We wanted to be able to be more descriptive about our idea, so we wrote a short paper that explores the details. Please read it if you have time.: https://drive.google.com/file/d/1YiwlB8AmH6hUL06Ici8tPUzjkD4MHdga/view?usp=sharing
High Level Overview XOR Open Loan is a novel open source and completely decentralized system that makes loan contracts that are low cost for borrowers, high return for lenders, and contain end-to-end transparency and immutability on the blockchain. XOR Open Loan removes the middleman by allowing lenders to vet borrowers themselves with a trust system.In addition, because lenders are themselves incentivized to make a maximum return on investment, they are incentivized to make the fee-to-interest ratio on the loan as low as possible. This creates a situation where both parties get the best possible deal. The XOR Open Loan system records all loan contracts on a public ledger on the blockchain. This means that all contracts are guaranteed to be transparent. A transparent open source loan contract allows for the possibility of infinite numbers of derivative markets based on those debt obligations that can be created by anyone with internet access. Thus, we can enable access to credit, leverage, and market-making to the whole world, and the possibilities are endless.
Technical Specifications We used a backend with node.js, a frontend with React, and blockchain code on Solidity. We also used Dharma's API js plugin and Dharma base level contracts.
Using React, we created a simple UI where one can access the mock debt obligation market. The UI interfaces with the Solidity code and the Dharma contracts to form a small POC simulation. We spent a huge amount of time trying to work through Dharma, so we were unable to fully interface Solidity with the UI directly. However, we progressed greatly with Dharma and filled out the logical functionality of the loan paradigm.
Programming aside, the real technical challenge was in coming up with intelligent mechanisms to produce optimality in our system. The choices in the governance of funds are immutable once they are uploaded, so we took care to make them relatively foolproof. In addition, we were careful to avoid any sort of central authority. We made the loan underwriters the loaners themselves so as to avoid a third party with a conflict of interest.
Examples A debt contract is the most basic asset class. Everything can be modeled as a series of debt obligations. This is perhaps the most interesting use case for XOR Open Loan. An opensourced, trustable, incentivized fair system for a debt contract allows for derivative assets to be modeled based on the debt contract as the underlying asset. We provide a few examples of common asset classes that can be modeled with XOR Open Loan.
XOR Credit Default Swaps When a lender assigns a valuation in XOR Open Loan, he is essentially buying a Credit Default Swap, but with the insurance provider being the collective pool of lenders. This provides a huge opportunity for accurately priced, essentially no-fee, credit default swap contracts. These insurance purchases can then be chained as underlying assets.
XOR Collateral Debt Obligations An XOR Open Loan Collateral Debt Obligation would also be an incredibly impactful event in finance. The tranches of the CDO can be comprised of loans of different risk tiers. Senior tranches could receive the first payments as the tranches descend to high risk borrowing customers.
XOR Synthetic CDOs More interesting is the potential for synthetic CDOs. A synthetic CDO is essentially a gamble on the performance of another CDO. These gambles can chain with increasing odds, leading to a massive amount of leverage in the market that otherwise didn't exist. Synthetic CDOs when used correctly are healthy for a market because they introduce liquidity and leverage. However, many synthetic CDOs have opaque underlying assets.
An XOR Open Loan synthetic CDO would be truly revolutionary because of the blockchain architecture. All tranches of the CDO would be fully viewable due to the public ledger of the blockchain recording every step of the creation of the CDO. Thus, XOR can enable a healthy and relatively safe form of CDO leverage and liquidity.
Creation of Random Markets An especially unique facet of XOR Open Loan is that it enables anyone to create any type of market. As explained previously, a debt obligation contract can be used to generally model a myriad of economic systems. Because of this, the XOR Open Loan system allows for the creation of markets by anyone within the framework of fairness, accessibility, and trustworthiness built-in. For example, one could create a sports betting market, or a market betting on the weather, or even some sort of crazy nth order synthetic CDO market where the underlying assets are cryptocurrencies pegged to weather patterns. As long as there are lenders and loaners, any market can exist through XOR Open Loan.
Problems and Future Additions In the timeframe of the hackathon, we were unable to complete everything necessary for the XOR Open Loan system to fully work. A big example is proof-of-identity. If a borrower does not have to prove identity, then that borrower can make x copies of himself and increase his leverage x-fold without actually deserving it. A proof-of-identity system is absolutely required to avoid this. A proof-of-identity implementation is well beyond the scope of one hackathon, but is still very much possible.
Another addition we would make is integration with 0x. A decentralized exchange is the perfect place to trade decentralized creative assets. Enabling seamless 0x integration would provide a strong incentive to use XOR Open Loan.
Democracy and Social Impact We believe that market making, trading, and financial asset synthesis should be available to anyone. In addition, we believe that these things greatly enable credit for those who could need it by creating leverage and allowing for loans. In many third world countries, a better life is bottlenecked because members of these countries do not have access to modern global economics and cannot be part of the system. However, XOR Open Loan's open source public architecture allows for anyone with internet to create their own wealth and markets. We think that this is a massively impactful technology that will lift many people out of poverty.