Unsecured Lending via Delegated Underwriting
This work addresses the problem of enabling unsecured lending in decentralized systems without trusted identities, offering a novel approach for pseudonymous borrowers.
The paper proposes a mechanism for unsecured lending among pseudonymous users that eliminates the need for collateral, legal identity, or centralized underwriting by using delegated credit from sponsors. It proves that the mechanism conserves aggregate credit capacity and makes repay-then-default weakly unprofitable under a simple cap.
We develop a mechanism for unsecured lending among pseudonymous users that does not rely on collateral, legal identity, or centralized underwriting. New borrowers enter only through sponsors who delegate part of their own credit capacity, so onboarding a new account reallocates existing borrowing power rather than minting new capacity. Default losses flow back along the sponsor path, while repayment creates earned credit that expands future borrowing capacity. We prove that delegation conserves aggregate credit capacity, that revocation and default remain local to a unique sponsor path, and that a simple cap on earned-credit growth makes repay-then-default weakly unprofitable.