Unsecured Lending via Delegated Underwriting
TLDR
A new mechanism enables unsecured lending for pseudonymous users through delegated underwriting, avoiding collateral and centralized systems.
Key contributions
- Enables unsecured lending for pseudonymous users through a decentralized, sponsor-delegated underwriting model.
- New borrowers receive credit by reallocating existing capacity from sponsors, not by minting new credit.
- Defaults impact sponsors, while repayments build earned credit, expanding future borrowing capacity.
- Proves credit conservation, localized defaults, and a cap on earned credit prevents "repay-then-default".
Why it matters
This paper offers a novel solution to the challenge of unsecured lending in pseudonymous environments, crucial for expanding decentralized finance beyond collateralized models. By introducing a delegated underwriting system, it provides a robust framework for credit allocation and risk management without relying on traditional financial infrastructure.
Original Abstract
We develop a mechanism for unsecured lending among pseudonymous users that does not rely on collateral, legal identity, or centralized underwriting. New borrowers enter only through sponsors who delegate part of their own credit capacity, so onboarding a new account reallocates existing borrowing power rather than minting new capacity. Default losses flow back along the sponsor path, while repayment creates earned credit that expands future borrowing capacity. We prove that delegation conserves aggregate credit capacity, that revocation and default remain local to a unique sponsor path, and that a simple cap on earned-credit growth makes repay-then-default weakly unprofitable.
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