The Ultimate Kickstarter

TRUSTLESS PEER-PEER LENDING AND INVESTMENT WITH COLLATERISED DEBT

As we transition to a debt-free economy with the Bitcoin Standard; the question must be asked — is it possible to raise debt (loans) in order to invest? What will the future start-up entrepreneur do?

The solution is to simply tokenise oneself; or rather, tokenise one’s income and credit score. These tokens can be held as fractional ownership and can be used to raise debt — but the debt is always secured.

Overview

This blog proposes a smart contract implementation that allows anyone to tokenise themselves and receive deposits from others. These deposits are collaterised with transparent leverage, and are treated as both investments as well as loans to the token owner. Depositors earn a monthly earnout, that accumulates in collateral. They can reinvest to buy more tokens, or withdraw.

The token owner first attempts to attract investment/loans by demonstrating that they can reliably and consistently make income payments into their pool — and maintain a strong credit score. The more they deposit as collateral the more they can attract in loans and investment.

The token is bonded against collateral “the pool”, and thus always has value. Any token holder can make a claim on the collateral, based on how many tokens they hold. This is mathematically defined and thus the token owners are always aware of the liquidity of their investment.

The end result is a healthy and liquid market around personal tokens, where the only way to economically gain from the market is to act honestly. We also discuss possible attack vectors and effective counters.

A bonded token

Comparison to Legacy World

When attempting to gain a mortgage (unsecured or secured) the individual must demonstrate proof of regular payments, such as income. Additionally, they must also show their credit score to allow the bank to assess the risk of the loan. They must also make an initial deposit to reduce the LVR (loan to value ratio).

This smart contract implementation attempts to emulate these characteristics, allowing the individual to prove a history of payments, as well as a verifiable credit score. The individual can make choices about their deposit, leverage ratio and monthly earnout, and thus influence the size of loans they attract, but are bound by them. The borrower must continue to act honestly and reliably in order to prevent being wiped out by their lender, and the lender can assert their loan indefinitely on the borrower until repaid in full. Importantly, this smart contract does not enforce or hard-code any terms, instead relying on transparent game theory and free market economics.

Implementation

Definitions

Token Owner — the person wish to create their own token for loans and investment

Collateral — the initial depost the person makes

Stake — additional deposits the person makes over their collateral

Pool — a smart contract that bonds collateral to tokens

TokensBonded — tokens bonded to collateral in a Pool

TokensOutstanding — tokens that have been emitted from the pool

Tokens — total supply of tokens = tokensBonded + tokensOutstanding

Income — regular payments into pool

Deposit — the deposit placed by investors/loaners

Earnout — the accumulation of stake paid to depositers

Earnout% — the monthly return to Depositers

Exit — the depositer exiting the pool

MaxLeverage — the maximum a pool can be leveraged

Setting up the Pool

TokenOwner creates 1m tokens “TKN” and places them into a smart contract that bonds them 1:1 to an amount of collateral, say 10 Ether.

Thus 100k TKN = 1 Ether; establishing a price of 0.00001 ETH/TKN

TokenOwner then sets the parameters to attract investment:

• Monthly earnout in % (1–5%)
• Payment frequency and amount
• Maximum Leverage on the pool

There are four ways to interact with the contract:

Stake

Staking simply adds collateral to increase the value of TKN. Only Token Owner can do this.

Deposit

Place Eth in to receive TKN. Anyone can do this.

tokensEmitted = (ethIn / (ethStake + ethIn) * tokenStake

The depositor receives tokens that represents their ownership of the pool.

WithdrawDeposit

The deposit can be immediately withdrawn by Token Owner. In this way, the deposit is the investment in Token Owner.

Exit

Place TKN in to receive Eth back.

ethEmitted = (tokensIn / (tokensStake + tokensIn) * ethStake

At any stage the investor can exit the pool by sending TKN tokens back. They will receive their pro-rata amount of Ether.

WithdrawEarnout

Withdraw the Ether accumulated monthly in the pool. Ie, 1% monthly earnout means the investor can withdraw their share of the 1% of the income each month. If they don’t withdraw, they can reinvest it to increase the amount of tokens they have, and their share of the earnout.

