The Rise of Decentralized Credit Markets: Evaluating the Credit Risk and Governance Challenges of Defi Lending Platforms

ABSTRACT : A new era of peer-to-peer financial interactions has started with the rapid growth of decentralized finance (DeFi). This is changing how people access, price, and regulate credit. DeFi lending platforms rely on smart contracts and digital assets that are backed by collateral, as well as community governance. This shift creates challenges in assessing credit risk, regulatory oversight, and overall system stability, but it also offers unprecedented accessibility and automation. This study offers a detailed examination of how decentralized credit markets operate. It examines how these platforms assess credit risk without knowing the borrower’s identity. It also examines how they manage and reduce that risk using incentives and protocol structures. The research combines insights from regulatory economics, traditional credit risk frameworks, and blockchain infrastructure theory. The goal is to provide a detailed analysis of the risks, governance structures, and regulatory gaps in DeFi lending, along with helpful advice for investors, developers, and lawmakers.