Decentralized Lending Protocol / Network

[jdbtracker]

I made a Paraphrasing of the OP's post to present the ideas in a high level for scope and implementation focus.




   
Reply with quote  #1
Primary assumption for the following: The protocol is imagined for a post-fiat world, where only cryptocurrencies exist.

The Problem: Bitcoin (and most other cryptocurrencies) is a deflationary binary currency system in which fractional reserve banking is not possible because a bank can’t create bitcoins out of thin air.

Both of these aspects make it difficult for bitcoin to integrate into our contemporary financial system as a currency.

Fractional Reserve Banking is not possible because all coins Are visible at all times; They Uncover the underlying movement of Funds.

A deflationary currency might decrease money velocity because of the increasing value of the currency discouraging spending (yes, this is a debate and experiment that we have all just embarked upon). Also, a deflationary currency may negate the incentive to invest. Why risk your money if your moneys going up in value anyway?

Coins that are in an upward value trend tend to have incentives to be held, throttling spending; This can be worked with by providing Investment and Spending services simultaneously like Traditional Banks, but with a system that allows it in CryptoCurrencies with no Fractional Reserves.

Thus, I present the Decentralized Autonomous Lending Protocol
(and Granting and perhaps payroll and automatic payments why not)

This is presented in a fashion where the underlying technology is only roughly sketched. Instead I focus on the user experience and the fundamentals of the system in the hopes that someone with expert knowledge of coding and what-have-you can make this into reality.

The idea is to create a lending protocol for the bitcoin network that works within the currency - no creation of a new coin or asset required.

The network gets its security from the same technology that bitcoin does - the blockchain.

A Protocol for CryptoCurrency to be moved from Investors, to Businesses and projects, using a Blockchain to Record Records and lock Funds in place.

However, unlike bitcoin, a lending protocol requires something to mitigate risk - that is, if I lend bitcoins to someone, how do I know they’ll pay me back. The protocol will utilize 3 components - 2 of which are algorithm-based, and the 3rd of which is human-dependent.

The protocol primarily mitigates risk by distributing the risk.
A secondary mitigation is a decentralized autonomous reserve
Finally, the protocol allows for a trust network to be built.

The protocol will exist as a blockchain on an alternate chain - a blockchain completely separate from bitcoin, however utilizing the exact same technology in order to capitalize on the network power of bitcoin. To be described later is how participating in validating the Lendchain will provide rewards to miners.

Because this will exist on a seperate blockchain, this protocol requires a secondary wallet, called the lendwallet. This lend wallet ultimately communicates with both the bitcoin blockchain and the lendchain.

Risk Mitigation by Dividing Investment  Sources, maintaining a
Withdrawal Reserve and  Rating System on a Merge-Mined Coinless Blockchain DataBase synchronized with the Bitcoin Blockchain.

How the lending process works:

Jane wants a loan for 100 BTC. In order to take out a loan, she must participate in the network by installing a lendwallet. She must also transfer into the lendwallet some amount of bitcoin. In one variation, we can imagine that you are only permitted to borrow 10X the amount of bitcoin you have placed in your lendwallet. Think of this as a minimum deposit required in a bank.

Proof of Stake Hedging by Borrower, Funding limits by Account Amount.

So after Jane deposits 10 BTC into her lendwallet, she selects “request loan” and fills out the details - mainly, the amount, the repayment period, and the interest she will offer. Additionally, there is space in the loan application to provide more information - what the loan is for, or space to include a web address or phone number such that lenders can further investigate the loan request.

She then submits the loan application out to the network, and this is stored on the blockchain. Other people with lendwallets are notified of this loan application, and they can choose to invest in it.

Borrower Funding Terms and Offer Application submission to Blockchain.

When a loan application first enters the network, it is clearly high risk - some random person wants you to send them some BTC. If you find the application convincing enough, you can choose to be the First into the loan. Being the first provides some bonus, because you have taken the most risk in this loan.

So Bill sees Janes loan application and decides to be the First. He doesn’t have much BTC to invest, so he only claims 1 BTC of the loan. Because he can only provide 1/100 BTC towards the loan, he can only claim some % of the First reward. Besides, its in his interest to share the First reward with other initiators, so that they will initiate.

So now the blockchain has stored that Jane sent out a loan request for 100 BTC, and Bill has put 1 BTC towards it and claimed X% of the First reward.

The blockchain has been updated. On Donna’s screen, she sees the loan and a “1% backed, 90% First Remaining””, and now Donna sees that the loan has some backing. Donna thinks “maybe Bill trusts Jane”, so she decides to put 5 BTC in and claim 20% of the First reward.

Now, when Bill and  Donna put their BTC into this loan, what they are doing is sending their BTC to a script that will only release BTC to Jane if the loan is fulfilled. So in Bill and Donna’s lendwallet, they are -1 and -5 BTC respectively, although the BTC haven’t been transferred yet.

This continues, and the information keeps getting added to the blockchain for Jane’s loan application.

By 40% fulfillment, the First reward is probably gone. A lot of members on the network see the loan is 40% backed, and think its a worthy investment, but they don’t want to risk much. So lets just assume for simplicities sake that the remainder of the loan is filled with people putting up 0.001 BTC each….

thats 60,000 people investing into this loan.

Which is totally doable.

Because its decentralized and autonomous and its all stored in the blockchain!

Investment Management Screen integrated into a Investor Social Network transcribing Loan Applicatioins and Commitments to the Blockchain.

So the loan is filled. The blockchain script recognizes that the loan has been filled and activates the transfer on the bitcoin network and tens of thousands of transactions occur in order to fill Jane’s loan request. 100 BTC shows up in Jane’s Lendwallet. Jane transfers the 100 BTC to wherever and does whatever she needs to do. And she starts paying the loan back every month.

To make payments, she transfers BTC to the lendwallet, and then goes to “make loan payment”. She clicks on the loan that she wants to pay, and submits a payment.

The payment activates the loan transaction in reverse. When Jane hits “submit payment” button, this information is sent to the blockchain. The transaction that was initiated upon filling Jane’s loan is then found and the transaction occurs in reverse, with Jane’s payment being split 10’s of thousands of ways… because hey, its digital currency!

