Onchain Lending Revolutionizes Borrowing Without Credit Scores or Banks

Banks have spent centuries deciding whether you can borrow based on your credit history, income, and identity. Onchain lending flips that logic entirely by using smart contracts to lend money without any of these social factors.

The system works by having borrowers deposit assets worth more than they want to borrow, which acts as security for the loan. If the collateral's value drops below a threshold, an automated liquidation mechanism sells part of it to repay the loan, protecting lenders from losses.

Protocols like Aave and Compound have extended this model across multiple chains, with total value locked in DeFi lending exceeding $40 billion as of mid-2026. The core problem onchain lending solves is that blockchains don't have the infrastructure to enforce credit scores or legal agreements, so they rely on overcollateralization instead.

Every DeFi lending protocol sets a loan-to-value ratio (LTV) for each asset it accepts as collateral, defining how much can be borrowed relative to what's deposited. The trade-off is that borrowers who want to stay safe typically keep their health factor well above 1.5, leaving room to absorb price swings without a forced sale.