The State of Undercollateralized DeFi Lending

Introduction

Undercollateralized lending accounts for an underwhelming portion of DeFi lending activity, with less than $2B of deposits across various protocols. This is, no doubt, due to the risks associated with unsecured lending and a lack of clarity around legal recourse for lenders in the event of a default.

However, unsecured lending is one of the best ways to unlock capital efficiency in DeFi, and various protocols have tried their hand at developing robust systems to earn the trust of crypto lenders. In this report, we look at the top three undercollateralized lending protocols and how they’ve fared over the past year.

For those familiar with the unsecured lending space, Maple and TrueFi are no strangers. They’ve consistently occupied the top spots by funds deposited and loans originated this past year. One major difference between the two is that TrueFi’s lending pools are segregated by the stablecoin type while Maple’s lending pools are segregated by the pool delegate.

On TrueFi, every USDC lender and borrower deposits and earns from the same pool, allowing for risk diversification across all USDC loans.

With Maple, as we explained in a previous post: “there can be many different pools for the same asset but with varying degrees of risk tolerance and expected returns. For instance, having one USDC pool that only lends out to extremely high-quality borrowers would likely be safer, but would give lenders lower yields versus a pool that lends USDC to slightly more risky borrowers.” Maple’s design thus allows risk to be isolated within each individual lending pool.

We’ve written previously about the protocol mechanisms of TrueFi and Maple Finance. The newest entrant to the game is Clearpool, with lending markets live on Ethereum and