Crypto lending reinvented: This solution can reduce liquidation and overcollateralization risks

Crypto lending remains one of the most important use cases in decentralized finance (DeFi). The three largest DeFi lending protocols — Aave, JustLend and Compound — collectively hold over $12 billion in total value locked (TVL), or 23% of the total TVL in DeFi.

Despite their popularity, DeFi lending platforms haven’t solved the most ardent problems, which are overcollateralization, high liquidation risk and actual asset ownership.

Crypto lending 101

In DeFi, lenders can have access to a wide variety of yield opportunities and passive income streams. On the other hand, borrowers are exposed to more risk because they have to pledge a higher value of collateral than the amount borrowed. This happens because DeFi lending is decentralized and noncustodial, meaning that there are no traditional evaluations like credit scores or income certificates to determine a safe loan amount. Therefore, DeFi loans are overcollateralized. For example, borrowers can get 50% or 75% of the amount they put up as collateral.

Despite overcollateralization, the risk of liquidation remains high due to the volatility of crypto assets. For example, if the price of the assets used as collateral drops below a certain threshold, the protocol automatically liquidates them.

While crypto lending remains an essential part of the DeFi ecosystem, the market needs better models to help borrowers feel safer about their collateral.

This DeFi lending protocol reduces liquidation risks

Some DeFi protocols try to solve the common challenges of lending platforms, and layer-1 chain protocol Nolus proposes a different approach that favors both lenders and borrowers.

The Nolus protocol is built on the Cosmos SDK. It addresses some of the major inefficiencies of the crypto and DeFi money markets, including overcollateralized lending, high risk of liquidations and a lack of true asset ownership. The protocol offers a noncustodial, cross-chain solution and aims to be the one-stop shop for all users’ crypto transactions.

The flagship feature of Nolus is DeFi Lease, which connects lenders and borrowers through an intuitive interface.

Nolus’ DeFi Lease addresses some of the major issues in the DeFi lending landscape. To begin with, it provides up to 150% financing on the initial investment, meaning that borrowers can own three times more than their current equity. They can also retain true ownership over the leveraged assets which allows them to earn yield over the asset in their amplified DeFi Lease position. 

How does DeFi Lease work?

Borrowers secure a down payment (in any asset) and receive 150% of it as a loan in stable coins, both of which are used to buy a desired digital asset. These funds are then held in a DeFi Lease position as collateral, mitigating margin call risk. Nolus' smart contracts handle these transactions on-chain for traders' ease and transparency.

Once the loan and interest are fully repaid, the collateral is returned. Nolus' DeFi Lease operates at a fixed interest rate with no hidden costs, providing clear loan charges to traders. After recent updates, users can use their asset appreciation to repay the loan.

Source: Nolus

Contrary to intuition, Nolus Protocol's elimination of overcollateralization doesn't raise liquidation risk. Instead, it employs strategies to prevent it, like urging users to maintain a good loan-to-value (LTV) ratio as a buffer against price changes. Thanks to the platform’s innovative approach of getting both the down payment and the loan purchasing to act as collateral, users have increased protection of their position. With real-time LTV updates, borrowers can modify collateral levels as needed. During substantial asset price drops, users are advised to add collateral or opt for partial liquidation, which preserves part of their position, reduces potential losses, and ensures ongoing access to Nolus' services.

Designed for lenders and borrowers alike

Nolus Protocol offers lenders benefits like dynamically calculated, cash-based interest, and freedom to adjust stakes. The native token, NLS, launched on Osmosis, enables functionalities like transaction fees, governance, and liquidity provision. Active participation in network consensus and protocol governance can yield rewards for stakeholders. Furthermore, Nolus Protocol offers improved rates for fund suppliers and reduced interest rates for stakeholders leveraging assets via DeFi Leases.

Source: Nolus

Nolus already addresses some of the biggest challenges in DeFi lending, but it has worked to add more relevant features, such as:

• Market close — the ability to close lease positions at the current market price, with the outstanding debt amount deducted from the leased asset.

• Limit liquidation — “limit” orders, giving the ability to set a price at which an open or close will be executed.

• Client-side swap — the ability to swap any crypto asset directly on Nolus instead of going to a DEX to perform the transaction manually. 

• Support of multiple decentralized exchanges.

The Nolus protocol represents a promising solution to the major issues hindering the adoption of DeFi lending. With its proactive strategies to mitigate overcollateralization and liquidation risks, Nolus paves the way for a safer and more user-friendly DeFi lending environment.