Uncollateralized crypto loans

[IMPACT] Please describe your proposed solution.

Uncollateralized loans - general overview

Overcollateralized crypto lending is enjoying high popularity and the TVL on the biggest lending

platform Aave peaked at almost $19b in 2021. But to tap into the worldwide

credit industry (worth some $11 trillion) and make crypto loans available to

the vast majority of the world, several pioneers already successfully launched

uncollateralized crypto loan platforms.

Uncollateralized loan platforms usually engage in B2B loans with the opportunity for retail

investors to participate on the borrowing side. The borrowers are usually

creditworthy businesses with proven business cases that use the funds to fuel

their business operations (imagine a micro-lending company in emerging markets

like South America or Africa lending small amounts of money for high-interest

rates to end-users through mobile phones; or a crypto high-frequency trading

market maker company with a delta neutral strategy). 

The mechanics of uncollateralized lending protocols differ but the high-level

business architecture is similar. There are usually several actors involved in

a lending process. A loan broker is somebody who finds the borrower, does the

due diligence, sets the loan term and eventually signs a loan agreement with the

borrower. The borrower should have a good cash flow and balance sheet. 

After the deal is initiated by a loan broker, Backers come in to check the quality of the

deal. If they find the deal appealing and the risk involved is appropriate,

compared to the loan terms, they will back the deal by providing initial

funding. In return, they will receive a junior tranche of the loan - this tranche

is always liquidated first if a loan default occurs. The Backers are usually

professionals who can assess the deal risk and who are willing to take the most

risk. In return, they receive increased yield from the loan. 

After the deal was vetted and partially funded by Backers, the rest of the loan will be

funded from a crowdfunded Senior liquidity pool to which any retail Investor

can contribute. The Investors have the highest protection because their tranche in

the loan is considered Senior - that means that they are the first to receive

the interest rate repayments and any principal repayments from the loan. If the

loan defaults, any proceeds are first paid to Senior tranche holders (Junior

tranche claims are repaid only after the Senior tranche was fully repaid).

Funds from a Senior pool are usually automatically allocated to loans after

the loan has enough backer support in some leverage ratio (usually 20:80 Junior:

Senior). Therefore, the Senior pool risk is dispersed among many deals and no

day-to-day management is needed from the retail investors while having better

protection than the Junior pool.

There are usually some lock-ups on investments in order to achieve good cash-flow and

cash-reserve management. Platforms usually work as DAOs and DAO members have the

right to change the business mechanics of the protocol. A reputation system

should be in place to improve the decision (and approval) rights of vetted and

reliable actors on the platform.

[IMPACT] Please describe how your proposed solution will address the Challenge that you have submitted it in.

Our business mechanics proposal

The whole process will be run on smart contracts. The platform should be a technical

solution provider, not a financial solution provider (due to regulatory issues). Therefore,

we need to attract platform actors that are regulated and have the

license to offer financial services. This way, they can act as loan underwriters (we name

them Fund Delegates) and actors who possess funds and have business and

financial services knowledge, so they can act as Backers (and provide

additional due diligence on the deals).

Fund Delegates can create Lending Funds. Based on the Fund Delegates' background,

each Lending Fund can have a different investment thesis. Some funds can offer

loans to fintech SMEs in emerging markets, others can offer loans to crypto

market makers, yet another fund can be funding operations of Asian neo-banks or

fund expansion of African telecommunication operators. Fund Delegates can set

attributes of the Lending Fund such as minimum and maximum loan term, minimum

and maximum loan size, capital needed for the pool, interest rate range, Fund

Delegate interest rate commission, the ratio for distribution of yield between

Senior and Junior pool, late payment fees, etc. 

After the Lending Fund is created, it should start attracting funding from retail

investors. The average retail investor will be investing in the Senior Pool of the

fund. Professional and educated investors, who will be verified and confirmed

by the DAO can invest in the Junior pool of the fund. The senior pool has the repayment

preference before the Junior pool but the Junior pool will earn more yield from each

loan. Usually, the ratio between the Junior and Senior pools should be 20:80.

Delegates should contribute to the Junior pool to have more skin in the game. 

Once the Fund attracted enough funding from investors, Fund Delegate can bring in

Borrowers and deals (loans). Each Borrower should be carefully reviewed by the

Delegate and proper due diligence and risk assessment should be done. 

Once

Delegate and Borrower come to an agreement and create the Loan on the protocol,

Backers come in to back the deal. As their money is first at stake in any

deal, they are encouraged (and possibly also incentivized) to do additional due

diligence on the deal and they can vote on the deal approval. Their vote is

weighted by the share of the senior pool they have. Once the voting is done and

the deal is accepted, it will be funded from the Senior and Junior pool

according to the leverage rate of the Fund.

At a later stage, we would like to also introduce the role of Auditors. Anyone can become

Auditor after paying down a certain amount of government tokens as collateral.

For each loan, there will be a group of Auditors randomly selected from the

pool of all Auditors. These auditors will independently review the deal and do

additional due diligence and collection of documentation mainly for the purpose

of supporting Backers decision-making process (expectation is that Backers are

high net worth individuals who don’t want to do tasks like “call Borrowers CEO

and verify his identity”, “confirm Borrowers business address on Google street

view” or “review contract if it contains key terms”. If the Auditor will do a

good job they will be rewarded, if they do a bad job their collateral may be

slashed. 

