Since its launch in January 2020, the Aave Protocol, which has attained the title of being the third-largest DeFi lending protocol, has been trying to find out ways to improve the capital movements within its ecosystem.
In its search to find out a way to unlock the locked value in DeFi, it recently revealed its Credit Delegation for the first time. Aave Protocol launched a decentralized exchange named DeversiFi, to deal with Credit Delegation, which is the first of its kind to be launched on such a platform like Aave.
Credit Delegation is referred to as a transaction where an Aave Protocol user delegates a credit line to someone they trust. The Credit Delegation product at Aave enables one party to deposit collateral and another one to draw a loan against that collateral, thus creating a mutual trust among the depositors and lenders looking for additional credit exposure.
Locking value into the DeFi ecosystem allows for free borrowing, lending, and trading across DeFi; credit delegation helps in unlocking this locked DeFi value to initiate free trade against collaterals deposited into the Aave. Anyone using the Aave Protocol can use this Credit Delegation approach by drawing a credit line from a dedicated ‘Credit Delegation Vault.’
To leverage Credit Delegation, depositors need to supply the capital to the Aave protocol, and in exchange, they are given ‘aTokens’. The users can then use these ‘aTokens’ to open a ‘Credit Delegation Vault’, with their preferred parameters like the interest rate or the maximum amount of capital that can be borrowed by a user. The borrowers who need immediate capital enter into a contract with the depositor via an OpenLaw agreement.
An OpenLaw agreement is a decentralized contract service that facilitates the borrowing and lending procedures where trusted users can borrow loans against the collaterals provided by other users. Then, the depositor whitelists the borrower’s address, after which the borrowers get the license to withdraw capital directly from the Vault created by the depositor; this time, the borrowers do not need to provide any asset as collaterals.
Credit Delegation serves as a secure way to source liquidity from the Aave network across DeFi and across traditional banking institutions without requiring the borrower to deposit collaterals.