One alternative idea is P2P lending, which directly connects borrowers and lenders, with accrued interest on the debt going directly to the lender, based on the principal amount of the debt. In this case, full utilization is achieved by definition, as there is no pool where funds would sit idle.
This idea was tested back in 2017, when Aave was known as ETHLend and originally offered this P2P lending model:
- Potential borrowers could come to the platform, deposit collateral, and “apply” to borrow, specifying the terms of their debt.
- Lenders could review such applications and provide liquidity to those borrowers whose terms they found attractive.
However, this system was not atomic and required several transactions for the full transaction cycle, and it implied the absence of any matching mechanism, as everything happened manually. Such a model sacrificed a lot of flexibility.
The P2P lending model did not find its market at that time, as the DeFi space was still narrow. New Peer-To-Pool models turned out to be more attractive, as anyone could instantly interact with the pool by depositing liquidity or borrowing. Flexibility was prioritized over ensuring a minimum spread between rates for lending protocols.
Subsequently, ETHLend turned into Aave and adopted a new model already successfully tested at Compound.
After that, the P2P lending model disappeared from the radar, but it remained tempting to reduce the spread between rates and overcome the obvious inefficiencies.
Now, Morpho reintroduces this idea, and we will further explore how they have managed to create P2P lending and what nuances are involved.