Unsecured stablecoin lending

Written by: haonan

Compiled by: Block unicorn

Foreword

Users in the global unsecured consumer credit market are like fat sheep in modern finance – slow to act, lacking judgment, and lacking mathematical skills.

When unsecured consumer credit shifts to the stablecoin track, its operational mechanism will change, and new participants will also have the opportunity to share in the profits.

The market is huge.

In the United States, the primary form of unsecured lending is credit cards: this ubiquitous, highly liquid, and instantly available credit tool allows consumers to borrow without providing collateral while shopping. Outstanding credit card debt continues to grow, currently reaching approximately $1.21 trillion.

Outdated technology

The last major transformation in the credit card loan sector occurred in the 1990s when Capital One introduced a risk-based pricing model, a groundbreaking move that reshaped the landscape of consumer credit. Since then, despite the emergence of numerous new banks and fintech companies, the structure of the credit card industry has remained largely unchanged.

However, the emergence of stablecoins and on-chain credit protocols has brought new foundations to the industry: programmable money, transparent markets, and real-time funding. They are expected to ultimately break this cycle and redefine the generation, financing, and repayment of credit in a digital, borderless economic environment.

In today's bank card payment systems, there is a time lag between authorization (when the transaction is approved) and settlement (when the issuing institution transfers funds to the merchant via the card network). By moving the funds processing workflow onto the blockchain, these receivables can be tokenized and financed in real-time.

Imagine a consumer purchasing goods worth $5,000. The transaction is authorized immediately. Before settling with Visa or Mastercard, the issuing institution tokenizes the receivables on the blockchain and receives $5,000 worth of USDC from the decentralized credit pool. Once the settlement is completed, the issuing institution sends these funds to the merchant.

After that, when the borrower repays the loan, the repayment amount will be automatically returned to the on-chain lender through a smart contract. Similarly, the entire process is conducted in real-time.

This method can achieve real-time liquidity, transparent funding sources, and automatic repayments, thereby reducing counterparty risk and eliminating many of the manual processes that still exist in today's consumer credit.

From securitization to fund pool

For decades, the consumer credit market has relied on deposits and securitization to achieve large-scale lending. Banks and credit card issuers bundle thousands of receivables into asset-backed securities (ABS) and then sell them to institutional investors. This structure provides ample liquidity, but also brings complexity and opacity.

Buy Now, Pay Later (BNPL) lenders like Affirm and Afterpay have demonstrated the evolution of the credit approval process. They no longer offer a general credit limit but instead review each transaction at the point of sale, differentiating between a $10,000 couch and a $200 pair of sneakers.

This transaction-level risk control produces standardized and split-able receivables, with each receivable having a clear borrower, term, and risk profile, making it an ideal choice for real-time matching through on-chain lending pools.

On-chain lending can further expand this concept by creating dedicated credit pools tailored around specific borrower demographics or purchase categories. For example, one credit pool could provide funding for small transactions for high-quality borrowers, while another credit pool could specifically offer travel installments for sub-prime consumers.

Over time, these funds pools may evolve into targeted credit markets, achieving dynamic pricing and providing transparent performance indicators for all participants.

This programmability allows for more efficient allocation of capital, provides consumers with better interest rates, and opens the door to establishing a global unsecured consumer credit market that is open, transparent, and subject to instant auditing.

Emerging on-chain credit stack

Reimagining unsecured loans for the on-chain era is not just about transplanting credit products onto the blockchain, but fundamentally rebuilding the entire credit infrastructure. In addition to issuing institutions and processing institutions, the traditional loan ecosystem also relies on a complex network of intermediary institutions:

We need a new way of credit scoring. Traditional credit scoring systems, such as FICO and VantageScore, may be able to be transplanted onto the blockchain, but decentralized identity and reputation systems may play a larger role.

Lending institutions will also require credit assessments, equivalent to ratings from S&P, Moody's, or Fitch, to evaluate the quality of approvals and repayment performance.

Finally, the less noticeable yet crucial aspects of loan collection also need improvement. Debt denominated in stablecoins still requires enforcement mechanisms and recovery processes, combining on-chain automation with off-chain legal frameworks.

Stablecoin cards have bridged the gap between fiat currencies and on-chain consumption. Lending protocols and tokenized money market funds have redefined savings and yields. Introducing unsecured credit on-chain has refined this triangular relationship, enabling consumers to borrow seamlessly while allowing investors to fund credit in a transparent manner, all driven by open financial infrastructure.