Secure Borrower Lender Blockchain Based Escrow with Repayment Distribution

Lets assume Jane’s loan was for a car, and she asked for 5 years. To keep things simple, lets just say she offered 5% interest (and I won’t compound it because I don’t feel like finding that excel function). So she pays 1.75 BTC per month. So the interest in each payment is 0.0875.

Here’s how the interest would get broken down.

10% to the miners (split evenly between lendchain and bitcoin blockchain)
5% to the Decentralized Autonomous Reserve (DAR)
10% to the Firsts
Remaining 75% go to lenders.

So, the lendchain miners will get a reward for every new block mined. This reward will be funded by some of the interest rate.

5% of the interest rate will go into the BTC transaction for the transaction costs of BTC.

10% goto the Firsts based on how it was divied up, and the remaining 75% goes back to the lenders based on their stake in the loan.

Payment Distribution using Bitcoin Merge-Mined Coinless Block-Time; Re-embursement for support through Interest.

The Decentralized Autonomous Reserve is a mechanism for the network to provide insurance for lenders. Additionally, it is a means of revenue for those participating in the network (DAR Dividends). In a nutshell, the DAR is a pot of money that can be used to pay back lenders some percentage of a defaulted loan. How much insurance is provided is dependent on how many people have backed the loan.

This prevents any exploitation of the reserve by exploiting the fact that collusion decreases as you increase the number of people involved.

Decentralized Autonomous Reserve loan insurance Dividends.

How the Decentralized Autonomous Reserve works. How the loans are insured based on the community backing.

< 100 people backing : 0% loan insured
100% insured occurs at 500 000
Insurance rate is exponential from 101 - 5,000 lenders for 50%

For 5,000 at 50%

X = 0.459308

percent insured = (# of lenders)^0.459308

101 = 8.329%
1000 = 23.874%
2000 = 32.8%
3000 = 39.5
4000 = 45.12
5000 = 50%

Then 100% at 500,000
x = 0.29834

percent insured = 50% + (# of lenders - 5000)^0.29834
6000 = 57%
10 000 = 62.69%
100 000 = 79.5%
400 000 = 97%

So here you can see that the loan is only fully insured when 500,000 people have backed the loan. In the Jane / Bill / Donna example above, with roughly 60,000 people backing the loan, only 75% of the loan is insured. And the numbers above can be modified or made to float based on participation in the network.

For example, if the network contains 300 million lendwallets, then the 50% would be at 500,000 and 100% would be at something like 5 million. And perhaps the lower threshold should be 500 or something.

This prevents this type of collusion: Jane goes to Bill and Donna and says “Hey, I’m going to take out a loan application for 100 BTC and totally never pay it. You two should back the loan, and then when i don’t pay it, the DAR will totally put money in your lendwallets!” In the basic plan outlined above, if Jane, Bill and Donna can convince 97 of their friends to collude with them to screw the system, they would only get 8.3% back, split between 100 people.

So for the DDR, its a matter of identifying certain #’s that will provide people security and deter collusion.

An insurance payment will be made based on some TBD set of rules - if a loan goes unpaid for over X amount of months, the DDR kicks in to start paying back on a monthly basis up to the insure point.

Variable DAR Insurance based on Risk Mitigation Threshold.

How is money in the DAR stored?

This is where some of the folks with more knowledge of the technology would come in handy, but I imagine it as this:

In the lendwallet there will be two balances - the balance of your personal funds in the lendwallet, and the balance of your share of the DDR. Your share of the DDR is determined based on the amount of BTC you have loaned.

So, if you have loaned out 50 BTC, and the DDR is currently at X BTC, the amount of BTC in your personal lendwallet DDR is at least 50 / X. For simplicities sake, lets say its 1 BTC.

This 1 BTC is stored locally on your computer but is not accessible by you - you can’t spend that 1 BTC, only the network can.

However, because the information associated with that bitcoin is on your computer, the reserve protects itself from being robbed - its decentralized. It also protects itself from being manipulated, because its autonomous.  

Bitcoin Blockchain separation of Risk by Transcribing bitcoins to Lendwallet Blockchain Control; Funds are Encrypted by Local Wallet, Fund Access is Separated by Loan Application Encryption. i.e. All levels of Transactions are encrypted into their respective Categories and Requests for maximum security.

What is a DAR Dividend?

The purpose of the DAR is to provide insurance against people defaulting on their loans so that people will actually invest in loan applications from strangers. The purpose of the DAR is not to accumulate massive amounts of wealth. Thus, there will be some algorithm that calculates how much money is required in the DAR based on the amount of loans currently floating in the loanchain. If total DAR funds exceeds what is necessary, the difference between these two values will be distributed to lenders in proportion to the amount of money they currently are lending (averaged over the month). This again provides incentive for individuals to participate in filling loans.

Investment Incentives through DAR Dividend, Better Risk Management equals better Return Dividend Bonus to Discerning Lenders.

Why did all of those idiots buy into Jane’s loan for 0.001 BTC? Surely they won’t get that much back on their investment!


Indeed, they won’t get back on the single investment they made into Jane, but these individuals may have made thousands of different investments. In theory, they could split 1 BTC into 100 million satoshis and thus have 100 million loans out to people. By distributing these small amounts of currencies, these individuals are able to diversify their risk and thus mitigate the risk.

Individual Risk mitigation through Micro-financing a diversity of Loan Requests.

Other network features:
Automatic credit history - all of your actions are recorded on the loanchain, so lenders can get an immediate picture of what kind of borrower you are. No more magic numbers from strange companies.

Grant function - the same mechanism for loan applications can be utilized for grants (a.k.a. crowdfunding). In this case, the BTC are simply not expected to be paid back.

Emergent trust networks - If Jane is a good borrower, Jane might know people in the real world that also need to borrow money that may have no history on the network, such as Ralph. So Ralph puts his loan app on the network, and Jane backs 50% of it immediately. Alternatively, if jane doesn’t want to front the money, Jane can just put the loan app out herself, and then its up to her to get Ralph to pay back the loan. In a way, trusted borrowers on the network may be able to charge a commission to non-trusted borrowers.

Lending and Borrowing Social Network Block Explorer.

