Under-Collateralized Lending

Unlock true leverage for creditworthy borrowers with less than 100% collateral

In traditional finance, consumer lending is a $4.5 trillion market that’s enabled by credit reporting bureaus and credit scoring agencies. In DeFi, accounts are assumed to be “unscorable,” requiring lenders to over-collateralize loans—limiting access and utility.

Cred Protocol quantifies on-chain lending risk at scale by building one of the first decentralized credit scores. We’re on a mission to expand access to DeFi lending to regular people and underserved communities, helping them access financial resources that make a meaningful difference to their lives.

New to credit-based lending? Start with Capital-Efficient Lending, which covers reducing collateral requirements while remaining over-collateralized (100%+). This page covers the next step: lending with less than 100% collateral.

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What is Under-Collateralized Lending?

Under-collateralized lending allows borrowers to access more capital than they deposit as collateral. This is how most traditional consumer lending works—and it’s the next frontier for DeFi.

Over-Collateralized

Collateral > Loan

Deposit $150 to borrow$100. Safe but capital inefficient.

Under-Collateralized

Collateral < Loan

Deposit $50 to borrow$100. Requires trust—enabled by credit scoring.

Approach	Collateral Ratio	Example	Risk Level
Over-collateralized	110-150%	$150 collateral →$100 loan	Low (trustless)
Fully collateralized	100%	$100 collateral →$100 loan	Low
Under-collateralized	50-99%	$50 collateral →$100 loan	Medium (requires credit assessment)
Unsecured	0%	$0 collateral →$100 loan	High (requires strong identity + credit)

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The Market Opportunity

1. Institutional Under-Collateralized Lending

   Happening today through protocols such as Maple Finance and TrueFi. However, loans are approved by governance token-holders, so risk underwriting is fundamentally “human powered” and limited in scale.

2. Consumer Lending Gap

   Consumer lending in traditional finance is a **$4.5T market**—almost three times larger than the$1.5T institutional lending market. However, DeFi-powered under-collateralized consumer loans aren’t happening yet.

3. The Missing Piece

   To enable consumer lending, we need to quantify risk at scale, which requires an algorithmic approach: a credit score. That’s what we’re building at Cred Protocol.

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How Cred Protocol Enables Under-Collateralized Lending

Risk Quantification at Scale

async function assessLoanRisk(borrowerAddress, requestedAmount) {
  // Get comprehensive credit data
  const [scoreResponse, reportResponse] = await Promise.all([
    fetch(`https://api.credprotocol.com/api/v2/score/address/${borrowerAddress}?include_factors=true`, {
      headers: { 'Authorization': `Bearer ${API_KEY}` }
    }),
    fetch(`https://api.credprotocol.com/api/v2/report/address/${borrowerAddress}`, {
      headers: { 'Authorization': `Bearer ${API_KEY}` }
    })
  ]);

  const { score, range, factors } = await scoreResponse.json();
  const { report } = await reportResponse.json();

  // Assess borrower profile
  const riskAssessment = {
    creditScore: score,
    creditRange: range,

    // Historical behavior
    hasLiquidations: report.summary.count_liquidations > 0,
    hasDefaults: report.summary.count_defaults > 0,
    repaymentCount: report.summary.count_repayments,

    // Financial position
    netWorth: report.summary.net_worth_usd,
    totalAssets: report.summary.total_asset_usd,
    currentDebt: report.summary.total_debt_usd,

    // Identity verification
    identityAttestations: report.summary.list_identity_attestations,
    isVerified: report.summary.count_identity_attestations > 0,

    // Calculate risk metrics
    debtToAssetRatio: report.summary.total_debt_usd / report.summary.total_asset_usd,
    requestedToNetWorth: requestedAmount / report.summary.net_worth_usd,
  };

  return riskAssessment;
}

Dynamic Collateral Requirements

Under-collateralized lending requires collateral ratios below 100%. Only the most creditworthy borrowers with verified identity qualify:

function calculateCollateralRequirement(score, loanAmount, riskAssessment) {
  // Base collateral ratios by credit tier (under-collateralized product)
  // Note: Only excellent/very_good tiers qualify for under-collateralized loans
  const baseRatios = {
    excellent: 0.50,   // 50% collateral (2x leverage)
    very_good: 0.75,   // 75% collateral (1.33x leverage)
    good: 0.90,        // 90% collateral (1.1x leverage) - barely under-collateralized
    fair: null,        // Not eligible for under-collateralized
    low: null,         // Not eligible for under-collateralized
  };

  // Check eligibility
  if (!baseRatios[riskAssessment.creditRange]) {
    return {
      eligible: false,
      reason: 'Credit score too low for under-collateralized lending',
      suggestion: 'See Capital-Efficient Lending for over-collateralized options with reduced requirements',
      alternativeProduct: 'capital-efficient',
    };
  }

  // Identity verification required for under-collateralized loans
  if (!riskAssessment.isVerified) {
    return {
      eligible: false,
      reason: 'Identity verification required for under-collateralized loans',
      suggestion: 'Add ENS, Gitcoin Passport, or other identity attestations',
    };
  }

  let collateralRatio = baseRatios[riskAssessment.creditRange];

  // Adjust for risk factors
  if (riskAssessment.hasLiquidations) collateralRatio += 0.15;
  if (riskAssessment.hasDefaults) return { eligible: false, reason: 'Previous defaults disqualify from under-collateralized lending' };

  // Adjust for loan size relative to net worth
  if (riskAssessment.requestedToNetWorth > 0.5) collateralRatio += 0.10;

  // Reward strong repayment history
  if (riskAssessment.repaymentCount >= 10) collateralRatio -= 0.05;

  // Ensure minimum collateral (never below 30%)
  collateralRatio = Math.max(0.30, collateralRatio);

  return {
    eligible: true,
    ratio: collateralRatio,
    requiredCollateral: loanAmount * collateralRatio,
    leverage: 1 / collateralRatio,
  };
}

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Loan Eligibility Framework

Under-Collateralized Tiers

Under-collateralized lending is a premium product requiring excellent credit and verified identity:

Tier	Min Score	Collateral	Max Leverage	Identity Required
Excellent	920+	50%	2.0x	Yes
Very Good	840+	75%	1.33x	Yes
Good	750+	90%	1.1x	Yes

Users with scores below 750, previous defaults, or no identity verification should use Capital-Efficient Lending instead, which offers reduced collateral requirements while remaining over-collateralized.

