Unsecured Lending via Delegated Underwriting

TL;DR

This paper introduces a decentralized unsecured lending mechanism among pseudonymous users, leveraging delegation and credit flow to manage risk without collateral or legal identity.

Contribution

It presents a novel credit delegation system that conserves aggregate capacity and manages default risk through local sponsor paths and credit caps.

Findings

Delegation conserves total credit capacity.

Default losses are localized to sponsor paths.

Credit caps make default unprofitable.

Abstract

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.