Definition ∞ An uncollateralized loan is a type of credit extended without requiring the borrower to provide any assets as security. In traditional finance, these loans are typically granted based on a borrower’s creditworthiness and repayment history. In decentralized finance (DeFi), uncollateralized lending is an emerging area that seeks to move beyond overcollateralization, often leveraging reputation protocols, credit scores derived from on-chain activity, or flash loan mechanisms. The absence of collateral increases lender risk but offers greater capital efficiency for borrowers.
Context ∞ The current discussion around uncollateralized loans in DeFi focuses on developing robust credit assessment models suitable for pseudonymous blockchain environments. A key debate involves mitigating the inherent risks for lenders and preventing defaults without traditional legal recourse. Future developments will likely include the integration of real-world credit data with on-chain identity systems and the creation of specialized lending pools designed for undercollateralized or uncollateralized credit.
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