Disclaimer: The purpose of this post is not that to be the proposal of a new crypto-related project. Instead, it just wants to expose my own reflection and open a serious discussion about the topic. I’m not a financial expert so I won’t be entering too much into details.
Since the boom of covid-19 and the arrival of a new economic crisis, I had much time to reflect about the current situation and the mechanics of our financial system. The economic today is mainly driven by governments and banks. As long as it may seems to work in time of economic growth, the flaw of the system clearly comes out in times of crisis. Today we have a liquidity problem, and all governments and banks can do is creating new debts and printing new money, thus moving the problem elsewhere.
I don’t want to open a political issue about what governments should or shouldn’t do. The fact is that, given their best efforts, there are a lot of businesses that are going to fail.
The most affected businesses in this situation will be those who operate in tourisms and food serving. Many restaurants, bars, pubs, airlines, hotels, travel agencies, etc. are going to fail not because they are not successful, but because they are low on liquidity and forced to stay close.
So, what can we do in order to help these businesses? In Italy, where I live, many ideas are already starting to circulate, and I bet many are circulating also in other countries. For example,
https://saveoneseat.com/ is a service that allows people to buy a voucher for a future dinner in certain restaurants. This is great, because it allows people to help a restaurant in which they want to go eat in the future to overcome this liquidity crisis. But there are two main problems with this business model:
- If a restaurant close down, the voucher is lost. When you are buying a voucher, you’re actively giving the money to the restaurant you chose, so you’re not going to be able to use that voucher in another restaurant.
- This system is mainly driven by the willing to help, and not by economic incentives. It is great to help a restaurant in this crisis, and even if it fails you just lost one dinner, right? The problem is exactly this. The system works if you are buying a dinner, but the lack of incentives and the risks are going to scare out potential big investors.
So, it came to my mind how government bonds had already solved problems like this many times in the past. And if they helped governments, why shouldn’t they help restaurants or other businesses? All we need to figure out is:
- How to attract investors by giving them incentives.
- How to build a decentralized infrastructure so that a bond (or a voucher, or a token) can be spent in every business in the system. In this way, if a business shut down no one will lose his own investment, but the lost will be mitigated among all investors.
Below is described a possible system that solves these problems through a blockchain. We’re going to stick with the restaurants example, but the exact same argument could be applied to many other businesses. We may want to create a system where restaurants across the world can be financed by investors across the world through a decentralized platform. These would be the main components of the system:
TokenA token (or bond/voucher) that can be spent in every restaurant that joins the program. A token is created by buying it through a stablecoin at a fixed rate that will change over time. The token will thus be bound in value to that stablecoin. By buying a token in this way, investors are giving liquidity directly to restaurants without any intermediary. The token will be spent in a restaurant in the future, and at the end of this cycle the restaurant will be able to burn the token in order to repay the initial debt.
Investors Investors are the actors who provide liquidity in the system and hold the token.
RestaurantsIn this case restaurants are the businesses who require liquidity in exchange for future services. The decentralized platform act as a contract between the restaurant and the user who is willing to spend his tokens in the restaurant. The restaurant is obliged to accept the tokens at least until it has paid all its debts or it files for bankruptcy (in which case, the usual laws will be applied considering the token holders as the moneylenders). Of course, the hardest bit in all of this is that in order to apply this system to the real world, regulatory laws must be created that consider the decentralized platform as a real contract from a legal point of view.
Fair liquidity distribution systemEach investor will be able to vote for one or more restaurants in which he believes and that he wants to help. The vote of each investor will be weighted based on the amounts of tokens that he holds. In this way, promising restaurants in which people is willing to go and eat in the future will receive the most liquidity, while restaurants in which investors are not interested or that are more likely to fail will not receive investments.
Incentive systemWe have said that the token will be bound in price to a given stablecoin and will be backed by the debts of the restaurants. However, what if the value of that stablecoin decrease? What if a restaurant files for bankruptcy and cannot pay back its debts? These are risks for investors, and they should be compensated by equal interests. This is nothing new, it is the exact same system used in historical forms of moneylending.
We can add interests in the system by changing the fixed price at which the token can be bought through the stablecoin. So, if in a certain year the investors have matured an interest of 5%, then the fixed price will inflate by 5% during that year.
At the same time when a restaurant that held X% of the token fails, investors will see an X% loss in their investment. We can apply this to the system by deflating the price of the token by X%. At the same time the debt in token held by that restaurant will be spread among all the other restaurants that hold debts. At the end of the day, nothing has changed for other restaurants since they have seen an X% increase in their token debt, and an X% decline in the token value, so the value of their debts have remained the same.
The interest on the debt will be the same for all restaurants and will be defined dynamically by the market. The more are the new investors, the lower is the interest. The higher is the demand for liquidation by the restaurants, the higher is the interest. For regulating the interest, we should expect a system like the one that regulate mining difficulty in Bitcoin. It must be specified that the interest applied to a single debt will be the same for all the life of that debt. So, the interested matured in a certain period will be calculated as the sum of the interests of all the single debts.
In the long run, the interest should compensate the losses and the token price should remain somewhat stable. Its value will go up if investors have made good investments and will go down if a lot of restaurants are failing. We are thus running a decentralized moneylending system where losses of failed businesses will be compensated by those who succeed.
Open marketThe token will behave like a normal cryptocurrency, so it will be traded on open markets. Its value will always be kind of stable since it is bounded with a stablecoin through a fixed rate. However, having an open market is a good thing for regulating the token. If investors feel like holding the token is too risky because restaurants are not paying their debts back, then the price on the market will be lower than the fixed price. But since clients of the restaurants will be able to use the token at the value of its fixed price when paying the restaurant, they will be incentivized to do so. If the token is trading at a value 10% lower than its fixed price, clients will be able to obtain a free 10% discount on their dinner by paying with the token! This will enforce the payment of the debts by the restaurants thus lowering the overall risk.
The system described above expose a general idea of how such a system could work. But there may be better way to implement such a system. There are also a lot of things that may need to be discussed in further details:
What happens if a restaurant won’t pay its debts even after a long period of time? Some may argue that this won’t be the case since clients of that restaurant will be able to pay in tokens at the restaurant, therefore paying the debt. However, we could also create a mechanism that penalize those restaurants that have kept a debt for longer than a certain amount of time. For example, we could enforce discounts for those clients who pay through the token.
As for the general architecture of the system, there would be many ways to design it. For example, instead of having a global system we could have many systems for restaurants inside specifics geographic areas. Or we could have both.
To end on a more provocative note: what’s the limit?
If you think about it, this system could be applied not only to restaurants, but to many other business models.
Decentralized bonds would be a new system that would allow to decentralize all kind of moneylending activity, thus giving power back to the people. It can be seen as a merge between government bonds and bank lending. With government bonds people are lending money to the government. With bank lending centralized banks are lending money to the businesses. With decentralized bonds people are lending money directly to the businesses without any intermediary, thus creating a peer-to-peer moneylending system.
