Trustless Peer to Peer Loan Sharks on BitShares?
Trustless Loan Sharks? A perfect Investment? Is it possible? With smart contracts and exciting blockchain technology, can we push the cryptocurrency frontiers?
Forgive me if Loan Sharks have a bad reputation, but I needed to get your attention. There is an interesting new crypto product, with a fluctuating value, that could effectively be peer-to-peer loans.
Let’s look at a potentially exciting new crypto product.
SKULD which means Debt in Norse Mythology.
Adam has BitShares.
Bob has BitShares.
Adam sees an exciting investment opportunity. He wants to invest in it. He needs and wants more money.
Adam wants a loan.
Adam is so sure of this, he would be willing to go down to the local loan shark, or get money from credit cards, but instead he really wants to borrow the money in BitShares. He knows and is willing to pay all the money and interest.
Interest is fundamental to the time value of money. It is important, fair and no one is forcing anyone in a free market.
How can Bob securely lend money to Adam?
How can Adam securely borrow money from Bob?
How can this be made secure that no one loses money?
How can Adam and Bob, both be assured that Adam will pay back the loan.
Can this be done in a trustless secure way?
Is there a way to tie this up, in a smart crypto contract?
Introducing Norns…. An exciting new algorithmic smartasset.
**First an Example: **
Adam has a core holding of 10,000 BTS. He likes BTS and he wants to keep the BTS long term.
But he also wants some BTS to buy NewSHINYcoin. He thinks it is going to go up.
So Adam takes his BitShares and puts them up as collateral.
He then issues SKULD.
Now SKULD is at 0.95 but in 14 days it will be at 1.05.
They value is set by a blockchain computer algorithm that slowly goes up and down.
So he knows he is going to need to repay the loan in 14 days.
(Whether this is smart or not all depends)
(Right now, we are worried about “doing it.”)
Adam puts up the 10,000 BTS as collateral, and issues 5,000 SKULD
Each SKULD is backed up by 2 BTS. These BTS are locked up in the BTS blockchain.
This is above the 1.75 minimum collateral ratio.
Adam then sells the 5,000 SKULD for 0.95 BTS each.
This gives him 4,750 BTS.
This keeps him above the collateral ratio.
Adam’s portfolio looks like this…
Long 10,000 BTS locked up in blockchain
Short 5,000 SKULD
Long 4,750 BTS (from selling SKULD)
Adam takes the 4,750 and makes the investment.
(Hopefully, he makes big returns…)
He now has two BTS backing up every 1 SKULD.
There are locked in the blockchain.
In 14 days, Adam is settled. Bob goes and clicks settle and in 24 hours the position is closed. The 4,750 SKULD disappear, but 5,250 BTS also disappear. The rest of the BTS are released from the blockchain.
He has paid interest as expected and is out of the loan.
We really don’t care if Adam made money with NewSHINYcoin, that is his business.
Let’s talk about Bob.
BOB, is a conservative investor.
He is not impressed with NewSHINYcoin like Adam is.
Bob just wants some nice simple low drama returns.
Bob does not trust most fake “blockchain lending schemes.”
Bob buys SKULD for 0.95 BTS.
In this transaction, Bob gives 4,750 BTS for 5,000 SKULD.
Bob know that in 14 days SKULD will be worth 1.05 BTS.
Bob know that 1.05/.95 is a 10.5% return over 14 days.
Annualized, for comparison purposes only, that is 274% return a year.
Note: This is is theory. No one has traded these assets yet. We don’t know in reality how it will all work. And there might be other risks somewhere, if you know where share in the comments.
Bob waits 14 days.
Then the value of SKULD climbs to 1.05.
Bob settles for 1.05.
At this point SKULD, now has a value of 1.05.
BOB has effectively loaned Adam his BTS for 14 Days.
BOB is a loan Shark.
Adam has gotten a loan.
Bob has always been able to settle the loan, because the BTS are tied up in the blockchain. Bob has always been protected because BTS are tied up in the blockchain. Bob is guaranteed to make money in BTS. Adam is guaranteed to pay interest in BTS.
Is this trustless?
Yes, this appears to work.
OK both people have money.
Money is moved from one individual to the other individual for a set period of time.
Payment is assumed to take place at the high point of the the wave.
If Bob, fails to force settle Adam, he might need to wait another 28 days.
