The Cream Finance project, a lending protocol that recently merged into the Yearn ecosystem, announced the upcoming launch of its Iron Bank feature, a name inspired by the once-popular TV show Game Of Thrones.
Cream’s Iron Bank is an attempt to create a decentralized finance equivalent of corporate debt. The announcement, released on Thursday, explains how the market for peer-to-peer lending in traditional finance, worth $70 billion, pales in comparison with the world of corporate credit, with $10 trillion in loans outstanding.
To create a similar industry in DeFi, Cream is now allowing other protocols to borrow funds without posting collateral. For risk management purposes, the system is not permissionless. Each protocol needs to be whitelisted by Cream for a line of credit. The protocol is then able to borrow freely, until it reaches the credit limit set by Cream.
Currently, the assets available for borrowing 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 Coin (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. For now, no new applications are accepted.
For the Yearn ecosystem, the Iron Bank can be particularly useful for increasing the effectiveness of yield farming strategies. By leveraging assets without posting collateral, Yearn vaults can effectively multiply the yield they obtain from farming SUSHI, CRV and ALPHA. At the same time, people supplying assets on Cream benefit from the higher interest-rate payouts.
Undercollateralized loans in DeFi have long been considered as the next great step in DeFi evolution. Current lending platforms almost always require users to post more collateral than the sum they are borrowing. This is primarily a limitation imposed by smart contracts, as the protocol cannot use legal means to recover bad debt. Overcollateralized loans are mostly just useful for adding leverage or selling crypto assets short.
Some proposed solutions for undercollateralized 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-collateral lending was proposed by Aave through its Credit Delegation mechanism. This feature offloads the burden of maintaining collateralization to a debt underwriter, who then can choose to delegate their Aave credit line to someone of their choosing, usually hedge funds or other institutions. The end-client could draw credit without posting collateral, while the underwriter would be responsible for recovering the debt if things go sour — and here, traditional means would be available as well.
The Iron Bank has a similar function to Aave’s Credit Delegation, offering undercollateralized loans to a limited number of trusted entities. The difference is that the entities are other protocols, confining the interaction within the realm of DeFi.
Nonetheless, it is unclear how Cream plans to recover losses in case of a protocol defaulting on its debt. So far, it seems it would need to rely on the good faith of the people behind that project.