Written by: Thejaswini M A
Compile: Block Unicorn
All lending institutions in the world are doing one of two things: either verifying your identity or seizing your assets.
The first system is massive and costly. It established credit bureaus, credit scoring companies, underwriting departments, collection agencies, and courts to enforce judgments. The consequences of default follow you for years. Trillions of dollars in infrastructure exist to enable banks to lend money to strangers while having a reasonable understanding of whether that money can be repaid.
The second job requires only a set of scales.
Securities lenders, also known as margin settlement agents, price the underlying assets and then sleep soundly. This is the oldest form of lending, and it works perfectly. It has never grown significantly because a system that requires you to already own something in order to borrow it primarily serves those who don’t need it.
In the realm of lending, cryptocurrency lending plays the second most important role: security. When people think of cryptocurrency, they often feel anxious, immediately recalling negative events such as the Sam Bankman-Fried case. Therefore, choosing a more secure lending option is beneficial for us.
In the cryptocurrency space, to borrow one thousand dollars, you first need to have one thousand five hundred dollars.
This product is only available to those who already have capital. It’s highly effective for traders who want to use leverage without closing their positions—and that, in itself, is a legitimate business. For everyone else, our offer is to prove you don’t need it, and then we’ll give it to you. That’s fair.
In traditional financial systems, credit drives economic growth. A bank lends money to a baker to purchase an oven, based on the baker’s future ability to sell bread. The bank’s trust in the borrower creates new economic value. This model works because, by definition, those seeking loans are individuals who lack available funds.
Today, I’d like to show you who’s trying to be the first to work on the chain—and what ultimately happened to them.
In the United States, the cryptocurrency market size reaches $5.14 trillion. However, the cryptocurrency market size is nearly zero. Few factors hinder the development of cryptocurrency:
Identity. Unfortunately, wallets are not people. I can now create ten thousand wallets by simply paying gas fees. If lenders cannot determine whether the address showing up today to collect payment is the same as the borrower who defaulted last year, the credit system built on reputation would collapse on its first day of attempted attack.
Pricing. Even if identity verification issues are resolved, lenders still need a way to charge different interest rates to different borrowers: 9% for some, 29% for others. This requires historical data, which in turn necessitates the involvement of credit agencies. On-chain data can show a wallet’s activity in DeFi, but it cannot reveal whether the person kept their job or repaid previous loans on time.
Recourse. Under normal circumstances, when a borrower stops making payments, a series of consequences follow: collection calls come in, default records are reported to credit bureaus, and courts may even garnish wages. But what can you do if a wallet stops repaying? Abandoning a wallet carries no cost. The creditor doesn’t know your name, your address, or anything they can seize.
Fourth, there is the legal aspect. Each enforcement method I just mentioned requires a license. Collection agencies must hold a license to operate and must comply with federal regulations, including limits on collection frequency and content. Interest rates charged by lenders are also capped by usury laws, which vary by state and product type. Consumer credit is one of the most heavily regulated activities in finance, and operating in this space without proper authorization is illegal.
See where this will lead everyone. In the end, we all head toward the grave.
Goldfinch, founded in 2021 and backed by a16z and Coinbase Ventures, bypassed on-chain identity verification entirely. It provides loans to real businesses in emerging markets through professional underwriters familiar with those regions, with funding supplied by cryptocurrency. Goldfinch has motorcycle taxi financing institutions in Kenya, lending organizations in Nigeria and Southeast Asia, and borrowers across 18 countries.
In October 2021, Tugende Kenya received a $5 million loan to expand its motorcycle financing business for taxi drivers. Goldfinch later discovered that $1.9 million was transferred to Tugende’s struggling Ugandan parent company, which was not permitted under the loan terms. Tugende defaulted in June 2023.
Another borrower, Stratos, defaulted on a $7 million credit line, while a third borrower, Lend East, defaulted on nearly $6 million. In total, the protocol watched over $18 million vanish into the very real-world risks it aimed to address. Goldfinch ceased operations in June of this year after deploying approximately $100 million in funds, and its token price plummeted by 99.8%.
