Performance Guarantees for Permissionless Lending
Abstract
We propose a lending protocol with far fewer risks than existing pool-based lending protocols (e.g., Aave, Compound). In our protocol, lenders and borrowers embody the spirit of decentralization by making competing interest-rate offers, resulting in the discovery of the prevailing interest rate through tâtonnement-like dynamics as opposed to taking rates partly determined by a central authority (e.g., Aave, Federal Reserve). We eliminate the risk of manipulation by creating loans with a fixed interest rate throughout the loan---like US Treasury bills. In particular, we further derive performance guarantees probabilities of repayment shortfall and liquidation by modeling the value of the collateral as a random walk, thus allowing participants to more efficiently manage their risk. To do so, we use characteristic functions and Fourier inversion to derive exact integral representations of the liquidation and repayment shortfall probabilities under the most general assumptions. We illustrate empirically this method by using Bitcoin as collateral and fitting its historical prices to Gaussian, Student-t, and symmetric stable Paretian distributions.
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BibTeX
@misc{wang2026performance,
title = {{Performance Guarantees for Permissionless Lending}},
author = {Nanqiao Wang and Jia Yuan Yu},
howpublished = {arXiv},
year = {2026},
month = oct,
doi = {10.48550/arxiv.2610.34774},
eprint = {2610.34774},
archivePrefix = {arXiv},
url = {https://arxiv.org/abs/2610.34774},
}
RIS
TY - UNPB
TI - Performance Guarantees for Permissionless Lending
AU - Nanqiao Wang
AU - Jia Yuan Yu
PY - 2026
DA - 2026/10/26
PB - arXiv
DO - 10.48550/arxiv.2610.34774
UR - https://arxiv.org/abs/2610.34774
AB - We propose a lending protocol with far fewer risks than existing pool-based lending protocols (e.g., Aave, Compound). In our protocol, lenders and borrowers embody the spirit of decentralization by making competing interest-rate offers, resulting in the discovery of the prevailing interest rate through tâtonnement-like dynamics as opposed to taking rates partly determined by a central authority (e.g., Aave, Federal Reserve). We eliminate the risk of manipulation by creating loans with a fixed interest rate throughout the loan---like US Treasury bills. In particular, we further derive performance guarantees probabilities of repayment shortfall and liquidation by modeling the value of the collateral as a random walk, thus allowing participants to more efficiently manage their risk. To do so, we use characteristic functions and Fourier inversion to derive exact integral representations of the liquidation and repayment shortfall probabilities under the most general assumptions. We illustrate empirically this method by using Bitcoin as collateral and fitting its historical prices to Gaussian, Student-t, and symmetric stable Paretian distributions.
ER -