Underwriting Tokenized Debt

In legacy finance an underwriter is responsible for analyzing your risk to determine if the terms of your loan are acceptable. The underwriter will review your application and check documentation for the following.

Capacity: Do you have the resources to pay off your debts?

Underwriters assess your available resources by reviewing your employment history, your income, your debts and your asset statements.

Credit: Do you have strong repayment and credit history?

The underwriter will review your credit score to see how you have handled past bills to predict your ability to make payments on time and in full.

Collateral: What is the value and type of property being financed?

The underwriter must make sure the loan amount meets loan-to-value requirements. Otherwise, in the case of a default, a lender may not be able to recover the unpaid balance of the loan.

Is it possible to underwrite tokenized debt?

Enter Dharma Protocol:

The Dharma protocol allows for the creation debt agreements.


Any kind of lending application can be built on the Dharma protocol.


The Dharma protocol is live on the mainnet with impressive volume already.

Check out activity here https://loanscan.io/


You’ll notice that most of the the loans are fully collateralized, or over-collateralized.

In order to get your debt order fulfilled you’ll most likely need to over collateralize, otherwise what’s stopping you from purposely defaulting.

This is mostly due the lack of trustworthy underwriters on the protocol (yet).

You could create and monetize an underwriting dapp on the Dharma protocol.

According to the Dharma whitepaper https://whitepaper.dharma.io/#faq

In traditional debt markets, underwriters are entities that collect fees for administering the public issuance of debt and pricing borrower default risk into the asset. In Dharma protocol, this definition is expanded and formalized.
An underwriter is a trusted entity that collects market-determined fees for performing the following functions:
Originating a debt order from a borrower
Determining and negotiating the terms of the debt (i.e. term length, interest, amortization) with the potential debtor
Cryptographically committing to the likelihood they ascribe to that debt relationship ending in default (process described in detail under Specification)
Administering the debt order’s funding by forwarding it to any number of relayers.
Servicing the debt — i.e. doing everything in the underwriter’s reasonable power to ensure timely repayment according to the agreed upon terms
In the case of defaults or delinquencies, collecting on collateral (if debt is secured) or the individual’s assets via legal mechanisms and passing collected proceeds to investors”

On-chain underwriting

Using traditional underwriting techniques in an on-chain fashion such as:

Decentralized credit score like Bloom

Loans collateralized by non-fungible tokens like a rare Cryptokitty.

Off-chain underwriting

Otherwise credit underwriting and debt collection happens off-chain.

With legacy loans, debt is collateralized by identity leveraging the strength of your credit score.

Asset backed tokens could be levered off-chain if lawyers got involved during the debt collection process/default.


Legacy debt markets are primed for blockchain disruption, with infrastructure being developed by talented teams. It seems that in the case of the Dharma protocol, the next step is a competitive network of trustworthy underwriters. This would bring the collateral down, and mitigate creditor risk thus increasing volume and quantity of debt orders. Can’t wait to see what to future holds for this space.

Note: Birch Global Lending is currently developing an underwriting dapp.

Disclaimer: This article is meant for general education purposes only. Birch Global is not affiliated with Dharma.

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