The Spread The Wealth loan - Someone could put out a loan app with the explicit intention of distributing a portion of the DAR to those that claim a stake in the loan. For instance, one could request a 1 BTC loan for this purpose, and theoretically 100 000 000 people could claim a 1 satoshi stake in the loan. The borrower never pays, and 100 000 000 people get 1 satoshi each from the DAR.

One could create a countermeasure by including a “ban” option in the lendwallet, and if the network reaches a simple majority ( > 50%), the loan could be denied. Alternatively, the number of backers required for insurance could be increased substantially.

Loan Risk Flagging

Alternatively, the STW loan could be utilized as a decentralized autonomous crowdsourced way to ease difficult financial times - essentially, create liquidity (essentially what the fed does by printing money, but in this case the money isn’t being printed, its just being released). However, the borrower now has 1 BTC. So if it were used in this manner, the backers of the STW loan would have to trust that the borrower would similarly distribute the loaned bitcoin.

A strength of the system: Autonomous “quantitative easing” - type liquidity measures.

If STW loans are filled, and the DAR is drained, this might causing a decrease in lending, which ultimately decreases the DAR.

However, the decrease in lending would reduce the amount of loans that need to be insured, so the dividend payments for network participants would skyrocket, essentially distributing the DAR anyway.

In general, if market conditions get to the point where lending is decreasing, the amount of money required in the DAR will naturally decrease (because there are no loans to insure), thus causing an increase in DAR Dividends, which would spread the money around and potentially encourage lending.

Social Welfare based Risk Mitigation by removing Investment Incentives and DAR Dividend Recalculations: Those with excess funds can donate Interest Free Loans on a flexible re-payment plan for Social Welfare.




Yes OP, using your system as a Business Deployment Platform... Business Templates could be provided to members; This would facilitate forming successful investments by taking a few steps out of the equation, things that we can provide.

The loans can go to high level ideas and trust that it will be Re-paid or The Businesses Structure could be routed through the DAFNE to pay employees or Divisions within a Corporation. This would give investors real time access to how their funds are being used... giving Investors greater Security.

A fully running system would have Templates for different Businesses, providing a structure dictating what skills, resources and equipment are needed. Since these Templates run through The DAFNE Investors can monitor their funds being allocated in real-time, even allowing them to see as individual purchases are being made by customers.  

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[Vessko]

I don't agree that its right or good.

I wasn't arguing that it is right or good - I was arguing that your claim that Bitcoin makes it impossible is false.

"they will be able to create multiple claims on the same bitcoins."... and issue these claims with, what?

Contracts.

as stated earlier in this thread, if we imagine some future bank of be a holder of bitcoins, we assume that your "account" in this bank is the equivalent of the bank having a wallet file for you that they store in some fantastic unbreachable system. The only way they will be able to simultaneously claim that you have 10 BTC in your account and that they can claim 9 BTC for lending is if they use some type of reserve note created that is backed by BTC and issued by that bank.

As I said, you don't understand how banking works.

First of all, if you deposit 10 BTC in the bank, these are no longer your BTC. (If you deposit $10 in a bank, these are no longer your dollars.) You have just lent 10 BTC to the bank and the bank has the contractual obligation to repay them with interest according to the terms of the contract. Unless, of course, the bank fails, in which case you become an unsecured creditor and are basically screwed (especially if you live in Cyprus), unless the FDIC makes you whole (by practically stealing via borrowing and inflation from the rest of the population).

Second, using these 10 BTC as reserves, the bank is allowed to make 100 BTC in loans - not 9.

Third, these aren't any particular BTC. Just because you can track their movement on the public ledger does not mean that the bank has the obligation to return you the very same BTC you lent to it by depositing them - or to lend to somebody else exactly the BTC that you deposited. All it has to do is return you 10 BTC (any BTC) according to the terms of the contract. Unless, of course, all depositors demand their deposits at once, in which case the fractionally reserved bank (any fractionally reserved bank) fails, no matter whether it takes deposits in US dollars, Russian Roubles, Zimbabwean dollars or BTC.

Fourth, when a bank lends, it doesn't create physical currency out of thin air (only the central bank can do that) - or on the blockchain, if we are using BTC. Instead, it creates an accounting entry, saying that the entity that took the loan is now allowed to do payments with that amount of money. Which usually means transferring parts of it to other accounts at other banks, because nobody in their right mind takes loans in order to extract physical currency from the bank and stuff it under a mattress. In the case of BTC, it can be a sidechain transaction that extinguishes itself once the loan is repaid and no-one being the wiser that virtual money supply was temporary increased out of nothingness.

Again, I am not arguing whether it is right or good. I am just explaining you how fractionally reserved banking actually works.

Otherwise, your BTC really isn't there.

It's not your BTC any more. It's the bank's. It just has to return you the same amount of BTC (but not necessarily the very same coins) according to the terms of the contract.

And yes, maybe this is how it worked back in the day of gold banking

No, it didn't. Even then fractionally reserved banking worked the way I explained to you. It's just that there was no FDIC, banks were failing much more often and people were more careful researching where to put their money, so the panics were more frequent but less damaging.

Now, before fractional reserve banking was legislated into existence, things worked more like you imagine they ought to work. You stored your money in the bank (because they had better security and storage facilities than you did) and paid them for the service. The bank gave you a note (or many notes) saying basically that the bearer of this note is entitled to get back from the bank X gold coins on demand. The note didn't contain your name (but usually did contain the name of the bank) and you could use it to "pay" somebody to whom you owed X gold coins - so that he would get them from the bank instead of you. Occasionally banks issued notes for gold coins they didn't have in storage, hoping that most people wouldn't demand theirs at the same time - but this was illegal way back then and when the bank's customers got a whiff of what the bank was doing, that bank failed pretty fast. Oh, yes, and occasionally the banker would sniff a good lending opportunity and would offer it to you (for a small commission, if you accepted), but it was ultimately your decision whether your money was going to be lent out and to whom and at what interest.

Ultimately, my point is: banking has its pros and cons. The pro is that it moves money around and can make things happen - lending is essentially our ability to say "yes, I believe in the future". The cons are that the manifest game of smoke and mirrors can obviously go very very very wrong (see 2008 crash).