Upon careful consideration, these failures are nothing more than ordinary credit defaults: oil prices rose, drivers couldn’t make payments, contracts were breached, and borrowers moved funds they shouldn’t have. The blockchain functioned perfectly—it simply couldn’t foresee whether those funds would ever be recovered.
Maple is a more instructive case because it was the largest unsecured crypto lending platform ever, yet it did not collapse. But to survive, it had to completely abandon its original mission. It realized that in the crypto space, unsecured loans based on trust and identity were too risky.
On December 5, 2022, Orthogonal Trading defaulted on eight loans totaling $36 million, representing approximately 30% of all active loans on the protocol. Prior to November, Orthogonal had informed its underwriters that its exposure on FTX was approximately $2.5 million. On December 3, the company admitted the actual amount was significantly higher. This deception immediately caused 80% of the funds in the largest-exposure pool—the M11 USDC pool, totaling around $31 million—to be lost, with Maple acknowledging it might recover only $2.5 million of the $36 million total.
Sid Powell later stated that undercollateralized loans require stricter due diligence, and Maple may shift toward partial collateralization.
It has continued to surge forward. Today, Maple’s loan-to-collateral ratio exceeds 140%, with no losses since 2023, leading to deposit growth of over $2.2 billion. This more secure option has proven highly effective.
This leads to the question of who is currently attempting it, as many are trying, and they have clearly categorized the obstacles involved in the attacks.
Divine Research is committed to combating identity blocking. Since December 2024, the company has issued approximately 30,000 loans, most under $1,000, denominated in U.S. dollars, to borrowers including teachers, fruit vendors, and anyone with internet access. Borrowers must verify their identity through a World ID iris scan, preventing individuals from opening a second account after abandoning their first. Loan interest rates range from 20% to 30%. According to the Financial Times, the default rate on the first batch of loans was approximately 40%.
3Jane is focused on price blocking. It retrieves borrowers' bank data through Plaid and uses Credit Karma’s VantageScore rating, then encapsulates both within a zero-knowledge proof to ensure no sensitive information is transmitted on-chain. Ultimately, it extends credit lines based on the results. Paradigm led its seed funding round. 3Jane currently holds approximately $620 million in funds, making it the largest on-chain unsecured lending institution today.
Wildcat is a non-recourse company that does not engage in any underwriting. It provides a master loan agreement template; once signed by the borrower and lender, Wildcat takes no further involvement. Its own documentation states that the company does not assess the borrower’s creditworthiness and will not interfere with market operations once the loan is initiated.
Huma took a different development path, completely ceasing lending to individuals. Huma Finance is regarded as the first PayFi network. They have partnered with Qiro Finance, which serves as Huma’s strategic underwriting and risk monitoring partner for the Huma PayFi network.
Huma provides financing for invoices and cross-border payment flows, where known institutions owe known amounts on known dates. The company has facilitated $2.3 billion in transactions through this method.
None of these schemes enforce any terms on-chain. Divine will exclude you from future opportunities—the weakest sanction among all, with a 40% default rate indicating that borrowers have already anticipated the consequences of this penalty. 3Jane will refer your file to a U.S. collections agency, which is effective because its borrowers are U.S. citizens with legal status and credit histories that defaulting would harm. Wildcat, by contrast, takes direct legal action in court.
If there is no excess collateral available for liquidation, all viable mechanisms are forced to revert to the old system. When issues arise, it is typically lawyers who step in, resulting in costs for individuals.
Note which sectors successful cases have shifted toward. 3Jane’s website now describes its product as a credit-backed yield token for fintech originators, offering warehouse facilities ranging from $5 million to $200 million. It purchased $8.5 million in small business receivables from a company called Slope. Huma provides financing for B2B payment workflows. In the event of payment default, Huma relies on real-world factoring agreements and deploys lawyers to enforce contracts. Both protocols have shifted toward institutional lending, as institutional lending anchors debt within the traditional financial system, backed by signed agreements and corresponding jurisdictions.
Therefore, the market's next attempt will be source withholding.
