It has been reported that Cream’s Iron Bank is an attempt to create a decentralized finance equivalent of corporate debt, as the announcement explains how the market for peer-to-peer lending in traditional finance, worth $70 billion, pales in comparison with the world of corporate credit, with $10 trillion in loans outstanding.
However, to create a similar industry in DeFi, Cream is now allowing other protocols to borrow funds without posting collateral. For risk management purposes, the system is not permissionless.
The report said that each protocol needs to be whitelisted by Cream for a line of credit. The protocol is then able to borrow freely until it reaches the credit limit set by Cream.
It has been analyzed that currently, the assets available for borrowing are Ether (ETH), Dai, and y3Crv, an interest-bearing token representing Yearn’s vault for Curve Finance’s Dai-USDT-USDC pool.
In the future, Cream expects to add other stablecoins such as Tether (USDT), USD Coin (USDC), sUSD, mStable USD (mUSD), and DefiDollar (DUSD), as well as Chainlink’s LINK, Yearn.finance’s YFI, Synthetix Network Token (SNX), and Wrapped Bitcoin (WBTC).
Current protocols supported by Cream are Yearn.finance and Alpha Homora.
The report said that for the Yearn ecosystem, the Iron Bank can be particularly useful for increasing the effectiveness of yield farming strategies. By leveraging assets without posting collateral, Yearn vaults can effectively multiply the yield they obtain from farming SUSHI, CRV, and ALPHA.
At the same time, people supplying assets on Cream benefit from the higher interest-rate payouts.
Under collateralized loans in DeFi have long been considered as the next great step in DeFi evolution. Current lending platforms almost always require users to post more collateral than the sum they are borrowing.
Thus, Cream plans to recover losses in case of a protocol defaulting on its debt.