Introducing Union

The global, permission-less credit protocol

Jacob Shiach
Union Finance

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Union’s Symposium by Liam Cobb

Credit is simply giving someone a dollar and expecting them to return it, often with interest. Simple.

Yet, access to credit determines who and what can grow at a pace faster than their bootstraps naturally allow.

Imagine you’re a seamstress, and can sew by hand 1 dress a month which makes you $1,000/mo, it’s a nice dress, and if your expenses are $900/dress, you’ll be able to buy a sewing machine($200) in 2 months to boost your production to 10 dresses a month. But if you have credit you can buy it now and make $12,000/yr minus ($200+interest) vs $10,000 if you bootstrapped your way there.

That $200 today is worth $1,800 to that seamstress.

It’s also the lifeline that lets people and businesses survive momentary gaps in revenue or otherwise fatal surprise expenses.

Take 2 yam farmers, one with credit we’ll call them Brock and one without we’ll call them Dan both plant their tubers and suddenly a drought hits. Brock has the credit to buy a water delivery to ensure his tubers grow healthily but Dan’s end up shriveled. At the end of the growing season Brock will have made enough to plant again, and yet Dan will have lost his farm.

Credit has the potential to be positive sum benefitting both borrower and lender because capital is not strictly fungible. A dollar is valued differently depending on who is holding it.

Yet, in traditional finance, unless you work for a lending desk at a bank, you have no control over who gets access to credit, even if that credit is sourced from your deposits. And increasingly such decisions aren’t even up to the banker and are instead being determined by a black box algorithm.

Resulting in credit systems that are often discriminatory, and incentivize credit behaviors that are most profitable to the bank not the borrower.

And that’s in locales with functioning financial systems.

Enter the Union Protocol

The Union Protocol is a credit network that enables any address to accumulate a credit line on-chain in a permission-less, crypto-native way. The protocol itself is not an underwriter of risk, rather a mechanism to lower the cost of coordinating trust into available credit.

Union enables any address on Ethereum to vouch for (re: underwrite) another address. Giving people, DAOs, and smart contracts the ability to accumulate lines of credit backed by their decentralized web of trust. And it allows those same groups to underwrite credit based on the trust models, assets, or parameters of their choice.

It is neutral as to why an address will vouch for another address, and makes no warranties to a specific address’s trustworthiness.

Cool Use Cases

Union is a primitive not a specific product. The products that will be made possible with Union are what you’d traditionally associate with credit. Things like Credit Unions, Credit Lines, Installment loans, Venture debt.

There are lots of types of credit relationships that could be defined in Union:

  • 1 → 1: This is a lot of overhead for the use case of a single person lending a friend $20, but that inital overhead pays off if you plan on borrowing more than once.
  • Many → 1: Groups working together: 3 people vouching $100 for a 4th, gives the 4th access to $300.
  • 1 → Many: An underwriting contract vouching for all members of a DAO
  • Many -> Many: Multiple DAOs all lending to each other

But, what does this do that wasn’t previously possible?

Great question Rhetorical Device!

  1. Creates efficiency. 1 Dai can be vouching for multiple accounts and contracts.
  2. Allows you to bring real world trust on-chain while retaining pseudonymity.
  3. A whole market of new businesses in between 0%-150% LTV products.
  4. Smart Contracts/DAOs get credit lines.
  5. Invest by extending Credit.
  6. There’s additional UX mechanisms and experiences you can create to incentivize vouching for different behaviors ie vouch for charity (microfinance), or invest in a dao by vouching (instead of a deposit).

We also think this is a transformatively good thing because it allows those without significant assets but solid reputations access to DeFi.

Note: It’s important to keep in mind Union does not make extending credit to people you don’t know and trust magically less risky. If you trust an untrustworthy person, you will lose your money. Union does not solve the inherent risks of being human.

Version.1 Design Considerations

Our goal with this first version (Union.v1) is to prove that a credit network is able to scale while retaining all the properties of decentralized finance(DeFi), and that such a system benefits from network effects. Improving as it grows.

There are a few bits of weirdness that do exist in normal credit markets but are usually obfuscated, such as how a bank doesn’t have $1 for every $1 in available credit it gives out. We made the choice rather than obfuscate, to specifically educate users about these quirks.

We kept the rate universal, and users determine risk based on the amount they believe is “risk-free”. This is both easier for users to reason about, and any loss of capital efficiency is more than made up in gas efficiency.

We deployed first to Ethereum-L1 because it’s the most secure EVM chain, and for the moment it’s where DAOs live. We went with DAI as the first underlying asset because it has demand, liquidity, and decentralized governance.

That said, the contracts do have the ability, if the DAO decides it, to expand into other currencies, and to deploy to other chains/rollups.

Progress to date & Next Steps

It’s been a long road to get here.

  1. Many limited run real money experiments
  2. Economic Modeling and Simulation with Gauntlet
  3. Demo-Net on Polygon : Dune Dashboard for the curious.
  4. CodeArena Audit
  5. Deployed v1 to Ethereum-L1.
  6. Deployed UNION Governance (more on this to come, but beware there is no UNION token that can be bought, it can only be earned!).

Now that we’re on MainNet we’ve entered the “Launch Period”. The goal during this period is to scale risk responsibly. The main forms of risk are:

  • Credit Risk — It’s not enough to have $100M in loans from a single whale, we need people and programs borrowing for various uncorrelated reasons.
  • Contract Risk — The highest initial risk of contract hack to a protocol is at launch and when funds at risk grow beyond the least honest black-hats ethics.
  • User Risk — If everyone trusts untrustworthy people because they don’t understand the protocol, the protocol will be fine, but the users will not.
  • Governance Risk — governing and setting parameters for Union is a bit more complicated and a different enough type of protocol that it will take time for people to understand how to govern it.

So for Union to succeed we need your help to accomplish a few things in the months ahead, that we can not accomplish without you.

  1. Strengthen the codebase: while it’s tested, has been thoroughly reviewed, and audited. It is still very much alpha software, and there are likely both unforeseen bugs and improvements that will only surface once more people have a deeper understanding of the protocol.
  2. Establish a community of Builders: There are thousands of potential credit products, interfaces, integrations, underwriters, and experiences that can leverage the Union protocol.
  3. Progressive Decentralization: During the launch period there are admin powers behind a 3-of-5 multi-sig in the event of an immediate bug-fix, as well as a 1-of-6 pause-gaurdian which can pause any of the upgradeable contracts. We will need to grow the community and get as much voting power in the hands of a diverse group of responsible governors. If you like data driven decision making, you’re the kind of delegate we’re looking for.
  4. Diversify credit risk: For Union to be a successful and functioning global credit network it needs people borrowing for different reasons, in different geographies, backed by a diverse sets of underwriters.

If you made it this far and would like to get involved in helping Union with any of the above, we’d love to have you. Even if you’re new to DeFi, Web3, or Finance, the fun part about joining a newly deployed primitive is no one has experience yet, we’re all learning!

Join us in Discord, introduce yourself, and ask us anything.

Helpful links:

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