BNPL Pay Protocol - Tackling Counterparty Risks Associated With Uncollateralized Borrowing In Crypto

Defi space has associated itself to be an unmatched and significant benefactor of crypto space. Expanding to a rocketing value of over $100 billion, decentralized finance instigated the debut of countless blockchain-based projects including DEXs, Liquidity pools, Staking, Lending platforms, etc. However, the majority of the established lending platforms ask borrowers to lock up their assets such as Ethereum as collateral often in excess, making such loans overcollateralized in relation to the loan amount. 

Where collateralized lending has led DeFi to transform into a raging success, attracting billions of dollars of capital into the defi market, leading players in the market have managed to look over an entire consumer base that is unable to meet the eligibility criteria for a loan in the crypto space. As a result, there is an entire market to address with the segment of under collateralized and uncollateralized loans in crypto, which can potentially take Defi into the mainstream light.  

While Defi market leaders such as Maker, Aave, Compound, etc. have held lending under collateralized terms, new projects ascending into the market like BNPL Pay are grabbing traction as they bring uncollateralized lending into the defi space. In their recent funding round, BNPL Pay was able to raise over $7.14 million for the protocol with an aim to serve those who lack in offering collateral.

Counterparty Risks in Uncollateralized Loans 

Uncollateralized loans or traditionally known as unsecured loans do not require any kind of collateral to back the loan itself in the event of a default. So instead of depending on the borrower’s assets for security, lenders go on to approve the unsecured loan on the basis of the borrower’s creditworthiness. While the defi sector has not yet gained much success with unsecured loans, in the traditional world, uncollateralized loans often have been used in personal loans, student loans, credit cards, etc. 

However, counterparty risks hold a high probability of default in uncollateralized loans due to the lack of security that can hold the participants involved in the transactions to adhere to the contractual obligation. Also, known as default risks, defi lending platforms depend heavily on leveraging excessive collateral to mitigate the possibility of counterparty risks.  While concepts like flash loans, using NFT’s as collateral, running third-party risk assessment, etc. have been introduced in the market previously against the use of over-collateralization in the defi landscape, nothing has seen a promising sight against counterparty risks. 

BNPL Pay, a decentralized lending protocol is directly addressing the overlooked consumer base in the lending faction of the market, offering uncollateralized loans to worthy borrowers on its open yet secured network. 

How BNPL Pay Works Against Counterparty Risks? 

BNPL Pay’s blockchain-based network primarily depends on the banking nodes that are in charge of managing the pools of liquidity. The operators of the banking nodes are responsible for releasing the funds to potential buyers based on the parameters that seem fit for the lender and the borrower’s terms of the agreement. 

Lenders participating in BNPL Pay’s network can access the fully transparent data and can independently choose the operator they seem fit to carry out their interest-bearing activities. Borrowers also have an open choice to apply for credit or loan from anyone or all the Banking Nodes in the BNPL Pay ecosystem. The network uses an iron-clad incentive structure that is responsible for reward distribution and fee slashing in the event of a capital loss due to default. 

Along with the 10% interest distributed to the stakers in the pool, the operators who are effectively carrying out their duties receive a 10% revenue share under the BNPL protocol based on the voting activity of the BNPL stakers. In an unfortunate case of default, a slashing event occurs based on the total loss incurred in relation to the size of the pool. 

Conclusion 

In a way, BNPL Pay creates a network of multiple banking nodes that acts like banks for lenders and borrowers to interact with and manage by the operators. With a high stake of 1M required to be locked in order to set up a banking node and a strong incentive structure with a slashing fee, the network has increased security to avoid counterparty risks and maintain the integrity of the network.