For a while now myself and other have contemplated about a Nubit lending scheme, as an entity that can create its own currency at will we have similar functionality akin to a bank, money lending is their prime business and it could be ours. However the sharp distinction between us and a real world bank in terms of money lending is that banks have legal instruments (law, police, etc) to insure that lenders are enforced by law to pay back their loans. We as a DAC in the crypto world do not possess such means.
So the question then becomes how do we issue loans but at the same time protect ourselves against counterparty risk? The answer is collateral, if we hold something of equal or greater value then the funds loaned we are effectively risk free. The reason people will be interested in these loans is because they need funds in the short term but don’t want to let go of their crypto. Say someone holds Bitcoin and believes it will go up a lot long term, however his car broke down and he needs 2000 USD for a few months. He could sell some of his BTC and repair his car but he would miss out on a rise in BTC value if it occurs. Instead he could park the BTC with us get the money he needs and pay us back later, knowing his BTC are safe and if they go up in value he won’t have to buy back later. Even if he never manages to pay us back if his BTC go’s up by 30% he only loses the USD amount he loaned + interest not the whole collateral.
Now I see this working in the following way, we have customer X who wants to lend say 5000 USD, we ask him to put up collateral of 200% value, so he is required to deposit 10k USD in crypto assets. We could accept any assets we want but I’d say we should aim for established assets that have liquid markets (I’m thinking BTC, LTC, PPC, NMC and maybe ETH, NSR, BKS). Now when person X has deposited his collateral in a multisig address controlled by a Nu multisig team akin to FLOT (I would vote for creating a new team) we transfer the Nubits to him. We charge 1% interest a month (or 0.25% a week) over the lend Nubits, the person has the option of paying us the interest when the loan ends or we subtract the interest from his collateral upon returning the Nubits.
These loans would be indefinitely prolonged, meaning the person can hold onto the Nubits as long as he wants as long as the collateral value – interest stays sufficient. The question is at what point do we start invalidating the loans? My opinion is when the value of the collateral drops to 130% of the loaned amount (in the above example that would mean if the collateral value drops to 6500 USD) we issue a warning that at the ending of the next month the loan is invalidated and we sell the collateral. If the value of the collateral drops to 110% (5500 USD in above example) we instantly sell the collateral and the loan is considered settled. The interest also counts towards this “margin” call so to speak so if the collateral remains stable after the first month the collateral is devalued to 200-1=199% (since 1% is our interest).
If we do it in this way we are protected against counterparty risk and also the lender to a certain extend since he doesn’t have to trust a single Nu entity but his funds are held in a multisig address.
To get this running we would need a Nu multisig team akin to FLOT that can hold a large amount of different crypto currencies in multisig accounts to secure the collateral.
We would also need an market executioner who can sell assets on loans that are being margin called or on interest that is charged.
And we would need a bookkeeper (we could also do this on the forum) that keeps track of all the loans and the collateral value vs the loaned value. I feel this last step we could automate to a large extend with a smart script. It would work something like this:
Row 1 I Row 2 I Row 3 I Row 4 I Row 5
Loaned amount I Colleteral I Colleteral USD value I Interest I Margin level
5000 NBT I 24 BTC I 10004 USD I 150 USD I 197,08%
In order to automate this we would need to pull the USD value of the coins we have as collateral out of some sort of API and put them into the spreadsheet. We could also manually do this of course.
The numbers I have chosen are of course arbitrary, we could also require 180% or 250% collateral and have margin calls at 130% instead of 110%. The numbers are up for debate as well as which coins we accept for collateral. However I think the method is sound and could be very profitable for Nu, if we aren’t able to automate this we could also say that the executioners get a % of the profits, I’m sure many would be interested in performing this service for us.