There are several revenue-generating fees to be collected and distributed to the actors

of the platform. Some activities may be initially incentivized with governance

token issuance. The fees will be mainly distributed between the Senior pool, Junior

pool, Fund Delegate and a portion of the fees will go to the project treasury to fund

platform operations. 

·      

Loan Interest

·      

Underwriting Fee

·      

Late Interest and Principal Repayment Fee

·      

Loan Early Repayments

In case of default of the loan, Fund Delegate will be responsible for Debt Collection.

They are obliged to take legal action if necessary. In any case, if the default

has a negative impact on the Junior pool and the Senior: Junior pools required

ration is not satisfied, Fund Delegate needs to find additional Backers to add

funds to the Junior pool in order to continue issuance of new loans.

Each Fund Delegate and each new Fund need to be approved by the DAO. The process for

acquiring Backer and Borrower role will be less complicated but extensive

KYC/KYB procedure will be needed, to protect protocol from Sybil attacks and

remain fraud resistant.

At later stage we may create a Omni Senior Pool that will be distributing funds to

individual Fund Senior Pools based on metrics and performance of the Funds.

This Omni Pool will provide maximum diversification for the investors.

[IMPACT] What are the main risks that could prevent you from delivering the project successfully and please explain how you will mitigate each risk?

Talent retention: A complex lending platform requires top-quality smart contracts. We are blessed to have 20 amazing developers but during such a project, some could find different priorities.

In case, some would want to move, we have Vacuumlabs our holding company which has over 300 talented developers, PMs, designers, and data scientists to help us fill the void.

Backers: Backers play a critical role in the ecosystem. They are the ones who create the deals and process them with due diligence. To ensure we have the right backers, we are partnering with Wincent a leading crypto market maker with is $3B+ daily volume and 300K+ daily transactions

Senior pool ratio: One of the main functions of this platform is to allow normal users to have the possibility to lend at institutional rates to good projects, as banks do in the real world. By partnering with Wincent we are getting the right backers, but the senior pool could be slower to onboard. The main value we need to work on is “Trust” and this is why the platform is implementing processes to ensure due diligence is done at the highest possible standard.

[FEASIBILITY] Please provide a detailed plan, including timeline and key milestones for delivering your proposal.

Project Phases

Phase 1 (Funded from this Catalyst Proposal – 8 month)

On-chain pool, investment and loan management,

Loan lifecycle management - approval process interest payments, loan (early) repayments, collaterals, liquidations (default), underwriting, fund distribution

Onchain backers' loan assessment

On-chain identities

Basic GovernanceToken incentivization

Phase 2 (Future VC funding)

Advanced GT incentivization and ecosystem 

Partial on-chain governance

Auditors

More customization for pools and loans (single borrower pools, change senior: junior

ratio, automated junior pool distribution without backers' approval, etc)

Rewards system for referring a Borrower

Reputation system

Phase 3 (Future VC funding)

On-chain governance

Fully decentralized fund delegates, pools, backers and loan approvals

Even more customization for pools and loans

Omni pool

[FEASIBILITY] Please provide a detailed budget breakdown.

Phase 1 breakdown

Duration 8 months

Cost per month (145k):

Project Executive Manager - 10k

Marketing Manager - 5k

Product Manager - 5k

CFO - 10k

CTO - 10k

Compliance Officer - 10k

FE Lead Engineer - 15k

BE Lead Engineer - 15k

Full Stack Engineer - 10k

Full Stack Engineer - 10k

Full Stack Engineer - 10k

SC Lead Engineer - 15k

SC Engineer - 10k

UX/UI Designer - 5k

CSS FE Engineer - 5k

TOTAL FOR 8 MONTHS: 1,160,000 USD

Additional costs:

Smart contract audit - 150k USD

Corporate structure setup and legal advisory - 160k USD

[FEASIBILITY] Please provide details of the people who will work on the project.

Advisory and founding team:a we will define the execution team once the project will be funded.

Michal Petro - CEO NuFI and AdaLite founder

Rafael Korbas – CTO NuFi

Miro Skovajsa - COO Vacuumlabs

Marian Hornak – CTO Vacuumlabs

Samuel Hapak - CEO Wincent

Tomas Kulich - CTO Wincent

Roman Basar - Fund Operations Wincent

Fabricio Mercier - Head Of New Business Wincent

Marek Krizka – CEO Sparring (law firm)

[FEASIBILITY] If you are funded, will you return to Catalyst in a later round for further funding? Please explain why / why not.

No; for phases 2 and 3 we would like to raise funding from VCs. Allowing other impactful projects on Cardano to be funded by the catalyst.

[FEASIBILITY] Are you or any member of your team working on any other proposals in this Fund9?

[FEASIBILITY] Are you or your team working on any other proposals from previous Funds?

[AUDITABILITY] Please describe what you will measure to track your project's progress, and how will you measure these?

• Total $ in loans
• Number of loans
• % of successful loans (granted and paid back)
• Website traffic
• Number of borrowers 
• Number of backers
• Number of auditors

[AUDITABILITY] What does success for this project look like?

1 year after we build our MVP, the platform would facilitate loans to smart companies for over 100 Million USD in a ratio 1:4 (backers pool: senior pool)

[AUDITABILITY] Please provide information on whether this proposal is a continuation of a previously funded project in Catalyst or an entirely new one.

Entirely new proposal