Meet Zero Collateral
Undercollateralized DeFi Loans on Ethereum
Total global accumulated debt accounts for $215 Trillion in assets¹, with $70 Trillion added just in the last decade alone, and unsecured debt accounting for over 80% of the total debt².
Presently, the emergence and development of decentralized technology have the potential to remove centralized financial custodians. DeFi (“Decentralized Finance”) protocols, such as Compound Finance and MakerDAO, enable borrowers to redeem a loan without borders, censorship, or discrimination.
The success of DeFi speaks for itself — these peer-to-peer platforms, among many others, are responsible for over $500M in locked assets.
Since most DeFi loans to-date are secured loans, platforms require over-collateralization — obligating the borrower to already hold assets greater in value than the value of the loan. This constraint results in a ceiling on the market adoption of DeFi thus cutting out 80%+ of businesses and individuals who borrow unsecured debt.
Current use cases of decentralized loans are limited to leveraged trading and preventing the liquidation of crypto assets. In order for the industry of decentralized lending to proliferate and grow, borrowers need access to a decentralized market of unsecured and undercollateralized debt.
Meet Zero Collateral — Undercollateralized DeFi on Ethereum
Zero Collateral Protocol is an unsecured/undercollateralized lending market on the Ethereum blockchain.
Here, borrowers must only maintain collateral equivalent to the value of the loan minus the amount of total interest paid from all previous loans. With frequent loan repayments, the required collateral needed for borrowing eventually drops to zero.
Lending on Zero Collateral
The DAI stablecoin is utilized as the digital asset medium — deposited into the market by lenders that receive zDAI in return. zDAI can be redeemed for DAI by withdrawing supply from the market.
Lenders can earn up to 389% interest per year. This maximum supply APR is based on 100% borrowing of deposited DAI with a compounding rate of 12% per month.
In practice, this percentage is typically not reached due to the lack of 100% borrowing and outstanding borrows not being repaid.
Borrowing on Zero Collateral
DAI can be borrowed from the market with a variable interest rate between 4% — 12% and with a payback date of 172,800 blocks (~30 days) per borrow.
For Zero Collateral V1, the interest owed is equivalent throughout the loan duration (Day 1 interest equals the interest on Day 30). Eg. — if you borrow 1 DAI (at an interest rate of 12%), you have 30 days to pay back 1.12 DAI.
Each wallet is allowed a maximum of one active borrow. A borrow is deemed inactive upon completion of repayment of the principal plus the interest thus unlocking the ability to create a new borrow.
Creating a new borrow after repayment results in an increase of the maximum borrow by 1/2 the interest rate. For example, if the first borrow is 1 DAI, then the following maximum borrow will be set at 1.06 DAI.
The collateral needed by the borrower equals the borrowed amount minus the total interest paid back. After each successful payback, less collateral is required. At the current rate, the borrower will not need collateral after 8 borrow + payback cycles (of the maximum borrow).
How Borrowers Can’t “Run Away with Money”
If the loan is never paid back, a liquidation is run on the wallet. This resets the wallet’s maximum borrow and collateral needed to the initial amounts, 1 DAI and 100%, respectively.
Since the borrower has either (a) contributed to the redemption pool by paying interest or (b) maintained deposited collateral, assets are not lost. Any borrow collateral is sent to the redemption pool. The total value accrued by lenders will be the redemption pool interest plus collateral deposited, minus the borrowed amount.
On a loan default, the total interest paid would be ~106% of borrowed capital. The borrower would exit the market with~-6% less money than on loan initiation and lenders would recover their funds with +50% of borrow interest (or averaging 6% interest per borrow instead of the initial 12%).
DeFi → To The Stratosphere
Stratosphere is the first cloud-interoperable blockchain. Through a distributed network of cloud nodes, Stratosphere enables DeFi protocols to interoperate with the CeFi (Centralized Finance) ecosystem and perform with the power, flexibility, and low-cost of major cloud providers.
Interoperability with Web2 and CeFi is key to bring mass adoption to the decentralized financial ecosystem. The next extension of Zero Collateral will be integrated with the Stratosphere blockchain (with the core protocol continuing on Ethereum 🙂).
Initial CeFi integrations will surround identity and risk management. Credit platforms, including Credit Karma and Experian, are an immediate step to creating true on-chain credit identities. CeFi data platforms, such as Nerd Wallet, and risk management systems will lead to better-informed lenders and data-based lending markets.
Further integrations include loan usage data and bank integrations. Loans offered on the Zero Collateral Protocol can even be specialized like mortgages or student loans. Real-time data, for example, home activity or student grades, can be streamed to the protocol through Stratosphere. Bank spending data can further be used as collateral itself against the decentralized loan.
Zero Collateral DAO
Zero Collateral is designed to be a community-run protocol. Similar to efforts made by Kyber Network and MakerDAO, we plan to convert the Zero Collateral Protocol into a Decentralized Autonomous Organization (DAO) — the Zero Collateral DAO.
We are in the midst of exploring DAO platforms, including Aragon, DAOstack, and DaoHaus. If you have insights or suggestions, please reach out at dao@zerocollateral.com!
Join the Zero Collateral Journey
We are an open ecosystem of developers, marketers, and DeFi enthusiasts who are here to build a more accessible and transparent financial world. If you support the mission of Zero Collateral, please join us in our journey!
🐦 Follow Zero Collateral on Twitter
🎮 Try out the Zero Collateral on Ropsten Testnet
⚔ Contribute to the open-source Zero Collateral codebase on GitHub
😎 Join the team! Email team@zerocollateral.com. Side hustlers are welcome.
[1]: Jeff Desjardins. (October 26, 2017). All of the World’s Money and Markets in One Visualization. http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/.
[2]: Maria Arias, Yi Wen. (February 17, 2017). Secured and Unsecured Debt Over the Business Cycle. https://research.stlouisfed.org/publications/economic-synopses/2017/02/17/secured-and-unsecured-debt-over-the-business-cycle/.
