Reshaping the On-Chain Credit System: Understanding the Wildcat Unsecured Lending Protocol

Original Article Title: A Vision for Wildcat: Saving Crypto Through Undercollateralised Lending
Original Author: @functi0nZer0, wildcatfi Member
Article Translation: zhouzhou, BlockBeats

Editor's Note: This article discusses how the cryptocurrency space can expand credit supply through uncollateralized lending to improve market efficiency. The author believes that the current over-collateralization mechanism in DeFi restricts capital liquidity, hindering large-scale credit expansion. The Wildcat protocol, through an uncollateralized and transparent lending mechanism, allows broader participation in lending, thereby promoting capital flow and market activity. It also explores the importance of uncollateralized lending in enhancing market liquidity, transaction efficiency, and attracting institutional participation, viewing it as a solution to save cryptocurrency.

The following is the original content (slightly rephrased for ease of understanding):

I often tweet succinctly about my view on the need for credit expansion in cryptocurrency and believe that we need a transparent, accessible low-collateral mechanism to achieve this. However, I would like to take this opportunity to explain why protocols like @WildcatFi are very useful in achieving this goal.

A reminder: I really want to spell it as "undercollateralized" to optimize SEO, but I'm afraid I've always spelled it the way I learned.

This is entirely me talking about my own ideas and perspectives, so you can absorb the content based on your understanding.

On Broad Money Supply

In traditional finance, the quantity of money in the system is tracked through "broad money supply," categorized by "Ms," ranging from M0—not a protocol, but refers to banknotes in circulation and bank reserves—all the way to M3, including institutional money market funds (treasury bills, government bonds) and repurchase agreements. You can see people going crazy trying to classify these things correctly.

In cryptocurrency, the closest metric we have is the total supply of stablecoins, LSTs, and other yield assets.

A well-functioning economy has a credit market that creates new money through lending and reinvests it in productive activities (of course, your definition of "productive" may differ from mine, but let's temporarily accept these activities as reasonable at that time and capable of generating profits, not existing in a vacuum).

I really enjoy and use overcollateralized DeFi solutions almost every day, but as we know, these schemes inherently require you to provide more collateral than the amount you can borrow, limiting the expansion of broad money supply.

This means that credit cannot extend beyond the assets already in circulation, and we have seen some consequences of this reality manifest in some of our favorite assets (true OGs will remember that the original DAI, before being renamed to SAI, was initially backed only by Ethereum).

For capital-intensive roles such as liquidity providers, traders, funds needing capital (or leverage, which isn't always a bad thing!) but not enough idle assets to use as collateral, this is especially inefficient.

If we want to replicate capitalism's most potent weapon on our own terms, we need to create "money" through lending, turning those loans into new deposits, thereby increasing the cryptocurrency's broad money supply, regardless of which measuring stick you choose to use today.

Permissionless, low-collateral, transparent lending mechanisms like Wildcat replicate this mechanism, allowing borrowers to access funds and issue debt that can be redeposited back into DeFi, creating a multiplier effect on available liquidity. The benefit we gain from embracing this mechanism is a dynamically and rapidly responsive monetary expansion, enhancing the utility of stablecoins and the Ethereum you've been seeing almost fall into oblivion in recent weeks.

On the Velocity of Money

The velocity of money is the "speed at which money circulates in an economy." If you care about formulas, the typical formula is:

V = GDP / M

where GDP is ostensibly the total economic value of all transactions in the system (though this could be a bit skewed if you look back at the impact of building Versailles on France), and M is a variant of the broad money supply you choose to focus on.

A higher V reflects the same "base unit" asset being used in multiple transactions, thus amplifying economic activity. We've seen this scenario exploited before (with lending protocols increasing airdrop farming frenzy through circular deposits or, more importantly, appearing more critical, Wildcat does "easily" fall prey to this influence, but combats it by showcasing each operation).

When loans are relatively permissionless (i.e., who can deposit) and low-collateral, capital flows more freely, increasing the velocity of money. Fewer assets are locked up, more participants gain access to credit, and capital is amplified through leverage, magnifying its economic impact.

Conversely, overcollateralized lending and/or mechanisms typically used in DeFi often lock assets as collateral (a pain point we specifically encountered while working on Indexed, as nearly every token in each index has a market on Aave, Cream, dYdX, etc.). As a result, the velocity of circulation has always been very low. Stagnation was a hallmark of the previous DeFi cycle, stemming from a lack of ERC-4626/hooks, which was essentially a bug that should have been better.

About Efficiency Improvement

In traditional finance, low collateral lending is tightly restricted (see here—a dated reference, but in 2012, 23% of loans were low collateral, with an average LTV of 60%). It is usually only open to select institutions with premium brokerage accounts or banks, and for the crypto industry, we are still somewhat far from this being a widespread solution.

Crypto-native funds, traders, and protocols (especially protocols) lack avenues to access this type of credit, forcing them to rely on inefficient methods such as raising funds from VCs or overcollateralizing in DeFi. For issues with the current crypto industry venture capital model, see (raise hand here) all related content.

A permissionless, low collateral money market like Wildcat means there is no centralized barrier to entry, with the ability to offload or automate risk assessment through on-chain data or other reputation systems (though I am very clear on this point: these are often gameable, and I prefer commercial-grade ZK tech to simplify proof of reserves).

Widespread use of such facilities means credit power is no longer concentrated in the hands of a few CeFi lenders, making DeFi integrations more robust—the protocol itself can become both borrower and lender in such a system: the Wildcat Foundation is applying for credit from Wildcat, attempting this themselves.

Putting all this on-chain for maximal transparency is not a bug: credit transparency mitigates part of the systemic risk of CeDeFi collapse due to opaque credit arrangements leading to cascading failures. Exposing all information to sunlight may make some potential borrowers uncomfortable (in which case they can choose not to use Wildcat), but it ensures lenders can have real-time insights into the loan health, default potential, and market-wide liquidity risks.

About the Cryptocurrency Macro Impact

This part is some of my blue-sky thinking. More credit availability will lead to higher trading volumes, more efficient arbitrage, and deeper liquidity between DeFi and CEX. Market makers can utilize borrowed capital to tighten spreads, reducing user slippage.

Institutions (remember them?) prefer capital efficiency and high liquidity markets. They may not like public transparency, but they are here in our world, not the other way around. Still, a well-functioning low-collateral lending space will also incentivize institutional participation as they can achieve leverage similar to the traditional financial environment.

Lastly, many yield strategies rely on capital efficiency (borrowing stablecoins for yield farming). A low-collateral model, by balancing risk across various asset allocations, entities, and assets, reduces borrowing costs and lessens reliance on the familiar "Ponzi" incentive mechanism.

Summary

Before going full-time in crypto in 2020, I co-led a startup addressing a similar problem: determining credit capacity in the community through trust networks like EigenTrust, intending to launch it pre-pandemic.

I'm deeply fascinated by the societal impact of credit, especially in markets where pseudonymity and whisper networks coexist with unimaginable sophisticated entities.

I've been interested in this issue for many years. Helping develop and actively contributing to Wildcat has been my way of driving this idea forward, letting the market decide its rationality before it completely overwhelms me, becoming the broad money supply multiplier you never thought could be.

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