Loan-to-Value (LTV) Ratio Based Structuring vs Credit-Score Based Structuring

Objective, asset-centric risk model: Risk is based on the collateral's volatility and liquidity (e.g., ETH vs. a stablecoin). This enables higher capital efficiency for liquid assets, with protocols like Aave and Compound offering LTVs up to 80-90% for stablecoin pairs. This matters for maximizing leverage and liquidity provision in established, volatile markets.

Near-instant, permissionless execution: Loans are created or liquidated automatically based on oracle price feeds. This creates a highly composable money lego, integral to DeFi yield strategies and flash loans. This matters for protocols requiring deterministic, programmatic settlement and deep integration with other DeFi primitives like Uniswap or Curve.

Holistic, identity-aware risk assessment: Incorporates off-chain data (e.g., traditional credit, on-chain history, Sybil resistance) to assess borrower trust. Protocols like Goldfinch or Maple Finance use this to underwrite real-world assets (RWA) and offer undercollateralized loans. This matters for expanding DeFi to non-crypto-native businesses and unlocking trillion-dollar RWA markets.

Proactive, relationship-based enforcement: Defaults are managed through legal frameworks and delegated underwriting, not just automated liquidation. This allows for longer-term, larger-scale loans unsuitable for volatile collateral. This matters for institutional capital and venture debt where relationship and recourse are as critical as collateral value.

Capital Efficiency & Predictability: Risk is directly tied to volatile asset prices, allowing for automated, real-time liquidation via oracles (e.g., Chainlink). This enables higher leverage for borrowers and predictable, math-based risk models for protocols like Aave and Compound.

Access Barrier & Capital Lockup: Requires over-collateralization (typically 150%+), locking significant capital. This excludes uncollateralized lending and is inefficient for high-credit entities, a gap being filled by RWA protocols like Centrifuge.

Permissionless Access & Capital Efficiency: Enables undercollateralized or uncollateralized loans based on on-chain reputation (e.g., DeFi score, transaction history). Protocols like Goldfinch and Maple Finance use this to onboard real-world businesses, dramatically expanding the addressable market.

Subjective Risk & Complexity: Relies on off-chain due diligence or nascent on-chain identity systems (e.g., ENS, Gitcoin Passport), introducing subjectivity and slower, less automated liquidation processes. This increases operational overhead and counterparty risk.

Maximizes asset utilization by focusing solely on collateral value. Protocols like Aave and Compound use dynamic LTV ratios (e.g., 80% for ETH, 65% for LINK) to enable high-volume, permissionless borrowing. This matters for DeFi-native users and leveraged strategies where speed and collateral fungibility are paramount.

Enables personalized interest rates based on borrower history. By integrating off-chain (e.g., Centrifuge) or on-chain (e.g., Cred Protocol) reputation, protocols can offer lower rates to proven entities. This matters for institutional borrowers and real-world asset (RWA) pools seeking cost-efficient, long-term capital.

Exposes borrowers to volatility-driven liquidations. During market crashes (e.g., -20% in an hour), even responsible positions can be wiped out by cascading liquidations. This matters for retail users and long-term holders who may be forced sellers at the worst time.

Introduces oracle and scoring model risk. Reliance on off-chain data or centralized attestations (e.g., Credix's underwriters) creates new trust assumptions and attack vectors. This matters for purist DeFi protocols that prioritize censorship resistance and composability above all else.