In his article, DeFi Protocols Don’t Do “Lending,” Chervinsky argues that DeFi lending is not lending because it does not involve a trust-based creditor-debtor relationship.In a typical lending relationship, a creditor assesses the creditworthiness of a borrower to decide whether or not to take the risk of issuing a loan. If the loan is issued, then the borrower is expected to repay the loan after an allotted time with interest.Regardless of a borrower’s creditworthiness, this type of transaction inherently comes with some default risk.In Chervinsky’s point of view, these two elements of credit and risk are essential for a transaction to be considered a loan. Since DeFi lending platforms do not involve either, he claims, they should not be considered loans.Here is how DeFi lending is set up to operate without using either credit or risk.DeFi lending platforms are built on permissionless blockchains. This means that anyone can pseudonymously use the protocol to borrow or lend. This makes it difficult to trace who the parties are in real life and thus eliminates the possibility to assess a person’s creditworthiness.In addition, funds are borrowed from the ‘pool’ of funds rather than directly from specific lenders. Since it can’t be determined exactly whose assets are being borrowed by whom or from whom, it is impossible to establish a clear lender-borrower relationship.As a result, DeFi lending platforms are built to function entirely without trust or a system of credit. Instead of using credit, DeFi lending is based on a system of overcollateralization and liquidation to facilitate transactions between unclear and unknown lenders and borrowers.Without credit in DeFi lending, collateral is everything.Through a DeFi lending platform, in order to get a ‘loan,’ one must first stake some digital assets. These assets are ‘locked’ up and allow the borrower to borrow another digital asset in…