Ripple is preparing to launch a new lending market that will allow XRP holders to earn yield on their tokens directly through the XRP Ledger (XRPL). The move taps into the loyalty of the so-called “XRP Army” but raises questions about risk management and investor protection.

Tapping into the XRP Army

Ripple’s latest initiative is aimed squarely at retail investors who make up its vast global base of token holders. The company’s director of product, Jasmine Cooper, described XRP’s retail following as “one large untapped asset.”

“There are tens of thousands of XRP holders that do not have an opportunity to gain yield on that XRP,” Cooper told DL News. With XRP’s market capitalisation sitting at around $163 billion, Ripple sees significant potential in directing these assets into onchain lending.

The new market will pool capital from smaller retail investors into institutional-sized loans. These loans will be uncollateralised, executed through smart contracts on XRPL and subject to know-your-customer (KYC) and anti-money laundering (AML) standards.

Unsecured Lending: Reward and Risk

Unlike most DeFi lending protocols such as Aave and Morpho, Ripple’s offering does not require collateral. While this approach increases capital efficiency, it also amplifies the risks for lenders, who have no assets to fall back on if borrowers default.

Ripple has designed optional safeguards, but ultimate responsibility will rest with lenders to decide which institutions they trust. Pool managers, who will underwrite loans and manage borrowers, may provide “first-loss capital” funds that absorb initial defaults to prove skin in the game. Borrowers could also offer transparency around their underwriting processes and in some cases, arrange off-chain overcollateralised agreements.

Despite these measures, unsecured lending remains a high-stakes strategy. Maple Finance, a protocol once focused on uncollateralised loans, abandoned the model in 2023 due to difficulties in sourcing creditworthy borrowers. Goldfinch, another platform, has faced multiple defaults, costing lenders millions.

A DeFi Lending Boom

Ripple’s move comes during a period of strong growth in decentralised lending. Deposits into DeFi lending protocols hit an all-time high of $130 billion in early September, according to DefiLlama. Platforms like Aave and Euler have drawn liquidity by sticking to overcollateralised models, providing lenders with a stronger safety net.

By contrast, XRP’s DeFi ecosystem remains small. Just $96 million is currently locked in XRPL lending protocols, less than 1% of Ethereum’s $120 billion. That imbalance underscores the challenge Ripple faces: persuading investors that uncollateralised lending on XRPL is both safe enough and lucrative enough to compete.

Still, Ripple argues that higher yields, a natural consequence of higher risk, could attract capital. With few opportunities for XRP holders to earn yield at present, the new market could provide an attractive alternative.

Governance and Competition

Ripple stresses that it is not running the lending protocol itself but only providing the underlying code. The system will be decentralised and governed by XRPL validators. These validators will soon vote on whether to activate the protocol in a network upgrade, with a final decision expected within two to three months after thorough review and testing. If approved, the lending market could go live at the start of next year.

Competition, however, will be stiff. Ethereum dominates DeFi with a vast liquidity pool and established platforms, while XRPL is only beginning to build its decentralised finance ecosystem. Cooper acknowledged the challenge but said Ripple is confident in the formula: “Investors usually look at three things: yield, accessibility and risk. If we can max out those three things, competition shouldn’t be a major issue.”

The Balancing Act Ahead

Ripple’s lending market highlights a broader debate within decentralised finance: whether unsecured lending can succeed without the rigorous credit assessment processes used in traditional finance. While institutions may be drawn to low-cost capital, retail lenders face the reality that defaults could quickly erode their investments.

If Ripple succeeds, it could unlock billions in untapped liquidity for both lenders and borrowers, positioning XRPL as a more competitive DeFi hub. If not, the XRP Army may find themselves exposed to the same pitfalls that have plagued earlier experiments with uncollateralised lending.

For now, the project’s fate lies with XRPL’s validators and with the willingness of XRP holders to put their trust and their capital, on the line.