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Update on LEND Token Profit Share — Token Holders are Rewarded with “Burnbacks”

Last week ETHLend introduced (https://steemit.com/ethereum/@ethlend/important-announcement-on-ethlend-token-sale-and-reputation-system) system to reward token holders for participating in token sale. Profit sharing was considered as a method of reward. ETHLend has decided to improve the reward method by introducing systematic buybacks. Instead of paying ETH to token holders addresses, ETHLend will use the ETH that is accumulated from lending on ETHLend (the 5% + 1–5% of the platform fees) to buy LEND from exchanges and ‘burn’ it.

The aim is to reward token holders by limiting the total supply of LEND which will increase the value of LEND token. Each buyback and burn will increase the token holder’s percentage of the ownership (reducing supply). It is up to the token holder to decide whether the token holder wishes to sell or hold the increase of ownership to realize profits.

What this means?

Percentage of token holder’s ownership grows each time ETHLend buys LEND and burns it.

The token holder can sell accrued percentage to realize profits.

The same model (5% + 1–5%) is used to calculate the amount of LEND that ETHLend will buy from the open market and burn.

Buyback and burn will occur every quarter of the year.

EHTLend will issue a quarterly report to advise on the buyback and burn statistics.

Why?

Avoid paying profits to exchanges. When token holder wishes to trade tokens, tokens are sent to the exchange and the ownership of the token is changed to the exchange’s custodian address. This means that the exchange receives the profit. Since there is no profit sharing structure currently adopted by the exchanges, this would create a risk. Moreover, holding assets at centralized exchange is subject to higher risks (e.g. Mt. Gox). Buybacks and burning ensures that the ‘real owners’ of the token is the will benefit from the reward.


Transaction costs are avoided. When profit share will be distributed in dividend-like manner, there would be thousands of transactions monthly or quarterly. Each transaction would exhaust a small amount of gas. With buyback there are only few transactions, which means that the saved gas will be utilized to buy and burn more LEND.
Regulatory uncertainty. If assets are associated with dividend-like profit sharing, LEND could be seen as a security by regulators. Buybacks ensures that more jurisdictions will allow usage of LEND resulting in larger demand and use for LEND.

Profit sent to LEND addresses that are dead. There are situations where Ethereum addresses are lost. In these circumstances tokens might be lost as well. This would mean that profit would be distributed to addresses that are dead. Sending ETH to addresses that nobody uses does not provide any value to anyone. On the other hand, if this value is used to reduce the supply of LEND, the value is distributed amongst all token holders.

Uncertainty on taxation. Dividend-like profit share might be seen in the near future as taxable income for token holders since the profit accumulates for holding an asset. On the other hand, buyback increases the value of LEND but might not trigger taxes on income. Of course, this does not avoid the fact that any value increase is taxed once sold, just as any other cryptocurrency.

Impossible to collaborate 100% with exchanges. It is understandable that most token holders will keep LEND tokens on exchanges for trading. It will be impossible to achieve 100% collaboration with exchanges to distribute ETH accumulated from lending on ETHLend.

Buyback solves all these issues and supports the aim to deliver strong token on the market.

The mechanics of the buyback will be advised after the ICO with community inputs.

Hi BenR, quite good questions.

1. The earning is quite simple. The when the borrower places a New Loan Request, the borrower inserts the amount of premium (interest) that the borrower will pay for the loan. Loans and premiums are in ETH. When placing the loan request it is up to the borrower to place such a premium that is attractive (and for sufficient ERC-20 token or ENS domain as a collateral). And it is up to the lender to fund loans that are attractive to fund.

Since the profit is the ETH that the lender receives from lending ETH, the earning is not subject to price movements of ETH (of course compared to collateral yes).

2. When the borrower places a loan request, sufficient collateral must be used. Otherwise the loan will not get funded at the market since it is not attractive for the lenders. Since the ETHLend is 100% decentralized, the borrower must use external data to assess the value (I use http://coinmarketcap.com or https://etherscan.io/tokens for popular tokens and for ENS domains I of course use the amount that is locked in). So what the borrower needs to do is asses the value of the tokens or ens domain that he is about to pledge as a collateral, and decide how much the borrower will ask. For example, if I would have 10 ETH worth of ICONOMI tokens, I would not probably ask the full 10 ETH (even though will be highly likely that it would get funded). Instead I would ask for 8 ETH, giving 2 ETH flexibility for the token price movements (volatility, btw we wrote a steemit post on how to take the token volatility into consideration when lending: https://steemit.com/ethereum/@ethlend/lending-ether-interest-free-on-ethlend-and-how-to-choose-the-right-amount-of-ecr20-token-collaterals). This would give 120% collateral against the 8 ETH loan, which is attractive for the lenders and they might go for lower premium as well. On ENS domains i would recommend 1:1 ratio since the is no price movements on ENS domains due to the locked ether.