I agree with you here. And my point is that the fixed supply of Bitcoins does not make this game of smoke and mirrors impossible, as you seem to think that it does.

[GingerAle]

^^^ thank you so much for the thorough explanation and your patience, and yes, I can see now how even with BTC, fractional reserve is possible.

I know this may be retrograde logic, but perhaps my point was that its difficult for fractional reserve banking (FRB) to exist with BTC using just the BTC network and the BTC currency. Your explanation below indicates that for FRB to work, you will end up with contracts, and in the BTC world, these contracts will probably end up as coins on a secondary blockchain (perhaps).

Ah yes, you even suggest this in point 4 to address the accounting issue with lending etc. (As I've linked to before, I believe some form of this has been created in Loancoin: http://www.reddit.com/r/Bitcoin/comments/2l5mw0/loancoin_a_decentralized_bankcrowdlending_network/ )

But yes, the point has been laid to rest. FRB is possible with BTC using the same accounting practices that exist today, and it can thus lead to the same house of cards being built in a room full of smoke and mirrors that our present day money is capable of.

I will modify the OP.

Alternatively, we can find a way to avoid the need for conventional FRB in the BTC world. One way is to combine  the fractional capacity of digital currencies with the interconnectedness of a peer 2 peer network.

And JDBtracker, awesome!

and squid, you mean in that .md file? done.

[edward_cullen]

This is an interesting concept.

[jdbtracker]

Well, I really like your idea and I think that it just might work.

Time to Flesh out the Obvious Structure.

The Interface can be Web based, as an App, or Program.

  Web based would require a little work with Javascript, CSS, PHP. I'm thinking it would be a good idea to import a client from C++ to asm.js for web deployment on Firefox and Chrome Nacl; This way we do minimal work and it deploys in a web browser.
  If as an App? will simply have to be built using Android or Apple Tools, Looks like Java though, not sure.
  For Program design we can definitely just use existing code, C++ or Java is fine, though I like Java's portability.

This Interface would require a Login Screen, Statistics page, Financial management screen, Proposal List, and settings.
 
  The login screen can be using Persona, OpenID, or any Social Network 0-auth solution; it can be good to start a Financial Lending Frenzy.
  Can also just use the built in encryption of the Bitcoin Client, you prove you locked it, you can have it.
 
  For Statistics I'm think a broad scope of Formulas and algorithms available for clients would be a good idea. Having a broad scope of Points of View and the ability to share that point of view, secure in the scientific foundations of such assertions... you know, economics. Charts and system metrics to understand what is happening within the DAFNe, i'm sure their is some code out there, something like Gapminder that we can incorporate easily.  This would have to be built with access right to the Core of the Client, to give live update information of every change.

  The Financial Management Screen is where people can check their personal statistics for Investments, Loans, Grants, etc. All financial actions should be available from this Screen,

  Proposals screen, where Members can look up available Investment Opportunities, Requests, Grants, Offers in a well Categorized manner.

  And Settings, places where you adjust your preferences regarding the security of your client, Layout, network security and level of support to Network(Hard Drive space, Memory, stuff like that) 


The Core, where all the work is done; The Blockchain, Infrastructure, API and DAFNe Rules.


The Blockchain is just a Database, I was thinking of swapping out BerkleyDB and putting in Apache Cassandra for a more manageable blockchain, Neo4J, or CouchDB. The Database we choose can be very important for deciding what features we have, Cassandra is distributed and has self management features, Neo4j is just wild to have that level of dynamic association in a Database, CouchDb is a Distributed database, it would be interesting to use any one of these.
  We can merge mine the Blockchain, set it up with parameters to be hashed that will lock decisions in place in the Blockchain Database. As people make their decisions they will enter their Bitcoins to be locked as part of a Investment Trust, releasable or Reversable according to terms... Basically, We take Bitcoins Given to the Lendwallet, Encrypt them, let it manage the Coins Virtually, pledging them to Proposals, but not moving them on the Bitcoin Blockchain until Conditions are met and all these decisions are internally managed by Merge Mined Hashes determining Block Time,(Bitcoin Mining Becomes our Metronome).
 
The infrastructure is how do we connect the database to the client? A web interface can be used for anyone willing to host a server and a web page; Code it with some PHP to a server.
Smart Phone Apps too, will need an interface.
Anyone who has a computer can just run the full client, with the whole Database. I was even thinking that why not make it like a Virtual Private Network? So People could connect to anyone hosting a Full Client from the web.

The API is for anything that wants to connect can connect to grab statistics, authenticate remote sessions or update client information. This can be helpful for people to share information on their social networks, or to gain more insight into investment trends. Someday you may just check Facebook to see how your friends investments are going.

And the DAFNe Rules? those are the rules the Database follows, These are already laid out in the OP, I believe.





Open Source Projects could fund themselves managing funding in an Open Manner from within the DAFNe. By this I mean that as funds are provided to an Organization of any type, that it can link to other members providing Services or sub-divisions of the Organization within the Decentralized Automated Financial Network.
   The CryptoCurrency funds are managed by the lendwallet securely and automatically on it's own Blockchain before commiting them for Proposals and eventual withdrawal from the lendwallet, making a single transaction with possibly thousands of Wallets. The network gives a safe place to manage bitcoins without worrying about the 7tps limit, all the coins are never commited to anything on the Bitcoin Blockchain until someone wishes to withdraw, by which time the DAFNe will give them their Bitcoins.
  In this Safe Virtual playground Bitcoins could have their own rules, organizations can setup payment structures, Individuals Could automate finances, Programmable Finances for any type of Venture at any scale. And we don't have to stick to one currency, since control of the account has been given to the DAFNe, all it's managing are private keys to carry out an operation on the blockchain, It just has to be linked to the appropriate Blockchain for verification.

