Huma Finance is a pioneering decentralized finance (DeFi) protocol offering undercollateralized loans based on real-world income verification. This innovative approach mirrors traditional credit lending models, disrupting the conventional overcollateralization requirement prevalent in DeFi. Currently deployed on Solana, Celo, Polygon, and Scroll networks, Huma Finance seeks to bridge the gap between traditional finance and the burgeoning world of blockchain-based lending. Tokenomics details are yet to be released and this article will be updated accordingly.
Table Content:
- How Huma Finance Works: A Tripartite Model
- Lenders: Providing Liquidity and Earning Returns
- Borrowers: Accessing Credit Based on Verified Income
- Pool Admins: Setting Loan Parameters and Managing Risk
- The Team, Investors, and Partners Behind Huma Finance
- The Team: Experienced Financial and Tech Professionals
- Investors and Partners: Backing Innovation in DeFi
- Similar Projects in the Undercollateralized Lending Space
Further Reading: A Deep Dive into Lending in the Crypto Space.
Huma Finance user interface showcasing its platform.
How Huma Finance Works: A Tripartite Model
Huma Finance operates on a three-pronged model, comprising Lenders, Borrowers, and Pool Admins. Each participant plays a crucial role in maintaining the ecosystem’s functionality and stability.
Lenders: Providing Liquidity and Earning Returns
Lenders provide liquidity to lending pools within Huma Finance, earning returns (interest) on loans taken out by borrowers. Due to the undercollateralized nature of these loans, a higher risk of default exists. To mitigate this, Huma Finance utilizes a reserve fund and income generated from options trading to compensate lenders in case of borrower default.
Recognizing the inherent risk, Huma Finance categorizes lenders into two tiers:
- Senior Lenders: Provide liquidity at a lower interest rate but are prioritized for repayment in case of default.
- Junior Lenders: Receive higher interest rates for assuming greater risk, with repayment contingent on remaining funds after Senior Lenders are compensated.
To maintain a balanced risk profile, Huma Finance mandates an 80/20 ratio between Senior and Junior Lender assets within each pool (4:1). This allocation prioritizes the security of Senior Lenders while mitigating overall default risk. Lenders must complete Know Your Customer (KYC) procedures and comply with the legal regulations of their respective jurisdictions.
Borrowers: Accessing Credit Based on Verified Income
Borrowers are individuals who utilize Huma Finance to access undercollateralized loans. Similar to Lenders, Borrowers must undergo KYC verification and income verification. Loan amounts and eligibility criteria vary depending on the specific pool and associated requirements set by the Pool Admin.
Borrowers are obligated to repay loans with interest, typically ranging from 12% to 20% annually, on a predetermined schedule. A grace period of up to five days is permitted for late payments, after which penalty interest rates, ranging from 18% to 24% annually, are applied.
Pool Admins: Setting Loan Parameters and Managing Risk
Pool Admins are responsible for creating and managing lending pools. They have the authority to set interest rates for both borrowers and lenders, define borrower eligibility criteria, and manage overall pool risk.
Given their significant influence, Pool Admins undergo rigorous KYC procedures. This role is often filled by established financial institutions like Arf and Circle, ensuring a high level of trust and expertise. Pool Admins generate revenue through transaction fees and a portion of the interest paid by borrowers.
Overview of Huma Finance product offerings and features.
The Team, Investors, and Partners Behind Huma Finance
The Team: Experienced Financial and Tech Professionals
Huma Finance boasts a team with extensive experience in finance and technology:
- Erbil Karaman (Co-Founder): Former CPO at Earnin, Product Lead at Facebook.
- Richard Liu (Co-Founder & Co-CEO): Former CTO at Earnin, Engineer at Facebook.
- Ji P (Co-Founder): Former Head of Machine Learning at Earnin.
- Lei Du (Co-Founder): Former Head of Data at News Break, Data Scientist at Opendoor.
The experienced team behind Huma Finance.
Investors and Partners: Backing Innovation in DeFi
Huma Finance has secured $46.3 million in funding across two rounds:
- Seed Round (February 23, 2023): $8.3 million led by Distributed Global and Race Capital, with participation from Circle Ventures, ParaFi Capital, and others.
- Series A (September 11, 2024): $38 million led by prominent investors including HashKey Capital, Fenbushi Capital, and Stellar Development Foundation.
Strategic partners include notable Web3 projects such as Jia, Rain, and Arf.
