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A New Wrinkle for Ethereum DeFi: Loans Backed by Crypto Collectibles

Rocket is a new kind of dApp that will allow DeFi users to receive undercollateralized Dai loans by putting up non-fungible tokens
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The Ethereum decentralized finance arena is blooming fast in just about every direction. Some of its most interesting growth so far has come from the lending sector, with the fledgling success of the Maker project being a prime example.

As intriguing as Maker is, its automated Dai lending system requires over-collateralization to work: users must lock up collateral like ether (ETH) or Brave Attention Token (BAT) to the tune of at least 150 percent of however much Dai they’d like to loan themselves.

This collateralization ratio works well to protect the integrity of the Maker project. But this model isn’t feasible for average folks who don’t have spare capital to lock up against a loan, a reality that’s led some stakeholders around Ethereum devising how un- or undercollateralized loans could work in DeFi. And that’s exactly where the new Rocket project comes in.

We Have Lift-Off

Alex Masmejean, who helps with Operations at MetaCartel DAO and has been spearheading undercollateralized loan efforts around DeFi, formally introduced Rocket on January 20th.

Now live on the Ropsten testnet, Rocket is a new kind of dApp that will allow DeFi users to receive undercollateralized Dai loans by putting up non-fungible tokens (NFTs), also known as crypto collectibles, as collateral.

For example, think CryptoKitties, ENS Domains, Axie Infinity, Gods Unchained, SuperRare, and Decentraland tokens as among the varieties that Rocket, which will be organized like a decentralized autonomous organization (DAO) NFT bank, could accept.

“Long gone are the days where you had to deposit more money in than you get money out,” Masmejean said.

Why NFTs?

In traditional finance, a person’s credit score might be enough to secure an uncollateralized loan. But since credit histories or related analogues have yet to be ported to DeFi, these aren’t actionable on Ethereum for now.

For Rocket then, NFTs are one early way to provide such a scoring, or rather a workaround. The types of users Rocket is eyeing are more likely to have some crypto collectibles laying around as opposed to hundreds or thousands of dollars of ETH.

Accordingly, these users can apply for undercollateralized loans through Rocket by putting up their tokens as stake. If defaults occur, the Rocket DAO can auction off the underlying collectibles to recuperate its losses.

Moreover, Rocket’s proponents think it’s a prime time to be working around NFTs in general.

“Apart from improving upon what the crypto industry calls ‘overcollaterization,’ a core assumption of Rocket is that the NFT market will explode in the next few years,” Masmejean said.

Building Up a Launchpad

Unlike Maker’s lending protocol, which is automated, Rocket’s DAO members will have the final say on which loan applications are approved.

As such, these members pool their own money to a lending pool, with the idea being to gain above-average returns on any lent funds over time. As Masmejean has explained:

“After careful due diligence, Rocket will query funds from our lending pool, which is a Moloch-based DAO dedicated to Liquidity Providers. The pool is in ETH to remain aligned with Ethereum future, and today is worth around $10,000 of potential loans to offer. Because of this, we don’t expect to accept loans for more than $4,000 in value … It’s riskier than lending DAI on classic #DeFi, but the goal is to have better returns.

A New Cryptonative

As DeFi continues to explode, new cryptonative profit opportunities will only continue to proliferate. Lending through Rocket is just the latest potential example.

Consider CryptoKitties, for instance. Users could already “breed” their tokens together and sell the ensuing offspring on marketplaces like OpenSea.

Rocket lets DeFi users who can stomach the risk offer liquidity-as-a-service to an underserved community, which is a new kind of opportunity altogether. More such innovations are coming as DeFi is collaboratively aimed toward escape velocity, too.


William M. Peaster is a professional writer and editor who specializes in the Ethereum, Dai, and Bitcoin beats in the cryptoeconomy. He's appeared in Blockonomi, Binance Academy, Bitsonline, and more. He enjoys tracking smart contracts, DAOs, dApps, and the Lightning Network. He's learning Solidity, too! Contact him on Telegram at @wmpeaster

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