If your salary is paid directly on-chain, lenders can receive repayment before you even receive your funds. This is the first mechanism in the cryptocurrency space to directly interface with consumer funds. The infrastructure has been live this year. Deel processes $22 billion in payroll and began offering stablecoin salary payments through MoonPay in March to approximately 40,000 businesses in the UK and EU. Rise has natively supported stablecoin salary payments for years. Toku, in collaboration with Aleo and Paxos, has built a private version for companies that cannot publicly disclose salaries on public blockchains. With these companies officially paying salaries in stablecoins, the infrastructure for "source deduction" is now finally in place.
But the problem remains. Deel sends payments to non-custodial wallets—employees’ wallets, controlled by employees’ private keys. Once the funds arrive there, the lender has no further control or ability to access them. Interception must occur upstream of the Web2 payroll system. However, if service providers like Deel allow cryptocurrency protocols to integrate into their systems, they suddenly become debt collection agencies or credit service providers.
As noted in the barrier section, "legal" regulations strictly govern wage garnishment and salary deductions. Currently, no payroll service providers, including Rise, Bitwage, and Deel, offer automated loan deductions or wage garnishment features for Web3 lending protocols.
Cryptocurrencies can transfer funds to anyone on Earth within seconds. Because the system guarantees irreversible settlement, it is inherently impossible to force the return of funds. Whenever someone attempts to recover funds, they rely on traditional methods, such as courts, collection agencies, credit bureaus, or employers.
In fact, withholding at source is not a new technology.
In the 19th century, British and American employers paid wages in company scrip, which could be exchanged at company stores at prices set by the employer. Workers’ wages never truly became money under their own control. Parliament passed the Truck Act specifically to end this practice, requiring wages to be paid in national currency. The mechanism relied on employers controlling both wages and where those wages could be spent.
Withholding at the source is also how 401(k) plans operate. Student loan garnishments, child support payments, and all wage savings plans work the same way. These are not exploitation at all.
Brazil has had a payroll deduction system, known as “consignado,” for twenty years, where installments are directly withheld from wages. The average interest rate on salary-backed loans is 28%, while unsecured loan rates can reach as high as 146%. However, this system relies entirely on a strict legal framework—including employment contracts, wage caps, and labor courts. Cryptocurrencies require a similar system, but blockchain itself cannot read or enforce the traditional legal mechanisms needed to operate such a system.
In 1984, the U.S. Federal Trade Commission (FTC) established the Credit Practices Rule, which prohibits six specific practices, one of which is wage assignment. Creditors are no longer permitted to include clauses in consumer loan contracts that direct the borrower’s wages to be paid directly to the lender. Creditors may use wage deduction plans, where the consumer authorizes a series of deductions to make each payment. However, creditors may not enforce wage assignments that the borrower cannot revoke.
Therefore, deductions are permitted as a method of payment, but not as a method of receiving funds.
The U.S. Federal Trade Commission (FTC) detailed its reasoning. The FTC found that wage garnishments force individuals to abandon legitimate defenses, as borrowers prefer to repay debts they dispute rather than have creditors contact their employers about the matter. Some fear losing their jobs. Due to the lack of legal enforcement, cryptocurrency wage deductions rely on the borrower’s voluntary consent—but this does not resolve the issue, as defaulting borrowers can easily revoke that consent.
Brazil's model works because the law locks in deductions and limits wage losses, thereby removing borrowers' ability to cancel their loans.
This is why these protocols strategically choose their jurisdictions. Divine Research operates overseas, while 3Jane relies on U.S. courts and credit agencies. Each selects a jurisdiction in the real world that can provide the necessary legal enforceability to ensure funds can be recovered.
So, what conditions must cryptocurrencies meet to obtain consumer credit?
Lenders need to confirm that multiple digital wallets belong to the same person; biometric technology can resolve this issue if all parties agree to scanning. It also requires a legally regulated credit agency to track individuals’ repayment records across different agreements. Additionally, it needs a mechanism to enforce continued repayment after a user cancels a payment. Consumer protection laws would never permit anonymous software to exert such significant influence over a user’s actual income.
Aave has been operating for six years without ever knowing the name of any user. Blockchain cannot turn to courts or legal systems. Therefore, we can only wait.