Leasing contracts in DeFi?

[milio]

I think I invented a new DeFi instrument class, let's hear some opinions.

The simplest definition is by contrast to lending.
In lending, you stake some amount of token A to get some amount of token B (worth less than what you staked) which you must return in time, plus interest, or you lose what you staked.
In leasing, you stake some amount of token A and receive a multiple of that amount in token A', which is not a typical futures contract, but rather a voucher, only accepted by the vendors that are familiar with the A' issuer and understand its mechanics.

Let's say you wish to rent a beautiful Unstoppable Domain for your next e-commerce site but you don't have the ₳120 required for annual subscription. You do, however, have ₳36 required to issue ₳'120 at leasing vendor. The token is issued for you after staking ₳36 and you are now obliged to pay ₳8 monthly for 12 months, so you'll basically return ₳132 after a year (10% interest rate). In case you skip a monthly payment, perhaps some reminders or friendly protocols could be engaged, but for conciseness, let's now assume you immediately lose what you staked and the ₳'120 you obtained will become tainted/worthless.

Now you take your ₳'120 to Unstoppable Domains and rent a domain for 12 months and pay for it in full with ₳'. The provider (UD) is familiar with ₳' and understands you are paying with money that doesn't fully belong to you, though it may check your leasing risk (simply: if we implement checking a leasing history, or checking the contribution percentage - it's 30% in the example, or the interest rate, t.b.d.) and provide you with different type of service depending on the type of customer you are (instantly). They now serve you the domain and in a month either you pay the next monthly payment or (simplifying) they redirect your domain to point to a blank page or an information "this page have been seizblocked due to unregulated payment". The whole world will laugh at you as you forgot to pay the bills and nobody will want to do business with you. Obviously, any ₳' can be redeemed by UD to the ₳ you already paid, but also chain ₳' transactions could be conceived (why make onchain transactions until it's necessary).

One could argue that why bother with ₳' if at any given time, the amount of ₳ paid until that time is greater than the amount of ₳ that a monthly paying scheme would cost. Imagine then, that we narrow down the class of "leasable" services a little:
a) The service is not easily divisible to smaller periods, e.g. a dedicated server requires some installation effort and the minimum rental period is 12 months, or
b) The user builds up its value while using it, e.g. it's a MMORPG character, or
c) It's any NFT
d) Possibly others?

In these scenarios, we may cut down the initial payment from 30% to, say, 5%, and the interest rate from 10% to 1%. But we introduce a more drastic liquidation scenario than simply stopping the service. Imagine you stop paying your mortgage - you get thrown out with all your belongings to the street, right? Or you stop paying your car leasing - it gets repossessed and you have to ride a bus. It hurts, right? Nobody wants to get into this situation, will do everything to avoid it. So imagine that in case of missing you payment, the smart contract is able to delete all the files on your server, or reset your password to "Ivebeencheating", or put your LVL80 character on an auction, or just repossess your NFT. Or imagine that it sends your Protonmail encryption keys to the hackers. Obviously, after you complete your payments, the contract simply commits a final transaction that transfers the full ownership onto you (or the service is ended anyway), but you are motivated to pay until you're paid up in full.

Another scenario to consider is trading with leverage. An inter-market trade of ₳' tokens (vouchers) for ₿' tokens could be implemented without a big headache, although some guarantee of liquidity would have to be secured. I'm not that much an economist, yet I do think the kind of smart contract that enables leasing is possible technically.

[jackg]

I've commented on ths before and I think it's easier to do it without a smart contract in almost every case.


It is possible to do technically but with the addition of ensuring the asset that's leased will remain desirible and won't drop in price.

The best way (and it might be the only way for some assets) would be for the lenders/financers to be directly wanting of what they're leasing to another person - this process might already be decentralisible though and not require a smart contract.

Realistically:
To start:
Person A locks 90% stake in a smart contract that will be lent
Person B puts down a 10% deposit and provide their asset as collateral.

Continuation:
Person B pays back 9% a month for the year

Finalisation:
If payments have been kept, person B gets their asset back and person A gets their funds returned too with interest (the example above puts it at 18% profit for easy numbers).
If payments are stopped at some point, person A gets the asset and deposit and any payments up until that point.


Each of the people in the example above can be a group or a collection of groups.

[milio]

the asset that's leased will remain desirible and won't drop in price

This could be rectified by expressing the price in a relevant tokens, doesn't have to be Bitcoin. Could be a stablecoin (although I don't trust them) or "CPU hours" NFTs, depending on the asset's nature. Also some global market rates could be used in the exact formula, e.g. USD inflation rate, interest rates.

and provide their asset as collateral.

I don't quite follow you here. B don't yet have the rights to the asset, so how could they provide it as collateral while starting the contract? I assume here that someone else, like C, is the seller here and is accepting the payment for the asset from the smart contract created by you. Does this smart contract also obtain the asset from the seller and secure it as B's collateral? It complicates the s.c. a lot as it now has to be familiar with the assets.

