Reliable lending in blockchain ecosystem

[Adamar]

Hi everyone,

Let me shortly describe the idea that have just came into my mind and let's discuss, criticize and develop it:

Thesis: Lending boosts an economy (if it is used to increase productivity but not to stimulate the consumption). It creates an additional cash flow. It helps funds to be distributed from those who possess more than he actually needs for living to those who knows how multiply the capital, who is in need for it. And this is a win-win game for both.

Objective reality: blockchain ecosystem does not have a developed lending system (as it main competitor, fiat financial system does). I don't take into consideration minor projects which are not influencing the blockchain community.

Action required: to develop such P2P lending system and make it reliable, simple and widely used.

Problems on the way: the risks of lending in crypto are too high to make the model robust now. Peers like you and I do not possess bank's instruments to collect debts (frankly speaking no one even wants to).

Possible way to solve: to make loans guaranteed and secured. To transfer proprietary rights via a smart contract if the loan obligation has been broken.

Example: I want my startup to grow faster. But I don't want to spend time becoming a fundraiser, making presentations, whitepapers, etc. I am a businessman and I just want to do my thing. I also possess a car, the proprietary rights for which are stated in Ethereum Blockchain. I go to a lending platform where I take a loan committing to pay 25% annually to a lender. If I break my obligations - the ownership of the car would be transferred to the lender.

So, finally, The Concept:

• to make ownership rights blockchain-based
• to make ownership rights transferable via smart-contracts
• to develop a lending platform with guaranteed loans

I would really appreciate if you share you opinion on the idea.

Thanks!

Yours,
Adamar

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[dothebeats]

P2P lending platforms have been around for almost 4 years now, and even in this forum we have a dedicated board for the sole purpose of lending. It might boost the economy, but the way bitcoin is designed, it will be the lending parties who will benefit from such boom and not the whole economy itself. Given that bitcoin has no central authority which can lend the coins to those who need it, there really is no point in creating a generalized lending platform. Perhaps users can just go to their local bank and ask for a loan rather than ask to borrow money from complete strangers in the said platform.

[exstasie]

So, finally, The Concept:

• to make ownership rights blockchain-based
• to make ownership rights transferable via smart-contracts
• to develop a lending platform with guaranteed loans

I like the idea. It's like the converse of the SALT Lending platform, where you use digital assets (stored in multi-sig contracts) as collateral to secure real world cash loans. This takes it a step further by allowing you to essentially tokenize anything to collateralize a loan.

One potential issue I see is whether these contracts will always be legally enforceable. I don't think we've seen much precedent in any court systems. In the case of your car above, how does the lender prove that the borrower agreed to forfeit his car, to the same extent as a wet signature on a contract? It sounds a bit more risky than a real world loan. Perhaps that risk would be reflected in the loan rates.

[Ucy]

It is a good idea. There are some decentralized lending platforms and many centralized ones available though. I think https://ethlend.io/en/ is one of the most popular one but it only use Ethereum tokens(not very sure) as collateral.

I think current lending platforms need to go beyond using Er20 tokens as collateral . It should be possible to use verifiable web  assets with ownership rights
that is transferable to smart contract of lending platform.

Identity and reputation can also play important role in the lending businesses. A decentralized reputation/identify platform like https://get-scatter.com can be helpful in this regard.

[Thirdspace]

• to make ownership rights blockchain-based

sounds like futuristic digital world, so if he loses his private keys then he will also lose ownership?
that's like if you lose your car key (no backup car key) you will lose your car
if the ownership right is to link/secure other crypto asset then I think it's more feasible
and make the smart contract to execute transferring/taking over asset when the loan defaulted

[aoluain]

The potential to abuse the system is massive.
If we take the idea of the OP where i am borrowing a certain bitcoin amount
and my car is put up as collateral, how can ownership of said car be properly
verified? How can the lender verify that the car is in fact a 2 year old BMW
520 and worth $35k? Supposing the ownership of the car passes to the lender
but it happens to be in London and the Lender is in Australia ?

People need to realise that bitcoin is based on a trustless system so identities
are not a big factor and that is an attractive feature to a lot of us.

[stompix]

As alouin said, there are so many ways to forge the ownership of the collateral in those cases it will simply not work.
To the points he made, let's add another one, what if I crash the car? 

And even if all those are not happening, if we forget how BTCJam ended, let's say the guys can't pay up and you have the rights to that asset. You know how lengthy the process will be? You can't simply walk and take that care even if your contract was legalized, you will need a judge to seize that.

Why do you think banks don't deal with this kind of assets and only pawn shops are doing this at outrageous rates?

People should really stop believing everything can be done with the blockchain and some tokens. Nope, it can't!!!

[Othuke]

For now, price volatility of cryptocurrencies discourages lending in the blockchain. For instance, if one borrows cryptocurrency and there is a sharp increase in the value of the currency during the time of repayment, a loss is inevitable. But suppose there is a drop in the value of the currency during repayment, such a borrower benefits. In essence, neither the borrower nor the lender can be sure if he will benefit or not.

Secondly, the blockchain thrives on anonymity. By implication, lenders cannot be sure if they will be repaid or not because we can hardly trust an anonymous person. And the process of collateral cannot be thorough under anonymity. Hence, the trust and scrutiny necessary to facilitate direct lending between two people is minimal with the blockchain.

To facilitate lending on the blockchain, better smart contracts will have to be employed to enforce security. Alternatively, peer-to-peer cryptolenders will have to work out their own terms of collaterization and interest rates.

[exstasie]

As alouin said, there are so many ways to forge the ownership of the collateral in those cases it will simply not work.
To the points he made, let's add another one, what if I crash the car? 

This is like when a bank agrees to a mortgage on a house, then the occupants burn it down, or any car loan where the car gets totaled. That type of thing is usually covered in any contract. I assume the loan would be called in since the collateral is no longer secured. Damages beyond the principle paid would probably be covered by some sort of insurance, and the premiums for that are paid for by higher loan interest rates.

But aoluain brings up some cases that reinforce the point: these contracts may not be legally enforceable. I hadn't even considered jurisdiction. Recovering collateral in cross-border peer-to-peer loans sound pretty iffy to me.

[gentlemand]

The potential to abuse the system is massive.
If we take the idea of the OP where i am borrowing a certain bitcoin amount
and my car is put up as collateral, how can ownership of said car be properly
verified? How can the lender verify that the car is in fact a 2 year old BMW
520 and worth $35k? Supposing the ownership of the car passes to the lender
but it happens to be in London and the Lender is in Australia ?

Yes. That's something that's never really computed for me.

So and so is now a coloured coin on the blockchain. Fantastic.

Who or what enforces and ensures the link between the real world asset and the pissy bit of code that you can obtain large amounts for and run away?

Lending and crypto simply will never fit. They are not compatible no matter how much fairy dust you sprinkle on top. People need to let it go. If others want to ruin themselves pursuing it, well it's not as if there aren't enough precedents for that by now.

[exstasie]

Lending and crypto simply will never fit. They are not compatible no matter how much fairy dust you sprinkle on top. People need to let it go. If others want to ruin themselves pursuing it, well it's not as if there aren't enough precedents for that by now.

They can definitely be compatible if cryptocurrency is used purely as a substitute for fiat money in loan agreements. Loan agreements generally don't cross state lines and the legal jurisdiction just needs to be agreed to. This could easily be done on a peer-to-peer or institutional banking level.

That's certainly not as sexy as "decentralized trustless tokenized collateral based lending" though. The more I think about it, the more skeptical I am.