Tiered Access Model

function determineLoanEligibility(riskAssessment) {
  const { creditScore, netWorth, isVerified, hasDefaults } = riskAssessment;

  // Disqualifying factors for under-collateralized lending
  if (hasDefaults) {
    return {
      eligible: false,
      reason: 'Previous defaults disqualify from under-collateralized lending',
      suggestion: 'Build positive repayment history, then try Capital-Efficient Lending first',
      alternativeProduct: 'capital-efficient',
    };
  }

  if (!isVerified) {
    return {
      eligible: false,
      reason: 'Identity verification required for under-collateralized loans',
      suggestion: 'Add ENS, Gitcoin Passport, or other identity attestations',
    };
  }

  // Under-collateralized tier definitions (all require identity verification)
  const tiers = [
    {
      name: 'Excellent',
      minScore: 920,
      maxLoanToNetWorth: 2.0,    // Can borrow 2x net worth
      collateralRatio: 0.50,     // 50% collateral
      leverage: 2.0,
      features: ['Lowest collateral', 'Highest limits', 'Best rates'],
    },
    {
      name: 'Very Good',
      minScore: 840,
      maxLoanToNetWorth: 1.5,
      collateralRatio: 0.75,     // 75% collateral
      leverage: 1.33,
      features: ['Low collateral', 'High limits', 'Competitive rates'],
    },
    {
      name: 'Good',
      minScore: 750,
      maxLoanToNetWorth: 1.2,
      collateralRatio: 0.90,     // 90% collateral
      leverage: 1.1,
      features: ['Reduced collateral', 'Standard limits'],
    },
  ];

  // Find eligible tier
  for (const tier of tiers) {
    if (creditScore >= tier.minScore) {
      return {
        eligible: true,
        product: 'under-collateralized',
        tier: tier.name,
        maxLoan: netWorth * tier.maxLoanToNetWorth,
        collateralRatio: tier.collateralRatio,
        leverage: tier.leverage,
        features: tier.features,
      };
    }
  }

  // Not eligible for under-collateralized, suggest alternative
  return {
    eligible: false,
    reason: 'Credit score below 750 required for under-collateralized lending',
    suggestion: 'Try Capital-Efficient Lending for better terms than standard DeFi',
    alternativeProduct: 'capital-efficient',
    currentScore: creditScore,
    requiredScore: 750,
  };
}

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Risk Mitigation Strategies

For Lenders

Diversified Loan Pools

Spread risk across many borrowers with varying credit profiles. A well-diversified pool can absorb individual defaults while remaining profitable.

Progressive Trust Building

Start borrowers with small limits and increase over time based on repayment behavior. This limits exposure while building track record.

Identity Requirements

Require identity attestations (ENS, Gitcoin Passport) for under-collateralized loans. This adds accountability and reduces sybil attacks.

Real-Time Monitoring

Monitor borrower positions and credit scores continuously. Early warning systems can trigger margin calls or reduced limits before defaults occur.

Implementation Example

async function monitorLoanHealth(loanId) {
  const loan = await getLoan(loanId);
  const currentScore = await getCredScore(loan.borrower);
  const currentReport = await getCredReport(loan.borrower);

  const healthMetrics = {
    // Score degradation
    scoreChange: currentScore.score - loan.originalScore,
    scoreDegraded: currentScore.score < loan.originalScore - 50,

    // Position health
    currentCollateralRatio: loan.collateralValue / loan.outstandingAmount,
    belowMinimum: loan.collateralValue / loan.outstandingAmount < loan.requiredRatio,

    // Borrower financial health
    netWorthChange: currentReport.summary.net_worth_usd - loan.originalNetWorth,
    debtIncreased: currentReport.summary.total_debt_usd > loan.originalDebt * 1.5,
  };

  // Trigger alerts or actions
  if (healthMetrics.scoreDegraded || healthMetrics.belowMinimum) {
    await triggerMarginCall(loanId, healthMetrics);
  }

  return healthMetrics;
}

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The Vision: Democratizing Credit

Under-collateralized lending isn’t just about capital efficiency—it’s about financial inclusion. Billions of people worldwide lack access to credit because they don’t have traditional credit history. On-chain activity can provide an alternative path to creditworthiness.

Who Benefits

User Type	Current Situation	With Under-Collateralized Lending
DeFi power users	Lock up 150%+ collateral	Access 2x+ leverage with proven track record
Emerging market users	No access to credit	Build creditworthiness through on-chain activity
Small businesses	Limited capital efficiency	Grow faster with working capital loans
DAO contributors	Reputation but no credit	Leverage on-chain reputation for loans

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Getting Started

Capital-Efficient Lending

Start here: reduced collateral while staying over-collateralized

Get Credit Score

Assess borrower creditworthiness

Get Credit Report

Deep dive into borrower financial profile

Contact Us

Discuss integration for your lending protocol