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Unlocking Credit In Emerging Markets With DeFi

Powered through DeFi protocols, this new landscape shows promise in opening up accessibility to credit for those who have been previously excluded from this major enabler of wealth.

Credit is an essential element of every economy. By borrowing, families can afford a home or an education, for example, that would otherwise not be accessible. Now, as many families globally experience spells of income fluctuation, unemployment, and medical emergencies, access to credit and lending has become increasingly important. Access to credit and borrowing options, however, are not universal.

Let’s look at formal borrowing. Formal borrowing includes individuals accessing credit either through a financial institution or credit card, while semi-formal borrowing involves using a savings club or credit association. Both are essential considerations in enabling wealth. However, as seen below, there is a lack of formal borrowing options, especially in emerging markets.

% of Adults Borrowing from a Financial Institution (2017)

Ultimately, banks prefer to lend to large enterprises, rather than SMEs, entrepreneurs, and families due to the following:

  • perceived higher risks
  • small loan amounts
  • absence of credit history and score
  • absence of collateral

Instead, they must depend on internal funds or cash from friends and family. Such reasons have resulted in an estimated 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, having an “unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending”. The opportunity is clear.

An Emerging Credit Ecosystem Built on Inclusion

Web 2.0/2.5 solutions have begun to explore this broader lending market. Peer-to-peer lending facilitated by companies such as Zopa has given people access to more straightforward, better-value loans. In tackling the absence of historical data for credit scores, new adjudication techniques have significantly expanded access to credit for the underbanked. KayaCredit, for example, uses data such as prepaid top-ups and remittances to predict a borrower’s financing needs and repayment behavior. Meanwhile, solutions such as ZestFinance are assisting traditional financial institutions with analyzing and processing such disparate data.

Despite these innovations, the web 2.0/2.5 online lending model is limited by high and unstable funding costs. This has led to projects turning to investors for capital to fund loans. The result; projects which initially set out to provide peer-to-peer lending for individuals had to ultimately cater to the very investors they initially tried to circumvent; high credit borrowers. This was the case with LendingClub.

LendingClub Investment % Per Channel

Attention Turns to DeFi

Now, financial engineers are turning their attention to DeFi, given that it is open and permissionless. Developers can build lending protocols without the burden of relying on finding banking partners and dealing with arduous regulatory processes. DeFi has become the front-runner in providing easily accessible credit and borrowing options to communities in emerging markets.

For DeFi to reach its potential and be an alternative to traditional finance, it has to be able to cater for multiple use cases for loans rather than just margin trading. Fortunately, efforts are being made to facilitate the tokenization of real-world assets via non-fungible tokens (NFT’s). This will not only increase the scalability of DeFi, but will give broader collateral options for individuals and SMEs in emerging markets. Persistence is one protocol tokenizing real-world assets using NFT’s. BitLand is digitizing shareholder rights of land in Africa, while RealT is digitizing the ownership of real estate properties using digital tokens. Meanwhile, countless firms, such as Factora, Harbor, Swarm, Polymath, and TrustToken, are exploring the tokenization of real-world assets.

An often cited criticism of DeFi lending protocols has been the method of mitigating risk. Over-collateralization has its limitations, especially when considering individuals who have limited financial means. However, to make lending protocols more accessible, two innovations show promise:

  1. Credit Delegation: Facilitated by Aave, credit delegation allows the user with cryptocurrency to act as the guarantor for a third party who does not have the necessary collateral to take a loan. Credit delegation significantly broadens accessibility by facilitating little-to-no collateral loans. Furthermore, it creates opportunities for novel lending arrangements.
  2. Credit Union DAO: In a credit union DAO, members stake funds and receive token shares on a bonding curve. The smart contract receives interest, and that interest is then lent out unsecured or under-collateralized. is pioneering this.

Regarding credit scores, the adjudication techniques mentioned previously are now being developed in DeFi. Colendi is one such credit platform using non-financial information while is providing an API that captures and analyzes millions of data points so that lenders can underwrite loans in emerging markets. Teller meanwhile, is bringing established credit scores on-chain.

As the effectiveness and efficiency of such adjudication processes improve, the lending protocols that incorporate such methods will lead the lending market in DeFi. These innovations will open up the addressable market and reduce the underwriting costs by automating the collection and analysis of critical data.

Scaling Liquidity Through Innovation

As we saw with LendingClub, the success of lending projects hinges on capital. For DeFi to avoid the pitfalls of Web 2.0 and to create services that cater to the intended user base, it must tap into decentralized liquidity. There is, however, the problem that much of the capital locked in protocols is inefficient. Many liquidity providers deposit into lending protocols without the intention to borrow against them. “This produces a vast amount of value locked within these protocols without any utilization.” Fortunately, innovations such as credit delegation are unlocking these capital inefficient pools. Along with efforts to improve interoperability across ecosystems, both will significantly scale DeFi liquidity.

At Conflux Network, we are developing our cross-chain asset protocol, ShuttleFlow, which will enable deeper liquidity to be accessed by allowing cross-chain assets to directly enter DEXes and other DeFi applications on the Conflux chain. Furthermore, such cross-chain assets will also be able to support other public chains. By focusing on liquidity, Conflux Network is giving developers the freedom to build DApps that will disrupt.

Overall, a new credit ecosystem is being built that is leading to universal accessibility to lending. While the DeFi credit ecosystem may not replace traditional lending, it is providing universal access to the infrastructure to collect, verify credentials and disburse loans. Once again, we see DeFi offering opportunities for growth and prosperity.

Written by Conflux Network’s Analyst, Niall Yorke

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About Conflux Network

The only state endorsed public, permissionless blockchain project in China, Conflux Network is an open-source, layer-1 blockchain protocol delivering heightened scalability, security, and extensibility for the next generation of open commerce, decentralized applications, financial services, and Web 3.0. Conflux Network is overseen by a global team of world-class engineers and innovative computer scientists, led by Turing Award recipient Dr. Andrew Yao. Fostering entrepreneurship and innovation, Conflux elevates startups and organizations across industries and continents to generate decentralized marketplaces and digital assets for meaningful business and social impact. Founded in 2018, Conflux has raised $35 million in capital from prominent investors including Sequoia China, Metastable, Baidu Ventures, F2Pool, Huobi, and IMO Ventures.



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Conflux is a PoW + PoS hybrid first layer consensus blockchain for dApps that require speed at scale, without sacrificing decentralization.