Mahdi Heydari
Nov 28, 2018 · 3 min read

Ether bank claims that it is implementing a platform providing zero-interest loans with no due time for Ether holders. Now, while most prominent decentralized lending platforms like SALT, NEXO, etc. ask for at least 6% interest on their loans, it is understandably suspicious that such platform fulfills what it promises.

Firstly, one might wonder how a bank offering zero-interest loans would pay for expenses. In fact, in the decentralized world, the banks have no bureaucracy and no staff. They do not pay any rent, nor do they deal with legal matters. They are merely a set of codes called smart contracts and therefore, do not have overhead expenses.

Secondly, even if the expenses are fully eliminated, what about the interest needed for paying the depositors? Would anyone deposit anything in a bank that pays no interest? And, how does a bank pay out loans if no one deposits their money there?

Questions like these signal misunderstandings of banks and money. As a matter of fact, banks do not use depositor’s money to pay out loans. If it were so, paying loans would lessen the depositor’s accounts’ balance. They actually provide loans the same way people issue cheques. When paying loans, banks issue cheques — aka IOUs — and give them out to receivers. Money is in fact nothing other than IOUs banks issue.

Smart contracts can function as banks and provide loans by issuing their own IOUs. One might argue that bank IOUs are considered valuable and used as money because of the support they receive from governments. So, where does the value of decentralized smart contract IOUs come from?

Credit theory of money states that money is nothing other than credit and what gives it value is its debtors’ solvency to pay it off.

The value of credit does not depend on the existence of gold behind it, but on the solvency of the debtor.

— Mitchell Innes

The banks’ money is valuable not because of the government backing it up, but because people are confident that they are able to pay off their debt.

Therefore, if smart contracts ensure paying off their debts, they can surely issue their own IOUs that are just as valuable as banks’ IOUs and can be used as money. This is exactly what MakerDAO does. Its stablecoin DAI is, in fact, an IOU issued by its smart contract. By over-collateralizing the loans, MakerDAO ensures that it can always pay off its debts. Consequently, its IOUs are valuable without any governmental involvement.

MakerDAO is the solid proof that we can have a smart contract bank that does not need depositors and paying them interests in order to provide loans. MakerDAO does not require any interest on their loans if you can provide them with enough collateral. The only problem is that they require a 2.5% fee to be paid to their investors to compensate for their participation in the ICO.

Ether Bank is also a decentralized bank that: A. Has no bureaucracy or staff, therefore, it does not have any overhead costs. B. Does not pay its loans using depositors’ money, so, it does not pay them any interest. And; C. unlike MakerDAO, does not plan to have an ICO, consequently, does not require any fees to be paid to its investors.

In conclusion, blockchain technology has actually enabled us to have banks that provide zero-interest loans for those who can prove their ability to pay off their debts by providing their crypto-assets as collateral. So, you can confidently welcome zero-interest loans without any doubt.


For further inquiries and more information visit idealmoney.io and look for Ether Bank there.

IDEAL MONEY

Paving a Decentralized Path Towards Stability and Fair Distribution

Mahdi Heydari

Written by

Monetary Reformist Economist Ethereum Smart Contracts blankdao.org

IDEAL MONEY

Paving a Decentralized Path Towards Stability and Fair Distribution

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