Is ‘hands-off’ lending with collateral possible? Wildcat thinks so

Wildcat, a lending protocol that recently landed on the Ethereum mainnet, aims to make collateral lending more ‘hands-off’.

The promise of collateral-free lending is to enable credit and monetary expansion while remaining decentralized.

In an

Laurence Day, the founder of Wildcat, told Blockworks that people in DeFi often talk about “don’t trust, verify” in big letters and insist that all on-chain agreements should be over-collateralized for security if the counterparty is pseudonymous .

While this may be the case, there is also a general acceptance that large-scale agreements between entities that can operate in DeFi must be properly papered and executed off-chain.

“We’ve handcrafted a rod for our own backs when it comes to visibility into deals that, taken as a whole, are far systemically more important than any position on, say, Euler or Aave,” said Day, whose previous Web3 efforts include the ill-fated Indexed Finance.

The name pays tribute to the pre-central banking days of the United States in the 19th century, when so-called ‘Wildcat banks’ issued their own private banknotes.

What the Wildcat Protocol hopes to achieve is to minimize third-party oversight of the collateralized lending process, leaving the specifications of loans and borrowings largely up to the borrowers and creditors themselves.

According to the whitepaper, there will be four main components involved in the Wildcat protocol:

• A Arch Controller contract reviewed by the Wildcat team, responsible for monitoring borrower eligibility;
• Market control factories who will monitor the restrictions that will be communicated to the markets, including fees to be paid to the protocol;
• Market controllers,the set of rules applied by individual borrowers in the market control factories; and most importantly:
• factual markets.

Markets are designed to publicly display what assets borrowers are seeking, at what maximum capacity, and at what annual percentage rate. Borrowers will also have the option to choose their collateral ratio, penalty rates and time frame in which they pay their penalties. They will also be able to choose who their lenders can be.

So unlike on-chain lending protocol Goldfinch, where borrowers must prove their creditworthiness through collective assessments, or Maple Finance, which offers borrowers collateral-free loans at fixed rates, Wildcat simply exists to provide the necessary tools for a collateral on the chain. contract. It does not get involved in the lending and borrowing process itself.

“I think it is important that we give lenders and their counterparties sufficient freedom to agree their own terms, without having to rely on delegates and intermediaries to dictate the parameters. You could call it free banking, I call it the freedom to enter into contracts,” said Day.

Wildcat markets will not be monitored or upgraded by the protocol once it is implemented. This means that the market and its interactions belong solely to the borrower, and the protocol will not be able to liquidate collateral, freeze markets or access funds.

Lenders cannot be forcibly removed from open positions unless they have been placed on a sanctions list. In the event that a ‘sentinel contract’ identifies a sanctioned user using Chainalysis nodes, it has the ability to reverse transactions or hold assets in an escrow contract.

If a borrower is penalized, the protocol recommends seeking legal advice. Noting that “existing reserves may be withdrawn from the market by lenders, but subsequent repayment of assets by the borrower could potentially result in strict liability violations on the part of a lender.”

Ultimately, Wildcat is designed to allow market participants to engage in collateralized lending by fully disclosing their terms. It will be available to users worldwide, excluding the United States.

Finding a solution for fractional reserve banking without reserves is a tough nut to crack, but an important one, said Evgeny Gaevoy, CEO of market maker Wintermute.

“If we can’t solve it, I don’t think we can really have any ambition for Bitcoin or Ethereum or any other token-based economy,” he wrote in a blog post. “Full reserve banking is at best static and at worst stagnant.”

And Dag agrees.

“If we try to create an alternative to the traditional financial system, we must find the most appropriate way to replicate its most powerful weapon. Wildcat is a repeat of that path: no more, no less,” Day said.

Macauley Peterson contributed reporting.