TL;DR: Anonymous Bitcoin Cash developer imaginary_username (imaginary) recently outlined what he’s calling Trustless Token Collateralized Loans (TTCL). Still very much in draft form and a thought experiment, nevertheless TTCLs are possible on Bitcoin Cash due to Op_CheckDataSig being brought back to the network. It proposes taking a legacy lending concept and mapping it onto the SLP token protocol. It’s a compelling, interesting idea, and we caught up with imaginary to ask about its implications.

Trustless Token Collateralized Loans

Modern economies are all but dependent upon credit, loans, access to capital. It’s the lifeblood of what greases investment, savings. It’s also the domain of a lot of plundering, malinvestment due to government intervention, and gaming in the worst sense. Thinking about how Bitcoin addresses the issue of loans and credit has bedeviled the ecosystem’s best thinkers.

To be clear, imaginary_username doesn’t claim to have solved the riddle. But he has come up with some novel approaches to use a tech nearly exclusive to Bitcoin Cash thanks to the reinstatement of Op_CheckDataSig and, in particular, SLP tokens. Trustless Token Collateralized Bitcoin Cash Loans he admits “is a crude description of the idea, and should not be taken as a complete draft description nor a specification ready to be implemented,” and borrows heavily from the work of Karol Trzeszczkowski and his “excellent Last Will and Mecenas contracts.”

A collateralized loan has a long and storied history as a debt instrument. “Generally speaking,” imaginary explained, it “involves a borrower putting up a valuable, less liquid, less fungible asset to borrow a more liquid, more fungible asset that is easier to use in commerce.” Mortgages are a prime example. A home and its value is placed against a smaller cash loan, and the lender makes back the principal plus interest for the risk and trouble. The borrower can use the liquidity now, pay off the loan in chunks, and ultimately gets to keep her home if all goes well. Genius really.

“In Bitcoin Cash,” he continues, “it is possible to construct smart contract loans collateralized by SimpleLedger (SLP) tokens representing illiquid or less fungible assets, and borrow Bitcoin Cash, which is by far the most liquid and widely accepted asset on the BCH chain. These contracts will retain the basic characteristics of traditional loans, with some key differences.” Any two parties can enter into such arrangements without the usual banking and law enforcement hurdles. “Enforcement of these contracts is via Bitcoin Script and can be executed by anyone, whether the participating parties or service provider, with no risk of theft.”

Interview with imaginary_username

CoinSpice: Tell us a little about your background. Why do you remain anon?

imaginary_username: I’ve paid attention to Bitcoin since late 2013 but only started getting involved in 2014; did some physical trades (out there, in cash, in person), participated as one of many in the scaling debates on Reddit, but only got to helping development and organization efforts since Bitcoin Cash.

Remaining anon partly for convenience. I don’t like the prospects of being harassed for my Bitcoin activities – as well as a desire to have people judge my opinion by themselves instead of the person. Anonymity is great for this purpose; for a non-anonymous person, people can form a judgment from your mug or bio even before they read a single word.

What prompted you to consider the Trustless Token Collateralized Bitcoin Cash Loans (TTCBCL)?

I was previously involved in bringing up and discussing the SLP token “vending machine” idea for DEXs [(decentralized exchanges)]. Having given quite a bit of thought to how SLP tokens and BCH can do neat things together, the loan is a natural extension.

Any lessons from lending, loan services like SALT?

Use case, use case, use case. I’ve dabbled in much earlier bitcoin loan platforms (Bitlendingclub and BTCjam), only to watch them fail to gain traction in any legit use cases and ultimately crumble when overrun by fraudsters. A new generation of collateralized loan services seem to be focusing on leveraged trade, which is reasonable direction to be heading; but I still wish people pay a lot more attention to questions like “who can we target,” “why do they want us,” and “is this going to work given the market, or will something else take over.”

So the lender would create a token, an SLP token?

No, the lender lends BCH to the borrower, who post collateral in the form of an SLP token he owns. The token has to already have value agreeable by both sides for this to work.

How would, then, the TTCBCL be similar to traditional loans?

It’s similar in that you need collateral valued above your loan amount, and that failure to repay results in asset forfeiture.

How would the TTCBCL be different from traditional loans?

Return of asset at repayment as well as default enforcement are both performed by the blockchain – no trusted third party is needed to ensure the loan terms are adhered to.

Any danger here of attracting the eyes of legacy regulators?

If it gets widely adopted, no doubt regulators will pay attention as they do everything else. However, since these loans are decentralized and can be constructed ad hoc, regulators will find that they have limited sway over them.

Maybe a snappier title would be BCH Pawn?

Indeed, it depends on which use case you focus on. 🙂

Such TTCBCL arrangements would not have been possible a year ago on BCH, right?

Yup, since it requires covenant scripts, it wasn’t possible before Op_CheckDataSig.

If the TTCBCL idea would take-off and gain traction today, what kind of loans in terms of amount size would be possible?

The amount is only constrained by the value of assets people tokenize and post as collateral.

Does the entire TTCBCL scheme depend on BCH retaining viability? If so, how does BCH spot volatility impact TTCBCL?

To a certain extent it does, as it does on having valuable SLP assets worth borrowing against in the first place.

Especially for the latter, I don’t think we’re there yet, which is part of the reason I posted this piece is to encourage asset tokenization and more projects based on SLP and SLP-NFT (non-fungible tokens, a form of SLP token especially suited for this purpose).

BCH volatility impacts this scheme in the form of permissible collateral levels; if BCH is perceived to be more volatile in either direction, lenders are likely to be less willing to lend close to full amounts for the assets. In other words, an asset may fetch 70% if BCH’s price and asset prices are perceived to be stable, but may only fetch 20% or less for the same period if prices of either or both are perceived to be very volatile.

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