That is why there are three coins. One or more can always be used.
Bob is always protected because more than enough BTS are tied up in the blockchain to repay his loan.
Adam knows he is going to have to repay the loan. He knew this up front. He got additional money though for a period of time. This is like a bond, loan or any other type of credit.
This is all straight forward.
No surprises. No drama.
Adam does not need a babysitter for his loans. He is a smart individual and knows what he is doing. And if he is in fact foolish, what business is it of ours?
What happens if Bob “forgets” to force settle at the high?
Well he can settle any time he wants. He will get whatever, the BTS value is at that point in time.
What if Bob sells at the top of the wave and force settles at the bottom?
Well he will lose money. He would have to be pretty dumb to do this (IMHO).
What if Bob forgets to force settle?
Bob knows this is a low risk transaction. He puts up BitShares and he gets paid back in BitShares. Bob is able to constantly make money. It doesn’t matter what BitShares does compared to external price pegs.
It is sort of like staking.
How do transactions work?
Bob simple puts an order up on the Dex to buy SKULD.
Pick your interest rate:
Now some may say the interest rate is too high. Well, there is a free market. If Bob wants to reduce the interest rate, he could simple buy the SKULD from the seller at a different price. A price could be found for any interest rate lower than the set amount. For example, if he sells at 1 and redeems at 1.05 the interest rate is only 5% over 14 days.He can put the offer up at any price. He could want a higher interest rate and offer to buy them at 0.8, 0.95 or 0.99.
It is a free market. (It would be foolish for anyone to sell them to him at less than .95 as he could be instantly settled for a profit.)(It would also be foolish to sell them for more than 1.06 as it would guarantee a loss.) Given that they can be settled at any time the price is likely to reflect the algorithmic settlement price.
When Adam wants a loan, he simple creates the SKULD and sells them. He now has the BTS.
Bob puts a note on his calendar and force settles all SKULD at that time.
Note: There is a limit of only 20% of positions being closed on one day. Some of these positions will need to be closed earlier and later, so not everyone can close all at once. I have communicated with the founder of the coin and think this is going to be adjusted.
There are three coins… Urthr, Verthandi, Skuld
And these coins are staggered so that one will always be in the phase that you want.
When a loan shark loans money, there is no collateral. (Or one could say the collateral is your unbroken legs and good health.) (That a loan shark will break if you don’t pay it back). There is in fact collateral here. That is why the loan is free from default risk for the lender.
It is like lending money a rich person.
Since they are rich, you know they can pay you back.
Why would you lend money to a rich person, so they can run the investments… this is done all the time in real estate. When big real estate developers make a new building, they use other people's money as much as possible. But they put their money on the line first.
Now it is true, that one could just sell the BitShares, to invest in a different coin. People can do that now. The benefit here, that if BitShares goes up and NewSHINYcoin goes up, Adam has both of them under his control.
It is also true Adam could just create bitCNY. This is available already. This though is only lending to the blockchain, there is no person involved. Here, both sides can benefit.
In America, establishing credit at banks can be difficult. Years ago, people would make a deposit at a bank, or put up a certificate of deposit, and then borrow money against it. This was a way to prove to the banker that you were a good credit risk. By putting money in a savings account and then taking out a loan and repaying the loan, one could establish a loan history. The bank saw a riskless transaction, and the person got a loan history. After one or more loans with collateral, people would then ask for a collateral-less loan. I do not think this is done a lot today, but it was done in the past. To some extent this is not much different from a home loan or a car loan. There is collateral there.
Within the BitShares community there are lots of interesting and exciting unique financial products be thought up and coming out. Hertz, was one product that came out. And now the Norns are coming out following it. This is a new financial frontier. Will it be successful? We know all new ideas face an uphill battle. Bitcoin did. BitShares did. Truth be told, the Norns will as well.
I have chatted with the creator of this unique financial product, and took the liberty to explain it the way I understand it. Will it work? I don’t know. Do we need to adjust it? I don’t know. Will it set up a financial revolution in online lending? I don’t know. But it accomplishes something major. It accomplishes peer to peer lending in a safe way.
This is a major accomplishment!
This should not be ignored!
This has the potential to open the door to a whole new world of financial products.
Disclaimer: all of the above is theory. These products are not out yet, but hopefully coming soon.
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