Fee Models for Over-Collateralized Loans vs Under-Collateralized Loans

Under-Collateralized Loans: Enable borrowing up to 100% of asset value, unlocking capital for growth. Ideal for protocols like Goldfinch funding real-world assets or established DAOs seeking operational liquidity without locking treasury assets.

Over-Collateralized Loans: Use >100% collateralization ratios (e.g., 150% on Aave, 110% on MakerDAO) to create a liquidation buffer. This minimizes lender risk, making it the standard for permissionless, trust-minimized protocols where on-chain reputation is absent.

Under-Collateralized Loans: Typically involve higher interest rates (10-20% APY) and origination fees (1-5%) to compensate for credit risk and underwriting costs, as seen with Maple Finance's pool delegates.

Over-Collateralized Loans: Dominate DeFi with $30B+ TVL across Aave, Compound, and Maker. Their automated, algorithmic model scales for millions of users but is ill-suited for institutional capital or real-world asset financing requiring off-chain trust.

Stable, recurring income: Fees are primarily generated from borrow interest rates and liquidation penalties (typically 5-15%). This creates a reliable revenue stream for protocols like Aave and Compound, which is crucial for protocol sustainability and token value accrual.

Minimized credit risk: With collateral ratios often >150%, the need for expensive underwriting and active risk management is low. This allows for simpler, lower-fee structures focused on gas costs and small spreads, benefiting high-frequency users and automated strategies.

Higher fees justify risk: Protocols like Maple Finance and Goldfinch charge origination fees (1-5%) and higher interest rates to compensate lenders for credit risk. This model unlocks 10x+ capital efficiency for institutional borrowers, making the premium worthwhile for specific use cases.

Costs scale with risk management: Fees must cover off-chain due diligence, active pool management, and insurance provisions. This leads to a more opaque and variable cost model, which can be less attractive for developers seeking predictable on-chain fee estimation.

Stability-focused model: Fees are typically a small, fixed percentage of the borrowed amount (e.g., 0.1-2% origination fee). This creates a low-risk, predictable cost structure for borrowers. This matters for capital-efficient DeFi strategies where users (e.g., on Aave, Compound) need to know their exact cost basis for leverage or yield farming loops.

Direct fee capture: Protocols like MakerDAO (Stability Fee) and Aave (borrow APY spread) generate consistent, low-volatility revenue from interest payments. This funds protocol development and treasury reserves, ensuring long-term sustainability. This matters for CTOs choosing a stable, battle-tested dependency where protocol longevity is a key requirement.

Success-fee model: Lenders (or protocols) charge fees based on loan performance, such as a percentage of the capital accessed or profits generated (e.g., 10-20% performance fee). This aligns incentives—lenders only profit if the borrower succeeds. This matters for institutional capital deployment and platforms like Maple Finance or Goldfinch, where underwriting real-world assets requires shared risk.

Risk-premium pricing: To compensate for the lack of collateral, fees (origination and/or performance) are significantly higher. This can include underwriting fees, servicing fees, and default penalties. This matters for borrowers evaluating total cost of capital—while access is easier, the premium can be substantial, making it less suitable for low-margin arbitrage.