Under-collateralized loan
An under-collateralized loan is a loan where the borrower posts collateral worth less than the amount borrowed — or none at all. The gap is covered by an assessment of the borrower instead of by locked assets. In decentralized finance this is the exception: most DeFi lending requires over-collateralization, locking, say, $150 to borrow $100. Under-collateralized lending inverts that, using signals like on-chain reputation to decide who can borrow, which makes credit useful to people who need capital rather than only to those who already have it.
Why is most DeFi lending over-collateralized?
Because smart contracts cannot chase a defaulter. With no identity or legal recourse, the only guaranteed repayment source is collateral the contract already holds, so protocols demand more collateral than the loan is worth and liquidate it on default.
That design is safe but circular: it only serves borrowers who already have more capital than they need to borrow.
What replaces collateral in an under-collateralized loan?
Creditworthiness. On Unlloo, that means on-chain reputation — a picture of a wallet’s history, activity, and verified identity signals — plus lenders who individually decide whether that picture justifies the risk and at what rate. Reputation does the work a credit score does in traditional lending, built from public blockchain data instead of a private bureau file.
Are under-collateralized loans riskier for lenders?
Yes — default risk is real and not fully absorbed by collateral, which is why the interest rates are higher than pool-lending yields. Crowd loans manage that risk by splitting each loan across many lenders, letting each one size their exposure to a single borrower.
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