  I was thinking even a market for templates of an organizations structure, A Business can have templates for managing a construction company, a store or Open Source Project. The DAFNe simply provides structures to manage the accounting... yes brother: Distributed Accounting Software linked to the market.
  Why chase around after Invoices with phone calls, e-mails and letters? Just link the damn systems together to save time... accounting is hard, no need to make it harder.
  Managing a fully open system is not that hard, For a Store Investors could see the inventory and view purchases in real time; A corporation may have multiple divisions categorized according to their focus and location with individual expenses and purchasing. It may even function as a CrowdSourced Business model, investors able to see operations live can dictate Business Focus through Suggestions or mutual agreements.
  These can further be linked from within the DAFNe, each Corporation, Business, Charity, Institution having it's own ability to exchange products and services within the directory. The DAFNe could begin acting as a product service database providing services on request from Affiliated Organizations.

It's Interesting structure is very similar to a Traditional Bank, Coins are held in a safe vault, Invested and loaned, deposited and withdrawn, businesses manage payroll, credit, etc but everything is Open to prove the funds exist while  never ever moving. Yeah someone may just spend the coins in the wallet but the lendwallet will be looking out for that, taking appropriate measures to prevent releasing funds by confirming Account balance. or the wallet may be encrypted locking the coins, but if you give the password to the DAFNe it can manage your wallet directly.

[jyakulis]

Could you put a flat fee to every loan. Say 1-5% on top of what the loan is for.

Say you want to construct a loan for 100 btc. Say the fee is 3% this would add 3 btc to the principal over the time of the loan.

For instance over 12 months. The monthly payment would be roughly 8.58 btc. My thoughts are if it came to a point where there were interest free loans the system could collapse. The fee would be a flat fee for mining power as well as go into the fund to hedge risks of loaning.

Additionally, one concern of mine is and maybe I'm reading this wrong is a sole loaner is at a disadvantage. For instance, what if the car dealership or real estate dealership wanted to get into the loan business. This would allow them to circumvent banks and offer loans and the incentive would be interest payments on top of what they were already making. However, the protection is for small loaners as oppose to a single loan. How do you encourage say a car dealership from picking up the lend wallet application, making a web based interface and trading property for bitcoin in this system?

[GingerAle]

Well, I really like your idea and I think that it just might work.

awesome! So glad that its clicking with you. Sorry I didn't have time this weekend - we were entertaining house guests.

Time to Flesh out the Obvious Structure.

Indeed. I'm curious if this is the best venue for this? I mean, the forum has the benefit of offering full community participation and witness, but the to and fro using the quote function can get old. But its fine.

The Interface can be Web based, as an App, or Program.

  Web based would require a little work with Javascript, CSS, PHP. I'm thinking it would be a good idea to import a client from C++ to asm.js for web deployment on Firefox and Chrome Nacl; This way we do minimal work and it deploys in a web browser.
  If as an App? will simply have to be built using Android or Apple Tools, Looks like Java though, not sure.
  For Program design we can definitely just use existing code, C++ or Java is fine, though I like Java's portability.

Yeah, I think any way forward is fine, and at this stage the simplest version is the one to go with. I don't know which of the above is the most simple.

This Interface would require a Login Screen, Statistics page, Financial management screen, Proposal List, and settings.
 
  The login screen can be using Persona, OpenID, or any Social Network 0-auth solution; it can be good to start a Financial Lending Frenzy.
  Can also just use the built in encryption of the Bitcoin Client, you prove you locked it, you can have it.

Yeah, at its simplest, that list you provided is it!

  For Statistics I'm think a broad scope of Formulas and algorithms available for clients would be a good idea. Having a broad scope of Points of View and the ability to share that point of view, secure in the scientific foundations of such assertions... you know, economics. Charts and system metrics to understand what is happening within the DAFNe, i'm sure their is some code out there, something like Gapminder that we can incorporate easily.  This would have to be built with access right to the Core of the Client, to give live update information of every change.

There should definitely be a broad scope of formulas - something that presents the actual inner workings of the DAFNe. Regarding some of the Key Numbers utilized in the system (# of loaners required for insurance and to prevent collusion), I think it would be great to get the opinion of an expert.... my wife thinks Social Psychology would be the field. I could actually probably just look up the literature myself.

  The Financial Management Screen is where people can check their personal statistics for Investments, Loans, Grants, etc. All financial actions should be available from this Screen,

Indeed. I'm envisioning like an overall summary on the splash screen, and then you can select through your lists of investments, loans. Should we call these financial products? A Grant really isn't a product. Maybe we can call them Outs.

  Proposals screen, where Members can look up available Investment Opportunities, Requests, Grants, Offers in a well Categorized manner.

  And Settings, places where you adjust your preferences regarding the security of your client, Layout, network security and level of support to Network(Hard Drive space, Memory, stuff like that) 

One of the things that would be nifty to have in the settings is an automatic option. So you can setup the following "if a loan application with credit score X and at least X% backing hits the network, automatically invest X"

The Core, where all the work is done; The Blockchain, Infrastructure, API and DAFNe Rules.


The Blockchain is just a Database, I was thinking of swapping out BerkleyDB and putting in Apache Cassandra for a more manageable blockchain, Neo4J, or CouchDB. The Database we choose can be very important for deciding what features we have, Cassandra is distributed and has self management features, Neo4j is just wild to have that level of dynamic association in a Database, CouchDb is a Distributed database, it would be interesting to use any one of these.
  We can merge mine the Blockchain, set it up with parameters to be hashed that will lock decisions in place in the Blockchain Database. As people make their decisions they will enter their Bitcoins to be locked as part of a Investment Trust, releasable or Reversable according to terms... Basically, We take Bitcoins Given to the Lendwallet, Encrypt them, let it manage the Coins Virtually, pledging them to Proposals, but not moving them on the Bitcoin Blockchain until Conditions are met and all these decisions are internally managed by Merge Mined Hashes determining Block Time,(Bitcoin Mining Becomes our Metronome).
 
The infrastructure is how do we connect the database to the client? A web interface can be used for anyone willing to host a server and a web page; Code it with some PHP to a server.
Smart Phone Apps too, will need an interface.
Anyone who has a computer can just run the full client, with the whole Database. I was even thinking that why not make it like a Virtual Private Network? So People could connect to anyone hosting a Full Client from the web.

The API is for anything that wants to connect can connect to grab statistics, authenticate remote sessions or update client information. This can be helpful for people to share information on their social networks, or to gain more insight into investment trends. Someday you may just check Facebook to see how your friends investments are going.

