One of the great things about various Defi protocols has been the liquidity inherent in them. Money markets such as Compound AAVE etc allow you to deploy assets, earn a yield and withdraw anytime you want.
The amount being lent typically exceeds the amount being borrowed giving the lenders the flexibility to withdraw anytime they want.
When releasing the OTL in the wild we were targeting illiquid offchain assets as collateral. Offchain comes with its own set of challenges. Add lack of liquidity to the mix and it becomes an issue.
Hence we opted for liquid offchain assets in the form of stocks which addresses part of the issue. If the collateral value drops or loan is not repaid as expected they can be programmatically liquidated.
And if there is a run on the bank situation where the lenders want to withdraw then we can sell the underlying collateral and repay the lenders.
The above serves as a big relief to potential early adopters who might be concerned about the lack of other lenders who they can swap out against.
Assets with underlying liquidity are important as a starting point.
However as the number of lenders on the platform starts to rise at that point the liquidity of the asset becomes immaterial.
Even if an asset fails and it can't be liquidated instantaneously the buffer between lenders and borrowers allows the platform to function smoothly from the investors perspective as it gives them the ability to exit when they want and a slow moving mortgagee sale does not impact that situation.
Essentially this means that there is a crossover point at which point illiquid assets such as real estate can be introduced on the platform.
The benchmark would be there has to be atleast twice the amount of liquidity than the value of the illiquid assets collateral.
Liquidity = Lender deployed sums — Loans on issue
If the OTL plans to allow a $1 Million illiquid asset on the platform it must have atleast two million sitting on the OTL as a buffer.
That would mean if the illiquid asset fails to repay and someone wants to withdraw that would allow those who wish to withdraw to do so without issues.
When the OTL is able to attract such levels of distribution it can start accepting illiquid assets such as real estate as collateral.