Published on: 2020-07-21T16:28:03+00:00
The email thread discusses a proposal for non-custodial coordination of small investors in lending money to businesses. The traditional banking system provides more than just custodial holding of funds, including matching long-term investments with short or variable term deposits and sophisticated risk analysis systems. The proposal suggests using features that allow for a non-custodial coordinator of multiple small investors who remain in control of their funds until transferred to the lendee.The coordinator takes on the risk of default, reducing the risk relative to a centralized custodial solution. Investors need to trust some bank in addition to trusting the businesses taking on loans to start/expand their business, but this proposal removes the necessity for custodial holding of funds. Prior to investors signing the loan-out transaction, they prepare a loan-payback transaction, which is signed with a SIGHASH_ANYPREVOUT signature. If the business is actually able to pay back its loan, the coordinator is never in custodial possession of funds. Investors may prefer to spread their risk by investing sub-sections of their savings into multiple different businesses, and each business can be given a loan-payback address controlled by the investors that extended their loans.The proposal also mentions collateralized loans, where a Cryptographic Relay would allow multiple small investors to act as the "loan shark" in the example. Ownership remains controlled by individual investors, eliminating any custodial issues. However, coordinating the sale of collateral amongst multiple small investors in case of default may be harder. An additional service may be willing to pre-allocate Bitcoin funds into a timelocked contract, earning by arbitraging time preference.Overall, the idea removes the necessity for custodial holding of funds, in the way traditional banks do. In a capitalist economic system, lending money is allowed as long as both parties agree upon the conditions of the loan. However, as the required capital to create new businesses or expand existing ones has grown much larger than most single individuals can invest in, coordinators that aggregate the savings of multiple individuals and lend them out for interest have arisen. These coordinators are traditionally called banks.However, this typically involves delegating the work of judging whether a business proposal is likely to give a return on investment to the coordinator itself, adding the risk of custodial default to small-time investors in addition to loan default. This write-up proposes the use of non-custodial coordinators of multiple small investors to reduce the risk relative to a centralized custodial solution. The coordinator need only find a sufficiently large set of entities that are willing to indicate their Bitcoin UTXOs as being earmarked for investment in a particular business.The coordinator for its services may extract a fee from the loan-payback transaction that all investors can agree to. Thus, it takes on the risk of default by the business, which seems appropriate if it also serves as a basic filter against bad business investments. By working in Bitcoin, it cannot have a lender of last resort, and thus must evaluate possible business investments as accurately as possible (as default risks its fee earnings).The investors would prefer to spread their risk by investing sub-sections of their savings into multiple different businesses. This gives somewhat lower expected returns but gives some protection against complete loss, allowing individual investors to adjust their risk exposure and their desired expected returns. The batch transaction that aggregates the allocated UTXOs of the investors can pay out to multiple borrowing businesses. And each business can be given a loan-payback address, which is controlled by the investors that extended their loans. Investors generate an aggregate loan-payback transaction and signature for each business they invest in.As observed in https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2020-July/018053.html, a Cryptographic Relay would allow collateralized loans. Nothing prevents the "loan shark" in the collateralized loan example from being a MuSig of multiple small investors. Practically, a coordinator would help facilitate construction of the necessary transactions and interaction with the loanee. An additional service may be willing to pre-allocate Bitcoin funds into a timelocked contract.In case of default, the investors would prefer to recoup their financial losses quickly, while the service is now in possession of the collateral that it can resell later at a higher rate. Note that these are all operations that traditional banks perform. This idea simply removes the necessity for custodial holding of funds, in the way traditional banks do.
Updated on: 2023-08-02T02:31:53.579200+00:00