I defer to you on these points, because I don't know what database is best.

And the DAFNe Rules? those are the rules the Database follows, These are already laid out in the OP, I believe.

Indeed, the DAFNe rules are in the OP. But we will nail them down and hopefully get some more expert opinion on the Numbers.

Open Source Projects could fund themselves managing funding in an Open Manner from within the DAFNe. By this I mean that as funds are provided to an Organization of any type, that it can link to other members providing Services or sub-divisions of the Organization within the Decentralized Automated Financial Network.
   The CryptoCurrency funds are managed by the lendwallet securely and automatically on it's own Blockchain before commiting them for Proposals and eventual withdrawal from the lendwallet, making a single transaction with possibly thousands of Wallets. The network gives a safe place to manage bitcoins without worrying about the 7tps limit, all the coins are never commited to anything on the Bitcoin Blockchain until someone wishes to withdraw, by which time the DAFNe will give them their Bitcoins.
  In this Safe Virtual playground Bitcoins could have their own rules, organizations can setup payment structures, Individuals Could automate finances, Programmable Finances for any type of Venture at any scale. And we don't have to stick to one currency, since control of the account has been given to the DAFNe, all it's managing are private keys to carry out an operation on the blockchain, It just has to be linked to the appropriate Blockchain for verification.

  I was thinking even a market for templates of an organizations structure, A Business can have templates for managing a construction company, a store or Open Source Project. The DAFNe simply provides structures to manage the accounting... yes brother: Distributed Accounting Software linked to the market.
  Why chase around after Invoices with phone calls, e-mails and letters? Just link the damn systems together to save time... accounting is hard, no need to make it harder.
  Managing a fully open system is not that hard, For a Store Investors could see the inventory and view purchases in real time; A corporation may have multiple divisions categorized according to their focus and location with individual expenses and purchasing. It may even function as a CrowdSourced Business model, investors able to see operations live can dictate Business Focus through Suggestions or mutual agreements.
  These can further be linked from within the DAFNe, each Corporation, Business, Charity, Institution having it's own ability to exchange products and services within the directory. The DAFNe could begin acting as a product service database providing services on request from Affiliated Organizations.

Yeah man! It seems like the applications of DAFNe Protocol easily go beyond lending! I like your term Safe Virtual Bitcoin Playground (SVBP)

It's Interesting structure is very similar to a Traditional Bank, Coins are held in a safe vault, Invested and loaned, deposited and withdrawn, businesses manage payroll, credit, etc but everything is Open to prove the funds exist while  never ever moving. Yeah someone may just spend the coins in the wallet but the lendwallet will be looking out for that, taking appropriate measures to prevent releasing funds by confirming Account balance. or the wallet may be encrypted locking the coins, but if you give the password to the DAFNe it can manage your wallet directly.

Thats what I was thinking, at least for the DAR part of it - the coins are locked and only controllable by the network. As for the the coins you put in the lendwallet for staking purposes (allowing you to make loans), those can be spent as if the lendwallet was any other wallet. But yeah, once you back a loan, the lendwallet would lock that amount of BTC in your lendwallet, so you can't spend them.

Could you put a flat fee to every loan. Say 1-5% on top of what the loan is for.

Say you want to construct a loan for 100 btc. Say the fee is 3% this would add 3 btc to the principal over the time of the loan.

For instance over 12 months. The monthly payment would be roughly 8.58 btc. My thoughts are if it came to a point where there were interest free loans the system could collapse. The fee would be a flat fee for mining power as well as go into the fund to hedge risks of loaning.

Yeah, that would totally work! just another option on the loan application, and something that would influence how attractive your loan is on the network.

Additionally, one concern of mine is and maybe I'm reading this wrong is a sole loaner is at a disadvantage. For instance, what if the car dealership or real estate dealership wanted to get into the loan business. This would allow them to circumvent banks and offer loans and the incentive would be interest payments on top of what they were already making. However, the protection is for small loaners as oppose to a single loan. How do you encourage say a car dealership from picking up the lend wallet application, making a web based interface and trading property for bitcoin in this system?

Hrm, interesting... I don't know how to encourage, per se. One possible workflow is that the car dealership , when selling a car, would fill out the loan application for you. Then they submit it to the network. They immediately stake a claim in that loan - something ridiculous, like 50%. This loan then becomes very attractive to other borrowers.

Hrm, another possible way to have a loaner trust system somehow. That way, a sole loaner can somehow take advantage of the security of the DAR.

[GingerAle]

I'm starting a mockup of the program (whatever the platform may be) using google presenter

https://docs.google.com/presentation/d/1uRQ4I4EYVENhCIehga_Cwei2IzP06OhWnOa2c9q_lkE/edit?usp=sharing

Feel free to add to it or comment.

So I guess for each instance of the client, there are actually up to 3 wallet files.

wallet #1 is the normal wallet. Funds are transferred here simply so that moving funds within the program is easier.

wallet #2 stores the coins waiting for the loan to hit 100%. So, when you claim a stake in a loan, the bitcoins are transferred from wallet #1 to wallet #2, so that these committed coins can't be spent. These coins can be transferred back to wallet #1 if the user pulls out of a loan. They might decide to do this if they staked into a loan that is taking a while to fill... i.e., if a loan has sat at 80% for more than 2 weeks, you might want to pull out and use your coins elsewhere.

Hrm, this might be technically tricky.... I always forget that BTC aren't actually digital things (or are they??) its really just a ledger entry that you have transferred value from you to someone else. Or is there an actual digital entity that can be locked up somewhere? In this case, wallet #1 and wallet #2 may actually be just 1 wallet, and the program will be written such that if you have committed X BTC, the lendwallet application will not allow you to make a transaction from your lendwallet address that would cause your balance to go below X BTC.

wallet #3 stores the coins for the Decentralized Autonomous Reserve. These coins can not be accessed by the user. Somehow we will have to find a way where if a user bails on DAFNe, the coins in their DAR vault make it back to the network.

A fourth # of bitcoins is also displayed to the user, and this is the amount that the user currently has invested. This is not really a wallet, its just the output of loanchain data for which the users wallet #1 address has sent BTC. This number is utilized to calculate the DAR dividend that the user receives.

