The Cream Finance project, a credit protocol that recently merged with the Yearn ecosystem, announced the upcoming launch of the Iron Bank feature, a name inspired by the once-hit TV show Game of Thrones.
Cream’s Iron Bank is an attempt to create a decentralized financial equivalent of corporate debt. The announcement, released explains on Thursday how the $ 70 billion peer-to-peer lending market in traditional finance is pales in comparison to the world of corporate credit, with $ 10 trillion in loans outstanding.
To create a similar industry in DeFi, Cream now allows other protocols to borrow money without placing collateral. The system is not consent-free for risk management purposes. Each protocol must be whitelisted by Cream for a line of credit. The protocol can then borrow freely until it reaches the credit limit set by Cream.
Currently, the assets available to borrow are Ether (ETH), Dai and y3Crv, an interest-bearing token representing Yearn’s vault for Curve Finance’s Dai-USDT-USDC pool. In the future, Cream expects to add other stablecoins such as Tether (USDT), USD currency (USDC), sUSD, mStable USD (mUSD) and DefiDollar (DUSD), as well as Chainlink’s LINK, Yearn.finance’s YFI, Synthetix Network Token (SNX), and Wrapped Bitcoin (WBTC).
Current protocols supported by Cream are Yearn.finance and Alpha Homora. No new applications are being accepted for the time being.
For the Yearn ecosystem, the Iron Bank can be particularly helpful in increasing the effectiveness of yield farming strategies. By leveraging assets without posting collateral, Yearn vaults can effectively multiply the returns they get from growing SUSHI, CRV and ALPHA. At the same time, people who provide assets on Cream are benefiting from the higher interest payments.
Collateralised loans in DeFi have long been considered the next big step in DeFi’s evolution. Current lending platforms almost always require users to deposit more collateral than the amount they borrow. This is primarily a limitation imposed by smart contracts, as the protocol cannot use legal means to collect bad debts. Overcollateralized loans are usually only useful to add leverage or to short sell crypto assets.
Some suggested solutions for secured loans include credit scores, both traditional and on-chain. Projects working on this include Tellor and Zero Collateral DeFi.
Another, somewhat more limited form of zero-lending was suggested by Aave through its credit delegation mechanism. This feature relieves the burden of maintaining collateral with a debtor, who can then choose to delegate their Aave line of credit to someone of their choice, usually hedge funds or other institutions. The end customer could take out credit without depositing collateral, while the underwriter would be responsible for recouping the debt if things go wrong – and traditional funds would be available here too.
The Iron Bank has a similar function to Aave’s credit delegation, offering collateralised loans to a limited number of trusted entities. The difference is that the entities are different protocols, limiting interaction within the domain of DeFi.
Nonetheless, it’s unclear how Cream plans to recover losses in the event that a protocol defaults on his guilt. So far it seems like it should rely on the good faith of the people behind that project.
Cointelegraph contacted Cream for more information but did not immediately receive a response.