Ever since its inception, lending in DeFi has been over-collateralized. Now, however, over-collateralized loans in DeFi are a severed Achilles tendon, inhibiting the industry’s growth. In this regard, we have with us Pranjal Prashar, the co-founder of PAXO Finance, discussing why under-collateralized loans are the need of the hour in DeFi.
Hi Pranjal! Thank you for your time. Please tell us your story and how you came up with the idea for PAXO Finance.
Hi! Thank you for having me here.
I am Pranjal Prashar, the co-founder of PAXO Finance. I am a serial entrepreneur with ample hands-on experience in building scaling tech startups. I built and scaled three tech startups from ideation to exit across Asia, Europe, and the USA in the last decade alone. I’ve always found myself trying to find out gaps and loopholes in systems across industries and building products to close those gaps.
After spending over a decade building startups from scratch, the developments in the blockchain and crypto industry caught my attention, and I started exploring this space. After a few years, however, I wanted to borrow some ETH for staking. This was when I realized that none of the available protocols facilitated under-collateralized lending. And this is a huge miss because over-collateralized loans hinder regular retail investors from venturing into the DeFi space with adequate capital that can make a difference.
So, this is when I decided to build a decentralized protocol like PAXO Finance that facilitates instant, under-collateralized lending.
The TradeFi to DeFi movement is touted to be the next step in the evolution of finance. What factors are driving this transition, and what is the linchpin that is now making DeFi more appealing to users?
It’s the pace and transparency.
For decades, the traditional financial system and its financial models have been very successful. But despite all this success, the system has some fundamental flaws that have come to light in the past decade. For starters, the TradeFi space is highly fragmented and not globally accessible. Then, there is a significant portion of the population that is unbanked even today, and the power of running this financial system is still vested in the hands of a few corporations. This means that even after a decade, TradeFi is not immune to a recession like the one that happened in 2008.
Now, DeFi, on the other hand, even in its initial stages, checks all the boxes that TradeFi leaves empty. Based on purely digital currencies, this new industry is globally accessible. It provides a means for everyone across the globe, even in under-developed countries, to access superior financial infrastructure. Then, the returns and yields in DeFi, far out-beat those in TradeFi. However, decentralized lending is the linchpin for DeFi. By providing easy access to capital to anyone across the globe, it forms the backbone of the industry, bringing in both users and liquidity.
In the Defi World, if I want a loan from Aave, compound, or Paxo finance, I could get that in minutes, whereas if I wanted a loan from a traditional bank, I would have to do all the paperwork and wait for weeks until I could get a decision/loan.
Well! Talking about decentralized lending, under-collateralized lending has been the hard-to-achieve frontier in DeFi ever since the industry’s inception. What is the current state of the under-collateralized, and why do you think it is essential to bring under-collateralized lending to DeFi?
Yes! As you’ve rightly mentioned, under-collateralized lending in DeFi has been hard to achieve. Even today, most of DeFi is in its over-collateralized form. In this aspect, the TradeFi market is miles ahead of DeFi. The global unsecured lending market is worth over $11 trillion. So, it is pretty clear that there is a huge demand for under-collateralized and unsecured lending that DeFi, at the moment, is unable to meet.
Many retail investors seek capital to invest in cryptocurrencies and gain from the DeFi market. However, when faced with over-collateralization, retail investors are deterred from DeFi. And this, in turn, hinders the growth of the industry and the number of people that adopt it. This is why there is a need to bring under-collateralized lending to DeFi.
How does PAXO Finance tackle under-collateralized lending? Can you give us an insight into its inner workings and what makes the protocol different from other available options in DeFi?
Under Collateralized loans need to be as accessible as mortgage/ car loans and as efficient/straightforward as aave/compound.
At its core, PAXO Finance is a decentralized money market protocol. Like the other money market protocols in DeFi, it allows users to lend and borrow capital. But the catch here is that we provide investment loans for investors/traders in an under-collateralized manner. This means that users who want to venture into the DeFi or crypto market and take advantage of the investment opportunities here can obtain capital from PAXO Finance.
By design, Paxo is an investment loan protocol allowing users to borrow up to 5x of their equity contribution. Paxo follows a walled, guarded approach to managing risk, which means invested assets are locked within the smart contracts as collateral after the investment is made. This approach allows our lenders to have an asset backing the loan and makes it as secure as over-collateralized loans.
And instead of over-collateralizing the loan, it is given against the user’s investment portfolio. This is akin to obtaining property loans where the borrowed funds are secured against the property itself. So, traders and investors can take full advantage of DeFi’s investment opportunities by getting capital against their intended portfolio of assets. Once the loan is repaid, the portfolio is released from its collateralized position.
PAXO Finance is fully decentralized and permissionless, and there is no need for credit checks/scores or verifications.
How do you think easily accessible under-collateralized loans will transform the DeFi landscape? Will this become the new universally appealing factor for the industry?
Instant and easily accessible under-collateralized loans are vital to unleashing DeFi’s full potential. They cater to that section of the population with low capital to begin with and, as such, open up the market to the next wave of retail investors. They are also poised to reduce dependency on TradeFi and centralized solutions, allowing capital access to anyone who has an internet connection. So, yes! I believe when under-collateralized loans become mainstream in DeFi, DeFi, in turn, will become mainstream in the global financial system.
A lot is being said about DeFi 2.0 these days. How do you think the transition towards this ambitious new iteration will happen, and what could it mean for the broader financial systems?
Problems like lack of fixed interest rate loans, build-up of idle liquidity, and lack of security for assets have long plagued the DeFi landscape. So, DeFi 2.0 is an umbrella term for a new wave of innovations to tackle these shortcomings of DeFi 1.0. This transition is a defining moment for DeFi as it goes from a mere speculative phase to its value creation phase.
And through this value creation, DeFi will be able to cement itself as a superior financial system that circumvents the problems with the traditional systems.
Lastly, what advice would you give to new lenders and borrowers navigating the DeFi landscape?
In DeFi, money market protocols have popped up like mushrooms in recent years. So, I believe new lenders and borrowers should be wary of scams and un-authentic protocols trying to make a quick buck. A little research into the history of a protocol goes a long way and allows users to make the right decisions, safeguarding their assets. Research can include checking if the protocol is audited, whether the team is anonymous or not, if the project at least has a viable testnet version, and whether or not they backed by substantial funds and VCs.