The XRP Ledger’s proposed LendingProtocolV1_1 modification has garnered backing from 22 of its 35 validators, achieving a support level of 62.86%. In recent weeks, three additional validators have endorsed the proposal. Amongst the supporters are nodes operated by Ripple itself, alongside prominent academic institutions such as the University of Waterloo and UC Berkeley.
Path to Activation
For the proposal to be enacted, it requires at least 29 votes, surpassing the 80% threshold and maintaining this level of support over a continuous two-week period. The related modification, known as the SingleAssetVault change or XLS 65, currently enjoys 23 votes, reflecting a 65.7% support rate. To implement this, six more votes are necessary.
XRPL documentation indicates that borrowers’ creditworthiness is assessed through off-chain credit reviews and risk management.
These initiatives aim to facilitate the issuance of fixed-term, unsecured institutional loans on the XRP Ledger. Consequently, the compulsory over-collateralization and immediate liquidation mechanisms will be bypassed. The loan’s structure, maturity, and interest terms are designed to resemble traditional bank loans, setting them in advance.
Operational Dynamics
Ripple previously trialed the protocol on a private XRP Ledger network featuring nine nodes, reflecting the main network nodes’ hardware configuration. Upon its potential activation, users could deposit XRP or stablecoins like RLUSD into the Single Asset Vault system, earning shares in return. Interest payments would be made on a cash basis, with depositors receiving returns only upon the borrower’s payment.
Withdrawals from the vault will be processed in the order of request. Simultaneously, off-chain Loan Broker structures will evaluate borrowers, and each loan issuance will be recorded. The initial loss capital provided by these intermediaries will act as a safety buffer, absorbing losses should the borrower default.
When an asset issuer freezes the vault, all transactions within and related to the credit protocol cease.
Opportunities and Risks for Stakeholders
Traditionally, XRP holders seeking passive income had to utilize third-party bridges and wrapped token solutions. Should these modifications be implemented, users will be able to deposit XRP directly into the XRPL pool and receive a portion of the interest paid by borrowers. The yield will depend on the conditions set by the credit intermediary and the repayment performance of the borrowers.
However, the system does not entirely eliminate risk. In the event of a significant borrower default and insufficient intermediary initial loss capital, the loss may be borne by the depositors. This situation could lead to a decline in the value of their vault shares.