WithdrawCollateral

Token Owner can withdraw collateral that is unencumbered — that is there are no outstanding tokens. If all outstanding TKN tokens have been returned then Token Owner can fully withdraw the collateral.

Adding Income

Token Owner nominates a payment frequency (week, fortnight, monthly) as well as minimum amount. Token Owner then starts staking into the Ether side, regularly. This represents income.

These income payments are auditable and work to maintain a credit score and payment history for the token owner. Token Owner’s credit score starts at 100%, and will remain at 100% as long as they meets every income payment (time and amount) that they nominated. If they misses a payment, then their score decreases.

If Token Owner can’t make their payments, they can change their payment cycle. This is public.

If Token Owner nominates a monthly cycle, (in blocks), then they can pay their income for that cycle 15 days of blocks prior, and 15 days of blocks after. The next cycle will then immediately begin on the next block.

Example:

Token Owner staked 10 Ether. After a period of time their income increased it to 20 Ether, however as there is still 1m TKN bonded on the other side of the pool, the value of their token will increase: 50k TKN = 1 Ether. Thus by making income payments, Token Owner keeps their perfect credit score, and increases the value of their own token. Token Owner can withdraw their own collateral, but this will reduce the value of their own token. It won’t reduce their credit score though.

Note: Token Owner cannot withdraw all the collateral f there are any outstanding tokens.

The First Deposit

Token Owner sets MaxLeverage to be 2.0 — which means they can only borrow as much as 2x their collateral.

Tom inspects Token Owner’s contract and determines they are happy with Token Owner’s credit score (100%), income payment history (2 months) and terms (monthly Earnout and maxLeverage 2). They deposit 10 Ether, emitting and receiving some of Token Owner’s tokens.

tokensEmitted = (ethIn / (ethStake + ethIn) * tokenStake

10 / (10 + 20) * 1m = 334k TKN

Tom now owns 100% of outstanding tokens and 33% of the total supply. Thus the following is true:

• He can claim 33% of monthly earnout (0.33% per month)
• He can claim 33% of the total pool value (10 ether)
• He encumbers 100% of his deposit’s worth of the collateral (10 ether)

Token Owner can withdraw Tom’s deposit, as well as withdrawing the unencumbered collateral (20 -10 = 10 Ether) if they want.

Tom can at any time exit with a 33% claim on the Total, which is 0.33* 30 = 10 Ether.

The First Payments

Token Owner continues to make their regular payments for the following reasons:

• To protect their 100% credit score
• To increase their net worth, as more Ether in the pool increases the value of Token Owner tokens
• To reduce the pools’ leverage ratio and attract more investment

They deposit another 10 Ether in after 10 months.

Tom is entitled to (333k/1m) * Earnout% * Income = 33% * 1% * Income, which is 0.33 Ether after 10 months. Tom can either:

1. Leave their ether in to accumulate
2. Withdraw their ether
3. Re-invest their ether to get more tokens, increasing their ownership and thus monthly earnouts (maximum of 100%)

Tom decides to invest up to the pool’s maximum leverage ratio of 2X. There is 30 Ether as collateral, as well as Tom’s previous 10 Ether deposit, so Tom can make another 50 Ether in investment, leaving a total of 60 Ether invested to 30 Ether collateral (2x).

So in summary, Token Owner has collaterised 30 ether. Tom has deposited 60 Ether and Token Owner has withdrawn it fully. Leaving a remainder of 30 ether bonded to 296k tokens at a price of 0.0001 ETH/TKN

Tom Exits

After 20 months

In the next 10 months Token Owner increases their payments to 4 ether per month to protect their credit score and increase the value of their token.

A further 40 Ether is accrued as income, total of 50 Ether.

The price per token increases. Tom decides to exit by sending in all the Token Owner tokens they have (704k):

704k / 1m = 70% * 70 Ether = 50 Ether.

Tom is also entitled to receive 704k/1m * Earnout% * Months * Income = 0.7 * 1% * 20 * 50 = 7 Ether. They can withdraw this from the income pool.

So, Tom has collected their Ether fully back, as well as gaining income of around 7 Ether, for an investment of 50 Ether.

