Bitcoin loans - technical how-to?

[AmpEater]

So I've been toying with the idea of bitcoin loans.  There are certainly times when having credit available is usefull.  And someone who intends to keep their BTC around for a while may as well be generating some revenue by renting them out.  

So the problem becomes how?

Bitcoin is inherently risky for the lender.  There is no reversing a transaction, repossessing a car, no identifying info to hunt anyone down with.  So do you collect personal info and break the asset of anonymity? It seems like the solution may like in the OTC trading forum which is reputation-based ratings.   You can still use a pseudonym, but if you fail to repay a loan you loose your reputation and ability to trade.

The problem then becomes how to calculate the BTC value of a persons reputation, and determine the value that loosing a relative portion of said reputation has as a basis for collateral.   I don't know how to solve this problem, other than by using the fuzzyist of all fuzzy logic, guesstimating while looking at a persons transaction history.  But what if you wanted an automated system?  How could you make "coinpal" but for small, automated BTC loans based on public trust data? 

And how do you hedge against the possibility that the repaid BTC will be worth less than the lent BTC?  You could offer loans pegged to USD, for instance. But the economics and implications of these possibilities makes me head hurt.

Thoughts? Ideas? Baseless ramblings?

[epii]

I was contemplating this same issue today.  I'd go into more depth if I weren't so tired at the moment, but my idea was to create a specification for a separate open distributed database like the block chain that could be used to keep track of Bitcoin credit ratings, along with a protocol to make sure it wasn't abused.

I'm not certain what that protocol would look like.  I imagine it would have to integrate the block chain itself, to make sure (for example) that a particular transaction actually took place.  Also, you would have the challenge (and distastefulness) of tying some sort of persistent identity to all of a person's addresses.

[caveden]

I think it's too early for that.
There's not only this "dead-bider risk", as traditional courts probably won't recognize bitcoin debts, but also there's the high volatility in bitcoins value. It's extremely risky to make serious lending in bitcoins since you have no idea what will be their value one year from now.

[Mahkul]

I don't think such a thing as anonymous loan will ever be possible - Bitcoin is like cash or gold. Would you lend either of these to a person you don't know anything about? It's hard enough to get money back from some people you actually know, leave alone the people you haven't even seen and that live a few thousands kilometers away.

In that aspect Bitcoin is no different than cash - you must know your customer. That's what I think, anyway.

[Nefario]

The only way you could "safely" lend bitcoin is with roughly equivalent value of collateral. Of course in the bitcoin world people cant use their cars or home so some other asset must be used.

The kind of assets would be digital, things like domain names, shares of a bitcoin company on the soon to be bitcoin stock market are what come to my mind (any others?).

The ownership of these would be transfered to a third party organisation, a kind of asset escrow. if the loan defaults then the borrower loses their collateral.

With this method, you reeally could have pseudo-anonymous lending/borrowing, although there are other risks to be considered.

[Daniel]

Just posted on this here:

http://bitcointalk.org/index.php?topic=4871.msg71389#msg71389

Since this issue seems to come up quite frequently now, maybe we should add some info in an easily accessible place, where people can find that there already are solutions in progress, and instead of expending time reinventing the wheel or airily debating they can just start establishing their own credit links.

[epii]

Of course!  Community credit, I've heard that's been very useful in 3rd world countries where they would have a lot of the same repayment enforcement problems that a Bitcoin bank would.

One thought, though... the incentive for repayment in both cases is the maintenance of connections / social status.  In my experience, the adage that friendship and money don't mix is a pretty good one in Western society.  With people in general here having less desperate need than in a 3rd world country, a lot of people might figure that the potential harm to a friendship of loaning money would exceed the potential benefit, especially if they charge interest.

[Daniel]

There's definitely no pressure to use credit with friends when anyone's uncomfortable with the idea. People who are more comfortable with it can form more densely connected hubs, while those who would rather keep their personal lives independent can restrict which nodes they interact with. You can continue to use the techniques for managing money you like, while also having awesome new possibilities.

[mndrix]

It seems like the solution may like in the OTC trading forum which is reputation-based ratings.   You can still use a pseudonym, but if you fail to repay a loan you loose your reputation and ability to trade.

Since the OTC web of trust is based on PGP keys, the loan agreement could be signed by both parties and posted in a public place.  The OTC community could verify the legitimacy of the agreement and adjust reputations accordingly.  Loans happen on OTC from time to time, but they usually rely on IRC chat logs instead of signed agreements.

The problem then becomes how to calculate the BTC value of a persons reputation, and determine the value that loosing a relative portion of said reputation has as a basis for collateral.

That's a pretty good description of a loan issuer's job, regardless of the currency.

And how do you hedge against the possibility that the repaid BTC will be worth less than the lent BTC? 

An options market would help here.  Until then, you can place bets on future Bitcoin prices to help hedge the risk.

[Anonymous]

Personally, I think the "technical how-to" of Bitcoin lending is a moot point.

Let's say vladimir is right and you would have to charge 30-60% per year to get your alpha up to an acceptable level... It is still a sucker bet. All indications are that the demand will continually lead the supply of BTC, it was designed this way on purpose. In my current estimation the value of BTC one year from now can easily be trading 100% above it's current value. Even if you charge 0% interest you can not hope to compete with the option of simply borrowing Dollars and using them to buy BTC. In terms of interest charged in BTC you would actually have to charge negative interest to be able to compete with this option. The situation gets no better if the Dollar weakens, which is the likely scenario. The opportunity for arbitrage between the U.S. Dollar and BTC creates a lot of pressure against lending BTC.

This is why we need a crypto-currency designed for loans.

[Anonymous]

Personally, I think the "technical how-to" of Bitcoin lending is a moot point.

Let's say vladimir is right and you would have to charge 30-60% per year to get your alpha up to an acceptable level... It is still a sucker bet. All indications are that the demand will continually lead the supply of BTC, it was designed this way on purpose. In my current estimation the value of BTC one year from now can easily be trading 100% above it's current value. Even if you charge 0% interest you can not hope to compete with the option of simply borrowing Dollars and using them to buy BTC. In terms of interest charged in BTC you would actually have to charge negative interest to be able to compete with this option. The situation gets no better if the Dollar weakens, which is the likely scenario. The opportunity for arbitrage between the U.S. Dollar and BTC creates a lot of pressure against lending BTC.

This is why we need a crypto-currency designed for loans.

IMO we need to steer away from the debt economy.

Businesses cannot start without lending. In the end, it's all about where the lending comes from.

[kiba]

Businesses cannot start without lending. In the end, it's all about where the lending comes from.

More like...capital.

[Nefario]

Businesses cannot start without lending. In the end, it's all about where the lending comes from.

More like...capital.

I'm with Kiba on this, if a business needs money to get started or do something it's capital, and that capital should buy a portion of the business (shares?).

[Anonymous]

You guys are right but it still is nice for some entrepreneurs to take loans outright. Investors can be hard to come by.

[So_Cynical]

P2P lending mite work, lenders apply directly (on-line) and lenders contribute to the pool...say someone wants to borrow 500 BTC, they state their case for needing the money and offer a interest rate and loan term etc, the 500BTC gets broken down into 20 blocks of 25BTC and investors spread there risk by only funding 1 or maybe 2 blocks per loan...over time the on-line loan app fills up with investors etc.