Aave announces Credit Delegation, enabling uncollateralized lending

After hinting at Credit Delegation on July 4, Today Aave CEO announced native Credit Delegation, whereby Aave depositors can delegate their credit lines.

The way it works is a depositor can supply assets like USDT to Aave just like they normally would; however, instead of drawing upon their deposits themselves, they delegate their credit to a borrower. This enables a borrower to borrow from Aave without posting collateral.

The uncollateralized loan agreement is negotiated between the delegator and the borrower on and are governed by OpenLaw legal agreements, which secure the enforceability of the agreement.

Why it matters:

• Overcollateralized lending is capital inefficient, and uncollateralized lending has been one of key missing pieces to DeFi lending. Assuming it works it has the potential to significantly scale DeFi lending, and could underpin many novel lending arrangements, leveraging Aave as a global source of capital.
• While on the surface it would appear that uncollateralized lending introduces systemic risk to the protocol, under the hood each uncollateralized loan remains overcollateralized by the system. It is the credit delegator who assumes the credit risk for the uncollateralized loans they issue.