Redefining DeFi Lending with WRAM: A Wallet-Based Risk Analysis Model

Introduction

Decentralized Finance (DeFi) has revolutionized financial services by enabling open and permissionless lending. However, one of its biggest challenges remains overcollateralization—the requirement that borrowers must lock up assets far exceeding their loan amount. This model ensures security but severely limits capital efficiency and excludes users with lower asset holdings. Traditional banking systems, in contrast, assess borrower risk through credit scores, income verification, and repayment history, allowing for more flexible lending terms.

To bridge this gap, we introduce the Wallet Risk Analysis Model (WRAM)—a novel risk assessment framework that dynamically adjusts collateral requirements based on a wallet’s transaction history, asset composition, and past borrowing behavior.

The Problem: Overcollateralization in DeFi

Protocols like Aave, Compound, and MakerDAO enforce static collateralization ratios (CRs)—often exceeding 150%—to mitigate default risk. This results in:

• Locked Capital: Borrowers must overcommit assets, reducing liquidity.

• Inefficiency: Many users are excluded from borrowing due to high capital requirements.

• Lack of Risk Differentiation: A wallet with a proven history of successful repayments faces the same CR as an unknown wallet.

  
  

The WRAM Solution: Risk-Based Collateral Adjustments

WRAM introduces a Wallet Risk Score (Rw) that determines an optimal collateralization ratio based on real on-chain activity. Instead of treating all wallets the same, WRAM calculates a borrower’s risk level using:

• Transaction History: Analyzing borrowing, lending, and repayment behavior.

• Asset Diversification: Assessing the composition and stability of holdings.

• Loan Repayment Performance: Evaluating past loans and liquidations.

• Recurring Income: Identifying consistent on-chain earnings from staking or payroll streams.

Using these factors, WRAM assigns a risk score to each wallet. The higher the score, the lower the collateral requirement, meaning borrowers with strong financial behavior can access loans with reduced overcollateralization requirements. Conversely, wallets with limited or risky transaction histories will still be subject to higher collateral demands to mitigate default risks.

Implementation and Benefits

How WRAM Works

1. A borrower requests a loan from a DeFi protocol.

2. The protocol queries the WRAM oracle for the wallet’s risk score.

3. Based on the assigned score, a personalized collateral requirement is determined.

4. The borrower provides the required collateral and receives the loan.

   
   

Benefits of WRAM

• Lower Collateral for Trusted Wallets: Borrowers with good financial behavior can access loans with reduced collateral, increasing capital efficiency.

• Better Risk Management: Lenders can tailor offerings based on borrower profiles, improving risk-adjusted returns.

• Incentivized Good Behavior: Borrowers are rewarded for long-term positive interactions, encouraging responsible financial activity.

• Enhanced Capital Utilization: More liquidity is available for the broader DeFi ecosystem, increasing market efficiency.

  
  

Challenges and Future Development

While WRAM presents a significant improvement over traditional DeFi lending models, challenges remain:

• Privacy Concerns: On-chain risk assessment may reveal sensitive wallet activity. Solution: Zero-knowledge proofs (zk-SNARKs) could be used to verify risk scores without exposing transaction details.

• Sybil Attacks: Users might abandon wallets with poor histories to create fresh ones. Solution: Heavily weighting wallet age and integrating cross-chain identities.

• Regulatory Uncertainty: Decentralized risk assessment may require governance mechanisms to ensure fairness and compliance.

  
  

Conclusion: The Future of DeFi Lending

By adapting credit-based risk assessment to the DeFi space, WRAM paves the way for a more efficient and accessible lending system. Dynamic risk-based collateralization not only enhances borrower experience but also increases liquidity, lowers systemic risk, and promotes long-term DeFi adoption.

DeFi lending should not be a rigid, one-size-fits-all system. WRAM is a step toward a more intelligent, personalized, and scalable financial future.