Under-Collateralized Lending
How Diamond and Gold tier participants can access borrowing facilities that require less than 100% collateral, unlocking institutional-grade capital efficiency on Canton Network.
Introduction
Over-collateralisation is the foundation of DeFi lending safety, but it is also its greatest limitation. Requiring 150–200% collateral locks up capital that institutions could otherwise deploy productively. Traditional finance solves this through credit relationships, but at the cost of opacity and counterparty risk.
Dualis bridges these two worlds. Through the hybrid credit scoring system, participants who have demonstrated exceptional creditworthiness — Diamond and Gold tier — can access under-collateralised lending facilities. These facilities allow borrowing with less than 100% collateral, subject to rigorous risk controls and continuous monitoring.
Eligibility Requirements
Beyond the tier score threshold, participants must meet additional eligibility criteria:
- Minimum protocol tenure — At least 90 days of active participation on Dualis, with a minimum of 10 completed loan cycles.
- Zero default history — No liquidation events or defaults in the preceding 180 days.
- KYC/AML verification — Full identity verification with enhanced due diligence (EDD) completed.
- Off-chain attestation — At least one valid zero-knowledge proof attesting to institutional credit standing (e.g., investment-grade rating, audited financial statements).
Risk Framework
Under-collateralised lending introduces credit risk that does not exist in fully collateralised models. Dualis manages this risk through a multi-layered framework:
Exposure Limits
Each participant has a maximum under-collateralised exposure limit, determined by their credit tier and score:
| Tier | Min Collateral Required | Max Unsecured Exposure | Per-Pool Cap |
|---|---|---|---|
| Diamond | 50% of loan value | $50M or 10% of pool TVL (whichever is lower) | 5% of individual pool |
| Gold | 70% of loan value | $20M or 5% of pool TVL (whichever is lower) | 3% of individual pool |
Insurance Reserve
A dedicated insurance reserve is funded by a surcharge on under-collateralised borrowing rates. This reserve covers potential losses from defaults. The surcharge is 2% of the base borrowing rate for Diamond and 4% for Gold, reflecting the differential risk profile.
Protocol-Level Caps
The total under-collateralised exposure across the entire protocol is capped at 15% of total value locked (TVL). This ensures that the protocol remains predominantly over-collateralised and that systemic risk from credit-based lending is bounded.
Continuous Monitoring
Under-collateralised positions are subject to enhanced monitoring compared to standard positions:
- Real-time score tracking — The borrower's credit score is recalculated with every on-chain event. If the score drops below the tier threshold, a 48-hour cure period begins during which the borrower must either restore their score or post additional collateral to bring the position to standard collateralisation levels.
- Collateral mark-to-market — Even partial collateral is continuously marked to market. If collateral value declines below the minimum threshold, a margin call is triggered regardless of credit score.
- Concentration monitoring — The protocol tracks per-borrower and per-pool concentration to prevent any single participant from accumulating disproportionate unsecured exposure.
- Cross-position analysis — The risk engine evaluates the borrower's entire portfolio across all Dualis pools. A deterioration in any position can trigger enhanced scrutiny of under-collateralised facilities.
Limits and Safeguards
Multiple safeguards ensure that under-collateralised lending does not compromise overall protocol health:
- Gradual ramp-up — New eligible participants start with 25% of their maximum exposure limit and scale up over 60 days of successful borrowing.
- Automatic de-risking — If the insurance reserve falls below 80% of its target level, new under-collateralised loans are paused until the reserve is replenished.
- Governance circuit breaker — DUAL token holders can vote to temporarily suspend or permanently disable under-collateralised lending in response to market stress or elevated default rates.
- Lender opt-in — Lenders explicitly choose whether their supplied liquidity can be used for under-collateralised loans. This is an opt-in mechanism; by default, supplied liquidity is only available for fully collateralised borrowing.