Other than being a Trustless Decentralized TX Scheduling Network, we experiment with trustless technology everyday to attract more users and to find the best way to serve them.

Research and development is an important part in our day to day activities to discover potential problems to solve. Our PoC blog articles talk about our exciting developments, what we discovered while working on them and we encourage everyone to test and hack on our tools even if they don’t end up being on the mainnet.

Introduction: ChronoLogic & Debt

When we started building the ChronoLogic smart contract, one of our top priorities was implementation into real life use cases. We built out the framework for a crowdsale smart contract & to govern the DAY token.

The best use case for the smart contract technology was loans and debt.

The question we’ve always been searching for an answer for is if we enable this technology to launch smart contracts for loans, who’s actually going to use it? Who is going to borrow crypto & exactly for what?

Ether Denominated Loans

Let’s look at a loan denominated in Ether.

When taking out a loan, the borrower is looking to borrow an asset which will then be used and some sort of return will occur that makes sense for the borrower to borrow although there is slightly higher risk.

For example, a borrower might borrow $250,000 to buy a house. Houses in the US are priced in USD so it makes sense to denominate that loan in USD otherwise it exposes the borrower to additional currency risk. For example, if the borrower borrows EUR250,000, then converts it into USD & then buys the house, he is de facto taking two positions where:

a) he’s thinking the property will generate a higher return than any interest he has to pay and

b) that the EUR relative to USD will either stay to same or the EUR will become weaker.

So why would anyone want to borrow a crypto such as Ether or the DAY token?

When I first asked that question, I thought to myself, there are no assets denominated in a crypto currency that can earn a rate of return such as in the above example where you borrow USD to acquire a property as an investment. You’re not going to buy a house for Ether (you can use Ether but the seller would most likely still convert immediately to fiat) & the value of that property will never be based on the price of Ether.

Enter ICOs — The #1 Ethereum Use Case

But then I realized that that statement is not completely true and we have to look at why the price of Ether is where it is today. Many people believe that it is because of the future of Ether, the potential of smart contracts & other factors but if you really look at the biggest driving factor is the ICO boom & speculation.

As ICOs gained popularity and many were denominated in ETH, the price of ETH naturally also went up because participants had to acquire ETH as well. And ICOs became popular because participants wanted to earn an outsized rate of return and arguably it is the most practical and number 1 use case of the Ethereum blockchain.

So let’s ask the question, why would anyone want to borrow Ether?

I think you see where this is going. If you believe that you’re going to let’s say get a 50% rate of return on an ICO which does happen, you wouldn’t mind borrowing even at a 10% monthly interest rate.

In fact, this even applied to me. A few weeks ago, although I had the assets, I had a short term liquidity challenge so I borrowed for 30 days at around that interest rate in order to participate in an ICO. The problem was I had to borrow in fiat and then change that money into ETH to participate in the ICO. When the price of ETH went down from around $300 to around $200 after the China ICO ban I wasn’t too happy since I was down 33% before I even participated in the ICO. Luckily the ICO returned around 400% and the price of ETH went back up before liquidating it to repay the loan but still you can see the problem in this situation and I would have definitely preferred to borrow in ETH than in fiat.

Trustless Peer-to-Peer Crypto Lending

The second challenge is, if it’s going to be truly crypto, it needs to be trustless. How do you borrow let’s say Ether and give the lender some sort of guarantee that the borrower will return the ETH especially since if it’s truly crypto there won’t be KYC or any other recourse.

When I was participating in the above ICO I realized that I had a portfolio of certain tokens that I did not want to liquidate hence why I took the loan rather than selling those tokens. That brought me to the realization that many people actually have ERC20 tokens and other cryptos that they own in their portfolio, might want to borrow let’s say ETH to invest in an ICO & would probably be ok with securitizing the loan by their alt coin portfolio to in essence leverage up their ICO investments.

Because of the current state of blockchain technologies where atomic swaps are not yet possible & there aren’t future contracts to be able to hedge risks effectively, the simplest form of the above is to do it on the ethereum blockchain.

Borrowers borrow Ether & securitize it via various ERC20 tokens. At ChronoLogic we’re working on the technology that will allow anyone to launch these smart contracts and effectively become a lender with payment to use ChronoLogic’s solution in DAY. The first token to securitize with would be the DAY token for the ChronoLogic community.

It is our prediction that most of these loans will be short-term around 30 days and interest rates will be quite high even in the range of 5–10% per month but we’ll let the market set these once people can launch them. LTVs will probably be around 150% to 200% because of the volatility of these cryptos.