After 40 months

Token Owner has done 10 months at 1 ether/mo and 30 months at 4 ether/mo, total of 130 Ether deposited.

Why would they do this?

• To protect their credit score
• To increase collateral, which reduces the existing leverage and allowing him to attract more loans
• To increase the value of their own token, thereby allowing him to get better loan terms

Token Owner doesn’t attract any other loans, although the current leverage is really low: 60/150 = 40%. This means Token Owner can theoretically borrow another (300–60) = 240 Ether in loans to maintain the cap at 2x leverage. This does not change the risk profile for Tom, so Tom wouldn’t care if Token Owner got other loans.

But Tom decides to exit anyway:

704k / 1m * 150 = 105 Ether. Token Owner is left with 45 Ether.

Whilst this sucks for Token Owner, it’s fair:

• Token Owner had to make the income payments to protect their credit score
• If Token Owner’s credit score dropped, Tom would have exited early anyway
• Token Owner was dumping in income to try and raise further debt (reduce leverage and increase the price of their own token)
• Tom invested in Token Owner
• Token Owner could have invested in himself (just like Tom did)

If Token Owner had invested in themselves, by dropping back down to 1 ether/mo for the last 20 months, and investing 3 ether/month:

Token Owner would have received 148k Token Owner tokens.

Tom would have exited:

704k/1m * 90 = 63 Ether.

In this scenario:

• Token Owner keeps their credit score
• Token Owner reduces Tom’s exit advantage
• Token Owner also earns back some earnout from Tom, as they has some of the outstanding supply
• Token Owner increases the price of their own token, making terms better for him if they gets more loans
• Token Owner has less collateral, which means they can’t borrow as much as before

As such an equilibrium will set up where the Token Owner will always pay their income, but may choose add more income, or invest in themselves to allow themselves to raise more debt. If they try and raise too much debt, then they expose themselves because existing lenders can exit on really strong terms.

Thus debt will always be sustainably raised, where the Token Owner won’t try and raise debt they don’t think they can pay back.

Tokens can be traded

If Token Owner is at maximum leverage (ie they have 10 Ether collateral and borrowed 20 Ether, to be at 2X leverage) then the smart contract will not accept any more loans/investment until Token Owner increases their own collateral, or Tom exits partially. The pool is “locked”.

However, Token Owner is really popular with potentially more income coming, so their tokens are desirable. Thus Tom can sell some Token Owner tokens on the secondary market for more than they are worth in the smart contract.

If this occurs, then Token Owner has even more incentive to make regular income payments to reduce leverage and unlock the contract again. If they do this, then anyone, including themselves, can invest in their token and emit more tokens to immediately sell on open markets. This will create a healthy market where collateral is always staked, and investments are always made.

Changing Max Leverage

Token Owner can also try and increase their maxLeverage — however this needs consensus from token holders first, done by casting on-chain votes. If Token Owner doesn’t own their own token, then this decision is entirely up to the majority of their token-holders as increasing the maxLeverage changes the risk profile on the investment they made — thus they must agree first.

However there is a feature that can be built to repay outstanding debt to existing tokenholders completely, and then gaining the ability to change maxLeverage as there is no longer any encumbrances on the pool.

In the case that Tom has 667k Tokens, on his 20 Ether deposit, which maxed out the pool’s leverage of 2 if there was only 10 Ether in collateral, the token owner can “force pay” Tom his 20 Ether from the collateral + income, removing the debt. The Token Owner could then increase the maxLeverage (say 5), however as there is no collateral, the token Owner would then need to follow up with a deposit.

Tom would still own 667k Tokens, giving him the ability to exit in future for further gain, but the token Owner can was able to change the terms of their pool in their favour.

Preventing an exit-scam

If Tom invests, but Token Owner exit-scams him immediately, then Tom can exit with the remainder of the collateral. Ie, if there is 10 Ether collateral, Tom gives Token Owner 20 ether and Token Owner disappears, then Tom can use their outstanding tokens to claim back the collateral of 10 ether.

If there are actually 2 investors, Tom and Alex with 10 Ether each, then they each own a part of the collateral, respective to the order in which they deposited.

