- Ripple is building a lending market.
- The loans will be uncollateralised.
- XRP holders will need to decide if they trust the institutions they lend to.
Ripple is banking on the XRP Army’s trust.
That’s the upshot of the XRP issuer’s new lending market that will allow holders of the $163 billion cryptocurrency to lend out their tokens and earn yield directly on the XRP Ledger blockchain.
The loans will be uncollaterialised, managed by onchain contracts, and are part of Ripple’s push to drive adoption of decentralised finance on XRPL.
“If there’s one large untapped asset that the XRP Ledger has, it’s the XRP Army,” Jasmine Cooper, Ripple’s director of product, told DL News. “There are tens of thousands of XRP holders out there that do not have an opportunity to gain yield on that XRP.”
The XRP Army refers to a loose group of retail investors who staunchly support Ripple and the XRP token.
“For institutions, the appeal is clear: no financial institution will turn down low cost capital if it can be sourced within know-your-customer and anti-money laundering standards,” Ripple said in an overview of the planned lending market shared with DL News.
“The lending protocol enables exactly that, pooling liquidity from a global base of smaller investors into institutional-sized loans while maintaining compliance.”
The fact that the loans won’t be secured by any form of collateral could raise the risk for lenders because there are no assets to claim if borrowers fail to pay back their loans.
While Ripple will introduce optional safeguards, it will ultimately be up to the lenders themselves to decide if they trust the institutions they lend to.
Ripple designed the XRP token to facilitate cross-border payments and helps develop the XRPL blockchain.
DeFi lending boom
Ripple’s plans come amid a boom in decentralised finance lending that’s sweeping over the crypto industry.
In early September, deposits to DeFi lending protocols soared to an all-time high of $130 billion, according to DefiLlama data.
Major lending protocols like Aave, Morpho, and Euler have become liquidity magnets amid the sector’s expansion, generating huge earnings from transaction fees. Those lending protocols tend to offer overcollateralised loans, however.
Giving often unsophisticated retail investors the ability to participate in unsecured lending isn’t a new idea in DeFi.
Many players have tried making it work with varying degrees of success.
Maple Finance, a lending protocol, provided infrastructure for uncollateralised loans up until 2023 when it ditched due to difficulties in finding borrowers with sufficient credit-worthiness.
Goldfinch, a protocol that lets retail investors lend to firms in emerging markets in Africa and South East Asia, has suffered three defaults, costing lenders millions of dollars.
Wildcat, a protocol that allows borrowers to deploy undercollateralised credit lines, had one of its users, Kinto, default on its loans earlier this month.
Assessing risk
Despite the risks, the potential rewards for getting uncollateralised lending to work are great. It has a broader appeal and is more efficient than overcollateralised lending.
Yet, financial institutions usually hire well-paid professionals to assess whether borrowers are trustworthy.
At Ripple’s new market, the question of trust will be mostly up to the XRP holders themselves.
Borrowers and lenders will need to comply with KYC and AML checks. But the market itself — which is built directly into the code of the XRPL blockchain — is decentralised, meaning Ripple has no control over how it is used.
“Ripple’s not involved in the lending protocol whatsoever, in terms of actually running it,” Cooper said. “We’re just building the code.”
Still, Ripple will implement some optional safeguards to help protect lenders, Cooper said.
Pool managers, entities who identify and underwrite borrowers and manage loans, can put up first-loss capital, money invested in a lending market that absorbs initial financial losses.
This, Cooper said, ensures that pool managers have skin in the game and are incentivised to manage loans responsibly on behalf of the lenders.
Another is giving borrowers the ability to be transparent about the underwriting process. If Ripple partners with a front end application, Cooper said, they will be able to provide lenders information on the underwriting and an investment overview.
There’s also the possibility for borrowers to offer safer overcollateralised lending through offchain agreements with lenders.
But for the most part, Ripple is taking a hands-off approach.
Stiff competition
The DeFi lending landscape is competitive. Often, the blockchains with the most assets — or liquidity — become the best places for both borrowers and lenders to congregate.
Ethereum, the biggest DeFi-enabled blockchain with almost $120 billion of protocol deposits, hosts the most onchain lending.
DeFi on the XRPL blockchain is tiny in comparison, with only $96 million worth of deposits to protocols — less than 1% of the deposits on Ethereum.
Ripple’s lending market has some advantages, though. Uncollateralised lending usually yields more than collateralised lending because the risks are inherently greater. And there’s also currently few places XRP holders can go if they want to earn yield.
Cooper said there are three things investors usually look at when considering investment opportunities: yield, accessibility, and risk.
“If we can max out those three things, competition shouldn’t be a major issue,” she said.
Ripple’s lending market is in the final stages of development and will be put to a vote among the XRPL blockchain’s validators, who will decide if it will be added in a coming upgrade.
That process kicks off next month, and should take between two and three months to complete as it involves thorough reviewing and testing of the new code by the validator community.
If all goes well, the new market could be deployed around the start of next year, Cooper said.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