The way that it will work is relatively straightforward. When launching a debt smart contract, the borrower will set the parameters which will include:

1) Interest rate

2) Duration

3) LTV (what level of collateral is required)

4) Whitelisted ERC20 tokens acceptable as collateral (for example the DAY token)

Once those are set, the smart contract can be deployed at which point the lender will send ETH to the smart contract address. Once sent, anyone looking to borrow will send a whitelisted ERC20 token to the smart contract address and based on the LTV the ETH or a portion of the ETH will be released to the borrower. Let’s say the smart contract address has 100 ETH and the LTV is 200%. If a borrower only sends 60 ETH worth of whitelisted ERC20 tokens to the smart contract address then only 30 ETH would be released to the borrower.

Although the use of funds can be anything, we believe that this will most likely be used for ICOs. How can we scale this peer to peer lending for other use cases where it makes sense?

Fees

Any fees that would be payable will be solely in DAY tokens. We see two types of fees possible. One in the case where there is an exchange that is being serviced that brings together borrowers & lenders. The other in the case where bigger corporations will want to use these debt contracts & pay ChronoLogic in DAY tokens to create a debt instrument for them.

Oracalized Service for Crypto Pricing Data

One of the challenges is receiving reliable pricing data to be able to price the collateral. For this there will need to be an oracalized service. Before this occurs the first iteration will be where these debt smart contracts will have no margin calls thus there will be greater risk for the lender as they will not become liquid until the end of the term.

For example, someone borrows 1 ETH for 30 days and collaterizes it with 30DAY tokens. If the price of DAY in relation to ETH falls to a point where the 30 DAY tokens are worth less than 1 ETH this would not unlock the DAY tokens so the lender can liquidate them during the term of the smart contract. The DAY tokens will only be liquid at the end of the 30 days. This additional risk to the lender will also mean that interest rates will be higher in the beginning and will most likely force lenders to require higher LTVs.

Atomic Swaps

Once technology advances where atomic swaps will be implemented and cross chain transactions will be possible, life will become simpler. That will open the door so cryptos such as tether pegged to USD and other fiat currencies can be used to actually borrow something pegged to fiat backed by crypto — completely trustless.

If a borrower wants to borrow the same $250,000 for a property and they have $400,000 worth of Bitcoin or Ether. A smart contract will be deployed where the lender will send $250,000 of tether to it and the borrower will send the Bitcoin, Ether or other crypto collateral to the smart contract to release the funds to be used for whatever the borrower wishes. Completely trustless. No complicated underwriting and collateral that is more liquid than anything such as real estate.

Tokenized Assets

The next phase will be once more and more start becoming tokenized. For example, eventually assets such as the ownership of real estate will be tokenized opening the doors to even more possibilities where collateral such as real estate can be used for collateral for these crypto debt transactions.

For example, real estate in the future will change. Rather than a deed or other legal papers that signify your ownership of that property, the owner will have tokens where the specifics of that deed will be governed by the features of that token.

That opens up the door to make assets that are traditionally complex from a legal perspective and have limited liquidity be tradeable on secondary markets through blockchain technologies.

Risks

The biggest risk is the volatility of the collateral. There are certain ways to protect against that. One option is to have a margin call meaning there needs to be a certain LTV that is kept. Let’s say that the normal LTV is 200%. If the collateral were to decrease in value where the LTV would hit let’s say 110% then the smart contract would automatically release the collateral to the lender and allow the lender to liquidate it as he wishes unless the borrower funded the smart contract with more collateral. This could be done via automatically trading out & liquidating the collateral or via a certain time frame of let’s say 24 hours after which the collateral is released. The 24 hour timeframe would protect against flash crashes and temporary intraday market volatility so that the borrower’s collateral isn’t automatically liquidated.

Since everything is trustless the borrower would have to monitor all of this themselves. However, this will only be possible per the discussion above once oracalized services can feed reliable pricing data to the smart contract that both parties trust.

Conclusion

The first iteration that we have kick started and for which ChronoLogic technology is perfect will involve ETH loans collaterized by DAY tokens. The technology that was launched during the crowdsale will be in use where instead of ChronoPower, the smart contract will have an interest rate and instead of a ChronoEra the smart contract will have a fixed term.

Blockchain technologies are revolutionizing financial markets. The above framework is something that the community will build on, advance and add additional ideas to make the debt markets peer to peer, trustless & completely on the blockchain. The future of debt & loans is on the blockchain.