Otherwise (if B has to bring the asset to the table), I can't see how is that different from lending (e.g. Maker). Both parties need to input a valuable piece to the transaction (lender needs 90% stake, lendee needs their asset as collateral). In leasing, the lessee only needs like 30% or even 10% contribution (the only collateral is the asset itself) and the lessor only issues debt tokens (₳') which makes it, AFAIU, a finance lease. Your scheme looks more like operating lease, where the asset is only leased for a period significantly shorter than its useful life, and as such being still valuable to the lessor at any time (especially after the last payment). I'd say most of the digital goods are useless to the vendor or lessor, until the lessee produced any value "on them" (e.g. leveled up this MMORPG character), however perhaps it would be best to distinguish between these two kinds of contracts and utilise them when relevant (if we lease server space, it might either be returned to the vendor and refunded, or the vendor might say he likes the money more and then the lessor needs to auction it - but again, this complicates the s.c. code). Yet, in both cases, I don't want the parties to stake larger values, as it decreases the availability of the service - the scheme should be as easy to engage on as possible - you can lease multiple items simultaenously, but you can usually only mortgage one house at a time.

Now about some benefits of this "smart contract centralization" that occur to me:
-Investors could stake their ₳ into the smart contract and increase the ₳' token supply this way (with interest, with some mandatory minimum stake time naturally)
-Vendors can split the interest with the smart contract depending on how fast they want their ₳'s redeemed into ₳s - e.g., if they instantly redeem everything they get, they get 0% interest and the sc gets 5%, but if they end until the end of the 12-month period, they get 2.5% and the sc gets 2.5% too.
-A broadly-known mechanism could facilitate mediation or other rules familiar to everyone. Like with Paypal, if you see a vendor accepting Paypal payments, you immediately know what is the refund policy, the fee, etc.
-Failed lease contracts (payment missed) can be managed on a larger scale, e.g. insured, or well-established procedures could be employed, e.g. if the vendor agreed on a lower interest split, they may get compensation from the smart contract, thus decreasing their risks while accepting vouchers as payment, thus allowing them to lower their prices (I expect this leasing system to cost almost 0 for a regular user).
-Successful leasing contracts build lessee's reputation, making them a higher-tier customer, allowing lower fees or larger transaction amounts.
-There could still exist other tokens than ₳', e.g. ₳'', ₳''', issued by different smart contracts, that would compete with each other.

I also wonder about the ramp-up of such system, liquidity and user perception. At first, ₳' would be just worthless until someone invested real ₳s to stake it. Then, vendors would need to accept ₳'s at a rate (e.g. 0.75 ₳'s for each ₳ worth of service they provide), constantly monitoring the ₳' supply. Obviously, at some point, ₳' could be even worth more than 1.0 ₳ as it's also including some level of interest and every reasonable user pays their debts, exactly like we have in USD since FED. However, I would like to employ a clear and enforcable criterion for market liquidity which would, if necessary, stop or reduce new leases. And again, I would like to have a foolproof method of liquidating assets when the lesee fails to pay on time. It may end up with a notion that only NFTs constitute a reasonable class of assets here, however the vendors may introduce NFTs for their CPU time, domains (aren't Unstoppable Domains NFTs?), game accounts or items, leaving this financial instrument unaware of what happens "inside" the NFT.

[jackg]

the asset that's leased will remain desirible and won't drop in price

This could be rectified by expressing the price in a relevant tokens, doesn't have to be Bitcoin. Could be a stablecoin (although I don't trust them) or "CPU hours" NFTs, depending on the asset's nature. Also some global market rates could be used in the exact formula, e.g. USD inflation rate, interest rates.

It'd have to be done on a by case basis. You might be better off using fiat for everything (especially repayments - because what if they become unaffordable - that's a disincentive to pay back)

and provide their asset as collateral.

I don't quite follow you here. B don't yet have the rights to the asset, so how could they provide it as collateral while starting the contract? I assume here that someone else, like C, is the seller here and is accepting the payment for the asset from the smart contract created by you. Does this smart contract also obtain the asset from the seller and secure it as B's collateral? It complicates the s.c. a lot as it now has to be familiar with the assets.

Like every other lease:
The lender/leaser needs to be able to own the asset and confirm their ownership.
The borrower/renter needs to be able to have almost full control of the asset throughout the lease (eg do everything but sell it).

Now about some benefits of this "smart contract centralization" that occur to me:
~Condensed~

I think most of these could apply to both centralised systems and decentralised smart contracts. In both cases there may be ways to amend what was previously agreed upon if a new agreement is made.

Trust and reputation for a lot of places can be gamed. Someone could take out small leases and constantly make them bigger (while filling them themselves) and waiting for a time they can make a larger one attractive to someone else to try to scam them out of the asset/time (eg social engineering).