[xrobesx]

This sounds like a very great idea,

I'd gladly run a node and mine to help secure the network,

Not sure how I could contribute at this time, but I'd love to see the project move forward.

[Vessko]

I had another thought the last night... Is lending for interest possible at all with a fixed-supply currency and fully-reserved banking? Let me start with the premises:

1) You have the whole society operating on Bitcoin or some other cryptocurrency that has a fixed supply. If this premise is not true (e.g., if you have fiat currencies existing in parallel, then there are no problems).

2) All the economically mine-able units of the currency have been already mined - its supply no longer increases. In other words, this isn't a problem now, while the supply of Bitcoins is still being inflated.

3) You operate in a fully-reserved banking environment, where the banks are not allowed to inflate the money supply - not even temporary.

Now, you want to make, say, a 10-year load of 100 BTC at 1% interest (total, not annual interest). In other words, by the end of the 10-year period, the debtor has to repay 101 BTC.

Question: Where would the additional 1 BTC come from? Before you try to answer, let me clear a few other things.

Money is not wealth - money is only a medium of exchange, a measure for wealth. Wealth is created by the productive members of the society - the larger the society is and the more productive its members are, the more wealth it generates.

With a fixed-supply currency, the purchasing power of the currency will increase with time, as more wealth is generated by the society but there is still the same amount of money chasing it. In other words, the prices of goods and services will decline. Let's not argue whether it is good or bad right now - I am trying to make a different point. Per se, Bitcoin doesn't have a problem with that, because it is very divisible. The problem lies elsewhere.

Where would the additional BTC (necessary to repay the interest of the loan) come from; I mean from the society as a whole? Remember, the amount of bitcoins in the society no longer increases - only the wealth of the society increases. You can repay the interest with wealth - but you can't repay it with money.

On the surface of it, for a single person, it's easy. You have invested the money from the loan, have produced wealth with your work, have sold it and you repay the loan (with interest) with the money you get. But where did you get the additional 1 BTC? Somebody gave it to you in exchange for the wealth you have produced. But where did that person get it from?

He could have performed a similar trick - sold the products of his labor for money and used that money to buy the products of your labor. But the question remains - the additional 1 BTC has to come from somewhere within the society in order to move through the chain of payments and reach the original lender in the form of interest. But one of the premises is that the supply of money is no longer able to increase.

This leads me to the conclusion that lending for interest in such a society is not possible. (In addition to this problem, the deflationary character of the currency would mean that the lender would have to account for it - i.e. ask for low or even negative interest, in order to account for the appreciating currency and still expect somebody to be willing to take the loan.) Any attempts to implement it would result in unfair wealth transfer from the debtors to the lender - and that would be just a temporary setback until the whole economy collapses due to a shortage of money to pay the interest on the various debts in the society.

Methinks, there was a good economic reason why the old religions prohibited loaning money for interest - at that time the society was operating on a gold standard, which was essentially a deflationary currency, since its supply increased slower than the wealth of the society due to population and productivity increase. The "jubilees" (forgiving of all outstanding debts every 50 years) probably served a similar purpose.

[GingerAle]

Yeah, I agree with this concern and it was one of the things that I tried to get my head around concerning lending with BTC, or BTC in general. Hence one of the 2 premises of the whole original ramble was something like "deflationary currency makes lending difficult".

Where will the extra 1 BTC come from? As you suggest, I think it would mainly come from a transfer of wealth - the markets of society will transfer wealth from different sectors, and the market value of these sectors, and the players in them, will change.

But that might not solve it as you point out.

Ultimately, I don't know. This might be the experiment that we need to run. One could argue it was run centuries ago when there was only non-fiat.

I think the primary difference between an economy of those times and the potential future economy of BTC is that BTC can (and hopefully will) be truly global. The "extra" 1 BTC may come from the fact that the buying power of a BTC is currently very weak in India compared to Venezuela.

So what might then happen is person in India is paid 3 BTC for every one of their whatsits, whereas in Venezuela, a person is paid 1 BTC for every whatsit. So now the guy in India has a lot more BTC to throw around in the DAFNE, and he can invest in Venezuelan whatsits.

And also, the fact that all of the worlds cultures have different market values for things may influence the ability of a deflationary currency to "create" the extra 1 BTC.

Or, as was presented some posts above, some claim that BTC was never meant to be a currency on its own, but instead exist alongside fiat. But even then, this wouldn't solve the problem, unless the DAFNe works in fiat anyway, and just uses BTC as a medium of exchange, which can also totally happen.

[jdbtracker]

If we build it, I guess we'll find out.

But I'm of the opinion, with good velocity of money it won't be a problem, A Good system will have a good flow of money that rewards everyone participating sooner or later. And things always appreciate in value, you just get more with less. Negative Interest it will be, bets on how valuable it can become.

I figure if it continues at this trajectory it will reach a point where it is measuring the entire economy and any additions and subtractions will be visible according to it's value. Things depreciate in value, Perishable Goods expire, and new things are made all the time, we may be able to see this in real time some day.

[jyakulis]

This leads me to the conclusion that lending for interest in such a society is not possible. (In addition to this problem, the deflationary character of the currency would mean that the lender would have to account for it - i.e. ask for low or even negative interest, in order to account for the appreciating currency and still expect somebody to be willing to take the loan.) Any attempts to implement it would result in unfair wealth transfer from the debtors to the lender - and that would be just a temporary setback until the whole economy collapses due to a shortage of money to pay the interest on the various debts in the society.

Methinks, there was a good economic reason why the old religions prohibited loaning money for interest - at that time the society was operating on a gold standard, which was essentially a deflationary currency, since its supply increased slower than the wealth of the society due to population and productivity increase. The "jubilees" (forgiving of all outstanding debts every 50 years) probably served a similar purpose.

I agree with your well thought out assessment. While bitcoin operates in parallel with existing money supplies it could work. But long term in a closed system it would fail. There's no greater evil in society than people who make money off having too much money.

But I still think you would need fees to offer incentive to people who maintain transactions and the infrastructure. So, I wouldn't think a flat fee would be out of the question.