3. Since in most jurisdiction ETH (or Bitcoin) is not seen as money due to the fact that it is not issued by any govermend, KYC might not directly apply. However, we do believe that regulation will follow, and that is why we are implementing KYC procedure on certain threshold to give more certainty for the users. We actually found couple of decentralized ways to do it. On lending laws, source of law primarily is the freedom to contract and contractual agreement between the parties (This is the Terms and Conditions of ETHLend). However, in most jurisdictions there are laws against excessive interest rates, here as well the issue of ETH no being a currency does not settle the question. On the other hand, since the borrower is the one that deploys the loan request, this should be a large scale issue.

On the question where the loan is made, we settle the question by the choice of law clause set in the terms used in the Terms and Conditions.

At the moment you can do basic lending on ETHLend (http://ethlend.io) by pledging ERC-20 tokens or ENS domains (secured loans), we will also add this week unsecured loans by using Credit Token (CRE) that is the reputation system in ETHLend. Practically every time you borrow and repay an secured loan (token or domain), you will get 0.1 CRE on each 1 ETH you pay back. 0.1 CRE can be used to borrow equal amount of unsecured loans (up to 0.1 ETH with 0.1 CRE balance). If the borrower does not repay the loan, the all CRE is burned, therefore reputation lost. Therefore, the unsecured lending on ETHLend is about building reputation through secured loans first. Once the borrower has enough reputation, the borrower does need to resort to lending with collateral (of course collateral will always reduce the premium as in real life).

Got a bit of publicity, we are blushing  Thank you Coinspeaker, for mentioning us:

ETHLend, a blockchain startup that introduced decentralized lending few months ago is about to deliver lending without the need to use a collateral.

Until today, lending Ether on ETHLend required the borrower to pledge any ERC-20 compatible tokens such as DigixDAO or GOLEM token as a collateral for the loan. Alternatively, the borrower can pledge Ethereum Name Service (ENS) domains as a collateral for the loan.

Therefore, if the borrower would not pay the loan back, the collateral is transferred to the lender (who can sell the collateral on exchange or at auction). Using collaterals results that lending in decentralized crypto-world would be efficient since the collateral increases the threshold for not paying the loan back and decrease the loss of loan capital since the lender can sell the token on exchange or the domain at an auction for regaining any losses.

Unsecured lending as such is challenging in decentralized environment. This is due the fact that distributed ledgers such as Ethereum network works with pseudo-anonymous addresses. Since the transactions are irreversible, there is no assurance that an untrusted borrower will pay the loan back. This results to the point that unsecured lending would be unworkable if the untrusted borrowers would not repay loans.

ETHLend introduces reputation system for unsecured loans. ETHLend provides more trust on unsecured loans by adding a reputation system that is managed by the use of ERC-20 compatible Credit Token (CRE). On each secured (or unsecured) loan repayment the borrower is credited with Credit Token (1 ETH = mines 0.1 CRE). Therefore, Credit Token represents the borrower’s reputation, which is used to borrow without a collateral (0.1 CRE allows borrowing up to 0.1 ETH).

If the borrower does not repay a loan on any amount, whether it is secured or unsecured, the whole balance of the borrower’s CRE is burned (permanently deleted). Using a reputation system motivates the borrower to build reputation to borrow more without the use of collateral.

The decentralized application is accessed  with the use of MetaMask. ETHLend also has a sandbox version of that is running on Kovan testnet. The latter is a good place to test the functionalities of decentralized lending.

Due diligence is required. CRE increases the threshold for defaults. However, unsecured lending is not risk free. Due to the pseudo-anonymous nature of the Ethereum network, there might occur misuse on unsecured lending, just as in the centralized lending. Therefore, lenders should explore and review the borrowers’ addresses on blockexplorers before deciding to fund loan requests.

More exciting stuff coming up. ETHLend’s Founder Stani Kulechov reveals that there are interesting expansion coming up. The ETHLend team will work hard during the next few months to expand lending to Bitcoin, Altcoin and maybe few other crypto-currencies. ETHLend’s financial and legal advisors are putting much research on KYC (Know Your Customer) compliance.

