Introduction to Peer-to-Pool Lending
The lending networks built by Ola Finance utilize a Peer-to-Pool lending model, a very common and popular method amongst DeFi lending applications. To understand how this model works, it is helpful to first understand the more common Peer-to-Peer lending.
Peer-to-Peer lending is about matching a lender to a borrower so that the two parties take the opposite sides of a specific loan. This form of lending is typically facilitated using some website/platform that connects borrowers directly to lenders. Peer-to-Peer lending aims to reduce the costs of intermediary parties, such as banks, so that lenders can earn greater interest on their loans and borrowers can receive loans for less interest.
In Peer-to-Pool lending, lenders supply tokens (provide liquidity) to a pool of assets, and borrowers take these tokens (borrow liquidity) from that same pool. Instead of each party interacting directly with the other, they interact with the communal pool.
These pools - managed by smart contracts on EVM compatible blockchains - algorithmically and dynamically determine the interest rates lenders earn and borrowers pay. In other words, the interest rates are calculated automatically with no intermediary party needed, thus significantly reducing costs. The Compound protocol, which introduced this concept, referred to such pools as Money Markets (MMs). Users enter and exit a MM (as lenders or borrowers) according to the rates that the Market quotes.
Ola's Peer-to-Pool lending networks rely on a mechanism known as over-collateralized lending.
An over-collateralized loan means that in order to take a loan from one MM, one must deposit tokens of higher value in another MM (known as collateral). Not only that, but the borrower must make sure they maintain a proper amount of collateral for the entire lifespan of the loan.
Over-collateralized loans are the dominant paradigm for DeFi lending because users generally interact with smart contracts pseudonymously. This means that in the context of lending, there is no room for identity-based enforcement of loan repayment (compared to how it works in traditional lending).