Thus we should adjust the exit algorithm to pay out to the investors the maximum of either their claim of the collateral based on outstanding tokens, or their claim of the collateral based on total tokens to ensure they always recover a portion of their investment.

ethEmitted = max[tkns/Outstanding * Deposit/TotalDeposit, (tokensIn / (tokensStake + tokensIn) * Pool)]

Assuming Tom exits first, then Alex follows:

Tom: max[333k/333k * 10/20, 333k / (333k + 444k) * 10] = max[ 5, 4.2] = 5 Ether

Then Alex: max[222k/222k * 10/20, 222k / (222k + 777k) * 10] = max[ 5, 2.2] = 5 Ether

Thus the consequence of an exit scam is limited to the inverse of the leverage. Ie in a pool of 2X leverage, the worse that can happen is losing ½ = 50% of your investment. However, the returns possible with higher leverage are better. It’s a risk/reward tradeoff.

Summary

We have designed an implementation of a smart contract that allows peer-peer lending and investing in individuals. All participants can view transparent metrics to allow them to make informed decisions before they participate. The smart contract does not hard-code any limits, allowing a free-market to set an equilibrium. Each participant has an agenda and can try and game the smart contract to benefit, but their interests align with the interests of other participants.

The inputs of the system:

Token Owner

• Token creation
• Regular Income
• Earnout Terms
• Leverage Terms

Investor/Lender

• Investment
• Exit
• Withdrawing of Earnout

The following are the agendas, with the action required to achieve it:

Token Owner

Attract Initial Lenders/Investors

Have a perfect credit score, sufficient collateral and favourable borrowing terms

Have a perfect credit score

Stick to the payment cycle they set themselves

Have sufficient collateral

Deposit income

Have favourable borrowing terms

Have sufficient earnout and low leverage

Lender

Make a low-risk passive return

Invest in pools with sufficient earnout, low leverage

Make an investment

Invest in pools with high leverage

Borrower

Don’t freak out Lenders so they exit with all your collateral

Keep the credit score, keep income happening

Attract more loans

Keep the credit score, increase collateral to reduce leverage and allow more loans

Business Case

To deploy this successfully, it would require:

• smart contract implementation
• dApp interface
• Deploy token contracts
• Deploy pool contracts
• Display pool metrics
• Allow users to add information around themselves

Revenue Option

Revenue could come from a 1% fee on all staked collateral, deposits and income.

If 1000 people staked $10k and added $1–2k a month, then $10m would be staked and a further $10–20m a year would be processed as income.

The fees would collect $200-$300k a year.

Reverse ICO Option

The collateral doesn’t need to be Ether, it could be another token, which itself is bonded — it is the token that is staked in the kickstarter pools. The reverse ICO would work as long as there are more people entering the ecosystem and staking/depositing/loaning than leaving or borrowers liquidating.

In this case 100m Kickstarter tokens are minted, and 80m are placed in a pool with some Ether. The 20m not placed in the pool are the founder’s to exit on later.

Each time Ether enters the ecosystem, it converts through the bond, emits Kickstarter tokens, and these kickstarter tokens are then staked as collateral. The Kick token would increase in price as more Ether entered.

Problems: Fluctuating $KICK prices may make it hard to control messaging and adoption.

DAI Option

Instead of a native token (leveraged fluctuation) or ether (fluctuation), the DAI token could be held as collateral to stabilise loans and investments.

Would it be a security?

If such a marketplace were to take off it would challenge the notion of what a security and investment is, as the mechanism described is a hybrid between a peer-peer loan and an investment. I personally won’t weigh into this debate any more than to say that security laws are a tenet of Keynesian economic theory and work to gain those already rich and in power. They should be changed (preferably removed) as well as almost all other Keynesian influences on our economy.

The mechanism in this blog describes a highly-liquid and highly accessible market where the tokens represent fractional ownership of people and their income.

Conclusion

We have proposed a smart contract that relies on game theory and free market economics to set up a stable marketplace around peer-peer lending and investments. Token owners work to establish an on-chain credit score with verifiable reliable income in order to attract loans. The loans are always collaterised, and the lender receives a liquid token they can trade or exit on at any time. They can also receive a monthly earnout from the person they invested in.

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I share, write and talk about the decentralised future.