Uncollateralized Lending

Definition ∞ Uncollateralized lending in decentralized finance refers to the provision of loans without requiring borrowers to deposit assets as security. Unlike traditional DeFi lending, which relies heavily on overcollateralization, this model extends credit based on a borrower’s reputation, credit history, or other verifiable on-chain data. It represents a significant advancement towards more capital-efficient lending markets within the digital asset space. This approach carries higher risk for lenders but offers greater flexibility for borrowers.
Context ∞ The expansion of uncollateralized lending is a critical area of innovation in decentralized finance, aiming to serve a broader range of borrowers and financial needs. Key challenges include developing robust credit assessment mechanisms in a pseudonymous environment and managing increased default risk for lenders. Regulatory scrutiny is intensifying around these protocols, focusing on consumer protection, risk disclosure, and the potential for systemic instability.