ETHLend declines to accept any VC funding. Unlike other blockchain startups, ETHLend does not have any venture capital fund backing the development. ETHLend has a team consisting of 16 people that found each other from the Ethereum and [Suspicious link removed]munity. Since ETHLend is building a global lending market, the team wants to have a distance on traditional banking and institutionalized funding.

Stani believes that associating with traditional banking and fund raising might compromise the development of decentralized lending. “We do not want to be guided back to the hands of traditional banking. We truly have an opportunity now to create something unique, which will help many people in different parts of the world.” ETHLend is also preparing for an upcoming token sale (ICO) and the team has come up with an innovative way to fund the pre-ICO phase, which will be introduced within few weeks. Stani adds: “our idea might change permanently the way pre-ICOs are funded.”.

ETHLend is open for contribution at Slack. Anyone can join and assist and brainstorm with the team on the development of the global lending market. More discussion on ETHLend at BitcoinTalk or Reddit.

https://www.coinspeaker.com/2017/07/20/ethlend-reveals-unsecured-decentralized-crypto-lending/

Hi,

Thanks for reading our longish WP. The funding goal is 150 000 - 200 000 ETH. The dapp is already stable running on Ethereum blockchain at http://ethlend.io . The ICO is on September 25. We will have an announcement on BitcoinTalk next week.

For testing http://test.ethlend.io (Switch MetaMask to Kovan).

Hmm.. not many ICOs do have a dapp ready 

Hi Guys,

We added instruction videos on using ERC-20 compatible tokens as a collateral for the loan:

Covering on:

1. How to place a loan request
2. How to fund a loan request
3. How to pay a loan back
4. How to claim tokens when the borrower has not paid the loan back

https://www.youtube.com/watch?v=Tb6fzGXADho&list=PLf4N4wF5YKdoJDIe2D_Cg4cXWa-ruMpV5

Enjoy!

Tokens are a collateral (or ENS domains). Actually it does no differ from traditional loan, since in the traditional loan in your example, the house or a business is the token! So in traditional sense the house/business ownership transfers to the lender, who then does the repossession. So to realize the house or business (the token) the lender must sell it in order to regain any losses. This is exactly the same pattern as in decentralized lending using ERC-20 tokens.

So what you are actually usually doing in real world with secured loans (loans with collateral), you do pledge value against value. That is the logic of secured lending, otherwise it would be unsecured. With the same logic shares, art, commodities are pledged, liquid or no-liquid, even if you have the market price and would quickly realize. I think the reasons why one pledged instead of selling comes down to different answers. With property, I want to own the token, even if I dont afford to yet. With shares, I believe that the company will grow and would not like to close my position since I might not get the shares back or back for the same price.

For me, a regular Joe, I pledge my tokens because I need more liquidity to participate in different ICOs. I get a decent salary, and I pay the loan amount back before it defaults. This way I can have more liquidity when needed (this was my personal reason why I wanted to use ERC-20 tokens for collateral). Also what I do quite frequently is that when I see the ETH price going down, I pledge my token portfolio to get a decent amount of ETH when it is down, and once I have my payday, I pay the loan back. For me it is just a quick way to get ETH when I need. But this is how I use my tokens and might not suitable for all. I dont sell my portfolio because my blood pressure would be too high if I would have to buy the same amount of tokens back from the market.

So instead of selling your portfolio you'll pay interest - you're just betting that the interest you pay is less than the appreciation of the tokens you used for collateral.

Hate the KYC/AML as well. Lets ask how Shapeshift does KYC? 

Yes any ERC-20 compatible tokens, the DAI project is interesting I have eagerly waited it too Although I found in my research DAI a bit complex, that why we actually came with the USD-peg explained below.

We are soon adding USD-peg lending option to our roadmap. This means that the borrower would not suffer from volatility since all loans could be calculated in USD even if the transactions are in ETH. This means that our non-crypto buddies can also borrow ETH, spend it in FIAT economy and pay the loan back with FIAT earned income without suffering from volatility. For example borrower borrows 200 USD worth of ETH and returns 200 USD worth of ETH.

UPDATE ON DAPP:

We added Gitter Chat to ETHLend DAPP.

Ask guidance, questions or just chat anything you feel like

Link to the dapp for testing it out: http://app.ethlend.io

Enjoy!