Risk Management in DeFi Lending: Best Practices

The State of DeFi Lending Risk

DeFi lending has grown to over $50 billion in TVL, but risk management remains a critical challenge. Over-collateralization requirements of 150%+ limit capital efficiency and exclude many potential borrowers.

Current Challenges

1. Capital Inefficiency - High collateral requirements lock up excessive capital
2. Limited Access - Many users can't meet collateral thresholds
3. Binary Risk Assessment - No gradation between "has collateral" and "doesn't"
4. Reactive vs Proactive - Most protocols only act after problems occur

Building a Risk Framework

Layer 1: Collateralization

Traditional collateral requirements remain important but can be dynamic:

collateral_ratio = base_ratio - (credit_score - 500) * 0.001

Higher credit scores = lower collateral requirements.

Layer 2: Credit Scoring

Integrate onchain credit data to assess borrower risk:

• Historical repayment behavior
• Portfolio health metrics
• Cross-protocol activity

Layer 3: Monitoring

Real-time alerts for risk events:

• Large collateral withdrawals
• Approaching liquidation thresholds
• Unusual transaction patterns

Implementation Example

Here's how to integrate Cred Protocol for risk management:

// Check borrower eligibility
const { score, range } = await credProtocol.getScore(borrowerAddress);

if (score >= 700) {
  // Offer reduced collateral (125%)
  return { eligible: true, collateralRatio: 1.25 };
} else if (score >= 600) {
  // Standard collateral (150%)
  return { eligible: true, collateralRatio: 1.50 };
} else {
  // Higher collateral or rejection
  return { eligible: score >= 500, collateralRatio: 1.75 };
}

Key Takeaways

1. Layer multiple risk signals for robust assessment
2. Use credit scores to enable capital efficiency
3. Implement proactive monitoring
4. Build gradual trust with new borrowers

Want to implement credit-aware lending? Check out our documentation at docs.credprotocol.com.