Lending DApp builds on the concepts of peer-to-peer lending and decentralized protocols such as Bitcoin. It was conceived of as an implementation of what are called DACs. A DAC is a decentralized autonomous corporation. In the classic sense, a DAC is an entity with no single point of control. It works by dividing its labor into computationally intractable tasks, which are done either by the DAC itself or by humans who have been provided with incentives to do them. The incentives for humans may be in the form of stock in the DAC.
The concept of DAC is still in its early phase, and its full potential to scale up the number of transaction independent of the capital pool remains to be seen. As such Lending DApp have chosen a hybrid model in which they have launched the LoanCoin, which appreciates via interest income, and a traditional equity component which participates in origination and transaction fees.
On existing P2P lending platforms, there is a huge demand for loans. Banks are withdrawing credit and charging higher interest rates, a trend that has become even more pronounced since the crisis in 2008. This turn has led to the growth of peer-to-peer lending.
Peer-to-peer lending has been enjoying rapid growth due to its convenience, lower rates for borrowers and higher returns for investors. As has been previously mentioned, P2P also has lower opex.
A lender invests outside capital into the Lending DApp network in exchange for newly-mined LoanCoin. This fresh outside capital is used to make loans that are managed by loan officers. Loan officers source, originate and service loans. They serve as the network’s point-of-contact with borrowers. They may include financial institutions such as banks, peer-to-peer lending platforms and even individuals. Loan officers perform due diligence on borrowers and set interest rates. They operate on a fee-for-service model and compete on the basis of fees and performance. The transaction fees are paid in LoanCoin, the Lending DApp’s in-network currency.
Anyone who holds LoanCoin in the network such as investors or even other loan officers becomes a Coinholder. Coinholders are able assign lines of Trust to loan officers depending on performance. It is easy to see, therefore, that any loan officer will want to aspire to greater levels of trust in the network. The Trust line specifies the amount of collateral a loan officer must post when extending credit to borrowers.
The more reputable a loan officer is, the lower required collateral or surety bond, and the higher the credit line. Each loan officer’s aggregate Trust line is determined by consensus among the Coinholders. Trust line is computed by applying an aggregate function to its set of weighted trust ratings. The network is, therefore, able to draw on the collective knowledge of its participants in assessing a loan officer’s reputation and creditworthiness. Loan officers charge performance fees that are determined by the difference between the risk-adjusted performance of the loans selected by the loan officer and the average risk-adjusted loan performance of all loans in the network.
Borrowers repay interest and principal on their loans either directly to the network or through their loan officer. As repayments are made, a loan officer is entitled to claim a proportional amount of the collateral posted earlier. In the event of a default or a missed payment, the loan officer loses his collateral. When repayments come back into the network, coinholders may choose to reinvest the proceeds back into the network in exchange for more LoanCoin. They could also choose to take payment through bitcoin or another supported currency. After payment, their LoanCoin is destroyed.
Investors can choose to purchase LoanCoin for exposure to the entire network, or specialize their asset exposure in areas such as emerging market debt, treasury bills and corporate debentures.
There are two ways of purchasing LoanCoins. An investor can buy through the primary market. In this method, the investor or lender purchases newly issued LoanCoin by injecting fresh capital. The other way is through purchasing LoanCoin on the secondary market through peer-to-peer and or an exchange.
The choice as to whether to buy from the primary or secondary markets is one of economics. If the price of LoanCoin in the primary market is less than or equal to the price in the in the secondary market plus the transaction fee, the rational choice will be to buy in the primary market. If the primary price is greater than the secondary market, it will then make sense to transact on the secondary market. Stability of the LoanCoin price will depend mostly on the arbitrage between the primary and secondary markets. It will also promote an appropriate influx of capital into the LoanCoin network.
In most jurisdictions, LoanCoin may likely be regulated under laws that govern money transmission and securities exchanges. The founders Mikhail Egorov and MacLane Wilkison are currently working on compliance with SEC rules before officially launching.
Ultimately, however, LoanCoin’s uptake will depend on how it handles its weaknesses. The first weakness would come from what are called Sybil attacks. A Sybil attack is a type of attack in which the reputation system is subverted by forging identities in a P2P network. It is possible to require all new loan officers on the network to post surety bonds. That does not mitigate against the long con in which a loan officer joins the network and absconds with huge sums of money after spending time building trust and reputation.
It is also possible for a number of loan officers to collude in executing attacks on the network. LoanCoin will, therefore, have to find ways of sealing these potential problems before it will be ready to go mainstream.
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Last modified (UTC): November 5, 2014 16:17