Huma is an open protocol for building next-gen decentralized risk and lending solutions backed by income and receivables.
Smart contracts’ transparency and automated execution played a critical role in DeFi’s success and will continue to do so. At the same time, the current DeFi ecosystem falls short when it comes to lending for real world use cases, where real users and yields are. First of all, it lacks the most critical input that all modern risk underwriting depends on, income (cashflow). Moreover, it relies solely on over-collateralization of a few digital assets, making adoption by new entrants really difficult. As such limitations become obvious to many in the industry, under-collateralized lending for real world use cases emerges as the next frontier.
In the next decade, tens of thousands of institutions and billions of people will onboard onto Web3 ecosystems. They won’t have rich crypto asset portfolios initially to collateralize against, however, most of them will be creditworthy participants.
The DeFi infrastructure for serving them is mostly missing today, and Huma Protocol is introducing such critical infrastructure elements to enable it.
We believe the future of DeFi is powered by automated underwriting supported by signals about the borrowers’ Ability, Willingness, and Commitment to pay.
Automated risk underwriting (ARU): Most successful fintech players serve high volume of credit applications in an automated fashion, often utilizing a variety of data sources. Similarly, major DeFi protocols are all run by Automated Market Makers(AMMs). However, it is a lot more complicated to support ARU in a risk-on world than in a risk-off world. Naturally, ARUs will evolve as additional data points (e.g. income, credit worthiness) and better intelligent models are introduced.
Income: Income (cashflow) is the most vital signal in a wide array of underwriting scenarios, since it offers the best measure for ability to pay. The more comprehensive we can understand income, the better we can underwrite.
Receivables: Today, collateral in DeFi mainly represents a handful of digital assets. The majority of businesses and people in the world do not have tons of digital assets idling, but they do have receivables in the form of future invoices, transactions, subscription revenue, paychecks, royalties etc. In fact, in structured finance, such receivables are regularly used in the securitization of loans. Receivables are the best signal for commitment to pay, because once an entity transfers the ownership of their receivables to the lending platform, it acts as a payment guarantee. We actually think collaterals are just special forms of receivables.
Credit worthiness: Credit worthiness is the most valuable signal for willingness to pay. Traditional credit scores played an important role for a long time, however they are known to be biased, and heavily centralized. We need alternative decentralized systems to carry these signals and to establish borrowing accountability.
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