Collateral-Free Loans

Grab some popcorn because this one is lengthy read.

First of all, I just have to mention that this is just a brainstorm, but something I think would bring more value to Anchor and be somewhat revolutionary to the defi ecosystem in general. (And I’m not a developer, I have no idea how this would be implemented)

What if we could borrow without collateral? Similar to TradFi, I think there is a way to streamline this process.

Two options come to mind for me, one more risky, and the other one more complicated to implement:

A. The risky one: Have a sort of “credit score” attached to your wallet.

Similar to ARCx.money, you would earn good score or “karma” by example: Voting on proposals, returning glitched/exploited funds, donating (angel protocol), hodling/staking for long periods, and by the age of your wallet.

Better “karma” or “score” would grant you bigger loan rights, based on your wallet’s net worth. Similar to providing collateral, but without providing collateral, you would have a maximum loan based on all your assets held.

Now if someone where to mess with the system by filling the account and then depleting it, not only would this account be banned from ever taking loans again, but the receiver of those uncollateralized UST and other assets meant to support the loan amount too.

Now I get this is getting complicated and there are flaws, such as someone sending the “stolen” UST to random addresses to get them banned. But like I said, this is a brainstorm to start a discussion

*The interest would be paid with the loan amount just like regular Anchor borrowing

B. The complicated one: UST voting rights, paid by a small margin.

In this one, you would have to deposit a small margin of UST to pay for the loan interest, during the loan period. But this loan would be very restricted to prevent theft, and misuse.

There would be either an interface within Anchor, or support directly through approved protocols (or both) to insure the good and only use of those special UST, let’s say “bUST”.

You could only use those bUST in no-loss scenarios i.e.: Farming stablecoin pools (Astroport…), automated bidding on discounted collateral that is immediately sold (Orca), and arbitrage opportunities with near zero risks.

In a sense, since these bUST would have limited use cases, they would essentially be voting rights to where Anchor deposits not borrowed should go.

As to what your borrowing limit could be would either be somewhat of reputation based, like option A, or purely out of your loan margin deposit for the duration of your loan.

Interest would be market based on supply and demand as the borrowers, even faced with a no-loss scenario, would risk making less returns than the interest on the loan.

*Also, important to mention most of the job would be automatic (you wouldn’t bid manually on collateral), somewhat like the automated process of Spectrum Protocol.

I hope I have sparked some ideas into your brains, we’re all on this journey together and it’s good to share solutions instead of saying this or this can’t work!

Sidenote: I think Peer-to-peer real life loans would also be a way to make good use of those funds.

The cryoto credit score sounds like what Oasis Labs (ROSE) is doing. It’s focused on privacy preserving DeFi contracts, and a user choosing to share their crypto credit score, and the DeFi and CeFi providers adding to their credit profile (without needing to do actual KYC), is one of the things it’s doing. (Summary here from a third party source.)

So, in the future it may be conceptually possible as each crypto user can be in control of their reputation and choose to share it with certain platforms.

That being said, anything with no collateral cannot work in DeFi, period. An extensive accounting, underwriting, legal and compliance body is needed to evaluate and vet borrowers, to continually monitor their financial health, determine their risk and the custom interest rate, terms and limit for each, and a sizable chunk needs to be set aside for the inevitable legal and collection costs. Doing lending without collateral otherwise is just throwing money down the drain.

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For me, sounds like you will need a real historic borrowing loan reputation. Like traditional bank loans.

So what you are saying is that Anchor could ask AAVE for example the reputation of a wallet. You have to know that if AAVE pass a list of approved wallets that can ask for borrowing without Collateral just because they paid the loan, that list will be like 80% of users or maybe all of them.

No one would like to lose the Collateral for saying the 65% of the value. Even if paying the interest would reduce the loss to 22% (65% of loan plus 13% of the interest equal to 78%).

If Anchor doesnt ask for collateral just because they paid the loan when asked Collateral, is like saying “we trust in good faith” and chances are that maybe just maybe 50% Will pay the loan because they think this reputation will be worth for future loans.

So, for me, this proposal is like flipping a coin.

It’s a no for me. Thanks for sharing.

Right now credit scores don’t work because there is no self-sovereign DID linked to wallets that prove someone is real-world person that would prevent users from making new wallets once they walked away with a uncollateralized loan.

The next best thing, as a lot of protocols have started doing, in creating a type of governance loan board, possibly with staked ANC to approve certain smart contract wallet addresses that are trusted, and can possibly even have a claim to onchain revenue.

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Personally the more research I do on flash loans the more I’m gravitating towards that as a way to do collateral free loans, use idle UST deposited, and boost borrowing demand in one shot.

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