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No Bank Run Risks

99% of DeFi has bank run risks - because the borrowers and lenders maturities are not matched. SmartCredit.io is doing the opposite - it matches maturities like traditional banks do.

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Key Takeaways

  • 99% of DeFi lending has bank-run risk because borrower and lender maturities are not matched.
  • SmartCredit.io eliminates bank-run risk by matching the maturity of every borrower loan to the corresponding lender's Fixed Income Fund bucket.
  • Lenders cannot withdraw early from funded loans - they wait for the fixed term to end, just like a term deposit in traditional finance.
  • Money-market protocols (Aave, Compound) allow lenders to withdraw at any time, creating the risk that the pool has insufficient free funds.

Why are there bank runs in DeFi? It's because the maturities are not matched. Maturity transformation is one of the key risk management capabilities of traditional banks. But most DeFi platforms do not match maturities - they have inherent bank-run risk.

Most of DeFi lending systems are based on the Money-Market concepts. The interest is variable, and the loan term is variable too. This means the borrowers can choose when they pay back their loans, and lenders can choose when they ask back their funds from the joint lending pool. However, the lenders can receive their funds only, if there are enough free funds in the pool. In case of adverse market situations it's quite possible that there are no free funds in the pool, therefore the lenders cannot withdraw, and hence the bank run on the Money Market.

SmartCredit.io is doing the opposite - it matches maturities as traditional banks do. 99% of Defi has bank run risks. Except for SmartCredit.io.

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