CD).
It is a new way where depositors can earn additional interest by creating credit lines between lenders and trusted borrowers through a special vault. Binding terms are drafted and enforced via OpenLaw —a blockchain protocol for the creation and execution of legal agreements. Trusted borrowers will draw capital from the Credit Delegation Vault. DeversiFi — after their successful experimentation, became the first to receive credit as per an Aave post on Aug 6.
Credit Delegation: An innovative Way of improving DeFi Liquidity
Simply, Credit Delegation unlocks capital from smart contracts.
In this arrangement, a depositor delegates a credit line to someone he/she trust and enforce this through a legal agreement concluded via OpenLaw. Interestingly, OpenLaw ties the legal agreement with executable Ethereum code by creating terms and legal signatures.
Alternatively, a depositor can delegate their credit line to an autonomous smart contract, executing as long as certain pre-set functions are met thereby eliminating trust.
By delegating a credit line to someone they trust (a borrower), the depositor (lender) earns more interest either through trust as a contract agreement is concluded via OpenLaw or via a smart contract.
Through the decentralized agreement enforcement platform, terms such as repayment period, use of funds, and the amount can be specified.
Borrowing without Borrower Side Collateral
To get going, a Credit delegator must first set the borrowing limits before depositing aTokens (which are interest-bearing) to the Credit Delegation Vault via Credit Delegation Proxy whose code is experimental but audited by PeckShield. From there, the credit line will be opened and the borrower can initiate the transaction.
As it is, Credit Delegation could be a way in which DeFi dApps and even firms in the traditional world can source liquidity from the Aave protocol without the need of the borrower depositing collateral.
With DeversiFi — a decentralized exchange, experimenting, and using Aave to source the much-needed liquidity, its success will likely draw more borrowers seeking express credit lines.
The higher the demand, the higher the interest depositors receive than they would if they had done through traditional channels.
In mid-July, Aave and Enjin announced an update that brought DeFi closer to the $159 billion gaming market in a move that saw ENJ — the native token of Enjin, added to Aave.