Sublime Founder, Ritik Dutta, Discusses the Possibilities of Undercollateralized Loans in DeFi

Loans in DeFi

Collateralized loans have been popular in our financial system from time immemorial. Taking loans against property, gold, and fixed deposits have been commonplace for a long time now.

Decentralized Finance (DeFi) was able to successfully challenge the traditional system in many aspects, but when it came to the collateralization bit, DeFi too went down the same old road. In fact, in DeFi, the entry barrier is even higher because protocols often require loans to be over-collateralized. 

But, a recently launched DeFi protocol dubbed Sublime Finance might have an answer to this. So, we reached out to the founder of Sublime, Ritik Dutta, to delve deeper into the possibilities of under-collateralized loans in DeFi and the evolution of social finance. 

Please tell us a little more about yourself?

“I’m Ritik Dutta. I come from a Machine Learning research background and was deeply involved in the applications of AI in healthcare and privacy-preserving machine learning. I first learned about blockchains during my research projects – there were many ideas floating around using them in sharing healthcare records and other such proof of concepts. When I started exploring DeFi last year, credit in particular caught my attention because in many ways it was similar to healthcare. The current focus in both the fields is on data-driven methods, and since they both revolve around humans, they suffer from similar issues, from data accessibility problems, to data privacy issues.

Being from India, a country where informal loans still rule, the importance of social reputation and mutual trust was evident. Under formal settings where legal enforcement is an option, lenders would still prefer to lend someone they inherently trust over a random borrower they don’t personally know, even if they present the same risk.”

What is Sublime Finance and what is your vision?

Sublime Finance is an on-chain protocol for users to build and access credit.  “While collateral might be required to compensate for the volatility and the risk that the lender takes, we’re starting to see the formation of reputation despite many of these figures being pseudonymous. Reputation-building is time-consuming and difficult, and it should be possible for borrowers to utilize that to reduce their borrowing costs.”

At its core, Sublime draws inspiration from social finance. Our vision with the protocol is to democratize access to capital and make it easier for users to obtain loans in a truly peer-to-peer manner. 

What unique services are you bringing to the lending market with Sublime Finance, could you give us an overview of your services?

Unlike other popular lending protocols, we allow users to leverage their social identities and reputations to obtain loans. The loans on our protocol are partially backed. This means that instead of over-collateralized loans, we offer under-collateralized loans.

We offer two different loan types on our protocol. First is the classic pool-based structure where lenders provide liquidity and a single borrower takes out the loan. The second is a direct credit line between lenders and borrowers, a concept that is new to the DeFi market. These credit lines allow borrowers to borrow from lenders without any fixed end terms. Along with this, our users are also given a savings account that doubles as a credit wallet and is integrated into existing overcollateralized options like Compound and Aave. This generates yield on idle liquidity. 

What is the global market size and level of demand for DeFi lending protocols like Sublime Finance today?

The global credit market is huge. To give you an idea of the size, the World Bank estimated there to be a ~$5TN credit financing gap for enterprises alone. Hundreds of billions worth of informal credit transactions take place in India alone each year.

In recent times, however, the DeFi ecosystem has ballooned to a few hundred billions, and within that, lending probably represents one of the largest sectors. From individuals and trading firms to large businesses, DeFi lending has attracted individuals of all capacities. 

The demand is definitely there and we believe that with Sublime Finance enabling capital efficiency via undercollateralized loans, we will be able to tend to a sizable share of that demand.

Could you give us a walkthrough of Sublime Finance’s decentralized lending ecosystem and how it works?

Sure! As mentioned before we have two loan types – pool-based lending and credit lines. For pool-based lending, borrowers verified by one of the supported methods can create custom loan pools. The size of these pools is equivalent to the capital required. Lenders can then browse these pools and choose to provide liquidity to the pools of users they trust. In turn, they receive interest rewards and ERC-20 pool tokens representing their position in the pool. The pools allow borrowers to customize their loan parameters and a single borrower can have multiple pools. 

When it comes to credit lines, they’re ideal for lenders and borrowers who wish to remain anonymous on-chain. Credit lines don’t require the borrower to be verified, can be created either by the lender or the borrower, and do not have a fixed term. The liquidity present in the lender’s savings account is used to fund the credit line and either one of them is free to end it if there is no pending debt. 

What is next on your road map, any more information you would like to share with our readers today?

Right now, we’re in the process of prepping for the Alpha Launch of the protocol. The Alpha Launch is set to take place soon and we can’t wait for users to finally try out our protocol. From there on, we plan to do our best to keep improving the protocol and make Sublime one of the most easily accessible lending services in DeFi.

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