[GingerAle]

Well, we may have run into a problem. I found an excel spread formula online where you can calculate how much a loan will cost you, compounded monthly (like a credit card).

https://docs.google.com/spreadsheets/d/1Z_4lBsfJtIZws_8jFLtpvgcpjDXtqEujs5P5SM_LIrY/edit?usp=sharing

If we use the numbers laid out in the OP (a loan with 3% interest, and with 5% of the interest going to the miners, and we assume 10 minute blocks)... and we assume that everyone's getting car loans of 50 BTC with roughly 5 year payment schedule...

and there are 2000 of these loans (!!)

then the average block reward is ~0.0015 with a standard deviation of 0.0008. I used average and stdev because not all loans are going to originate at the same time...

I don't know if thats enough to sustain participation in the network... This might discourage pure miners...

One participating in the network would be rewarded, though, with dividends from the DAR based on their amount invested.

However, if we take full advantage that the current BTC network doesn't need transaction fees (because blocks are rewarded with the current disbursement), we could utilize 10% of the reward portion (labeled as the "miner cut" in the spread), then the numbers are:

0.003 with a dev of 0.0017

But the spreadsheet is fun to play around with...  if there are 10,000 loans, then we're at 0.015 block reward.

And if we increase the average interest to 5%, then we're at 0.026 +- 0.013 .

Hrm, so if there are concerns of 51% attack, then we might need to think something up.

[GingerAle]

I'm starting to develop the wiki of the github page. I'll reserve this thread for standard discussion, but any type of conceptualization or code mapping or psuedo-code that I may write up will be on the github. I'm assuming this will make the moderators happy (i'm surprised they haven't moved this thread already!)

https://github.com/Gingeropolous/DAFNE

BTW, did I set up the github properly? Can others modify and add stuff and make commits fly through the night sky?

[GingerAle]

and I finally cleared up a concern I had that I didn't understand things properly. Bitcoins don't exist. Only transactions exist.

http://www.coindesk.com/information/how-do-bitcoin-transactions-work/

[Vessko]

Where will the extra 1 BTC come from? As you suggest, I think it would mainly come from a transfer of wealth - the markets of society will transfer wealth from different sectors, and the market value of these sectors, and the players in them, will change.

No, that won't work. This is precisely why I emphasized that money is not wealth. In a healthy society, wealth increases so this seemingly isn't a problem. But the problem arises from the fact that loans of money are repaid with money - not with wealth. Yes, you sell the wealth you have produced to get money - but that works only on a person-to-person basis. If in the society, as a whole, money supply is constant, it is simply impossible to repay (society-wide) monetary loans with interest with money, even if the wealth of the society keeps increasing.

The only solution is not to loan deflationary money at interest. Normally, the interest is the reward the money-lender gets for taking the risk that the loan will not be repaid and for postponing his consumption by lending his capital instead of spending it. But money is just a means to achieve that - not the goal. A deflationary currency should keep appreciating. You can make a 100 BTC 10-year loan at 0% interest and still be rewarded with wealth for it because by the end of this 10-year period the 100 BTC you get back will have more purchasing power.

[GingerAle]

Where will the extra 1 BTC come from? As you suggest, I think it would mainly come from a transfer of wealth - the markets of society will transfer wealth from different sectors, and the market value of these sectors, and the players in them, will change.

No, that won't work. This is precisely why I emphasized that money is not wealth. In a healthy society, wealth increases so this seemingly isn't a problem. But the problem arises from the fact that loans of money are repaid with money - not with wealth. Yes, you sell the wealth you have produced to get money - but that works only on a person-to-person basis. If in the society, as a whole, money supply is constant, it is simply impossible to repay (society-wide) monetary loans with interest with money, even if the wealth of the society keeps increasing.

The only solution is not to loan deflationary money at interest. Normally, the interest is the reward the money-lender gets for taking the risk that the loan will not be repaid and for postponing his consumption by lending his capital instead of spending it. But money is just a means to achieve that - not the goal. A deflationary currency should keep appreciating. You can make a 100 BTC 10-year loan at 0% interest and still be rewarded with wealth for it because by the end of this 10-year period the 100 BTC you get back will have more purchasing power.

Then what is the incentive to loan at all? Why not just sit on your pot o' gold? There's no incentive to risk an investment. Are people going to do it out of the good of their heart?

While I do think its too soon to say that a global economy using a single deflationary currency would not have local differences in wealth that might subsequently modify the value of money (I'm not a fan of saying things are impossible.... I'm a scientist by training, and I'll trust the experiment, and the experiment has not been run, even though we used deflationary money in the past, we weren't able to send this money to the opposite side of the globe instantaneously)


...... we can effectively kick the can down the road on this one.

Right now, bitcoin is technically inflationary, even if people keep losing coins.

The protocol could also be modified to work in the hybrid fiat-crypto economy, embracing the "bitcoin as a payment system" ethos.

And the protocol can ultimately be used for a cryptocurrency that is inflationary.

[jyakulis]

The thing to do is offer the option for usury in the short term as a necessary evil while still applying a standard fee for miners and people that maintain the network.

In the future in a perfect world anyone that would offer to pay usury would be a fool. They would realize that's it's going to take more goods and services to pay back the loan with no interest let alone another 5%. Any additional interest would be crippling. But you can't legislate for stupidity can you? Neither can you program your way out of stupidity. More options is likely better than few options is what I'm saying.

[xrobesx]

I don't think interest is much of a problem. The extra 1 BTC you are talking about in that scenario could be acheieved by working and saving for it over the years or creating profit from whatever you did with the loan.

I think the bigger problem might lie in the price volatility. Lets say someone this year was to start a loan request for 10 btc to be paid back over 10 years. Right now the price of the 10 btc would be worth roughtly 3500$. Now lets assume they are repaying 1 btc every year. 5 years from now the price of btc could be worth 3500$.

This would not be a problem if the loan applicant kept their loan in btc. But right now I would assume most loans would probably be sold and used as fiat only to rebuy btc later to repay the loan.

In this scenario people could be left in a position trying to pay back 10x the amount of money they ever borrowed in the first place. Clearly that would be their own fault, but it still could be a drawback to the average person looking to exchange the btc loan for fiat.