Bitsquare Lending Facility

Trading
1

I would like to offer up a proposal for a new lending feature to the Bitsquare platform. I think that this feature would enrich the Bitsquare platform as it would have the following value proposition:

  • Allow users to earn income by lending crypto-currency
  • Allow traders to profit through short selling
  • Increase revenue for the Bitsquare platform

Basically lenders would offer loans of crypto-currency to Bitsquare users. The lenders would need to own the crypto-currency that they lend out. Borrowers of crypto-currency would need to provide a Collateralized Debt Position (CDP) made up of bitcoin that would cover the balance of the crypto-currency borrowed, the interest fee for the loan, an arbitration security deposit. This CDP would be a 2-of-3 multi-signature bitcoin transaction with the keyholders consisting of:

  • borrower
  • lender
  • arbitrator

There would be a maker/taker fee (going to Bitsquare) for loan transactions.

The Bitsquare platform would provide a screen where loans are displayed. Users would be able to make loan offers by specifying:

  • the crypto-currency of the loan
  • the interest rate for the loan
  • the period of the loan

Users would also be able to make loan requests specifying the above parameters. Loans could be matched on a P2P basis.

This feature would provide Bitsquare users with a new revenue opportunity via lending, enable Bitsquare traders to profit via short selling, and increase revenue to the Bitsquare platform.

I would be willing to write a white paper describing such a lending feature in detail for review if there is any interest. Let me know if you think this feature would add value to the Bitsquare community.

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2

Hi dougbebber,

I would like to see something like this too. Look how I see this working:

Some important information: I’m from Brazil and here people can lend money with 13% annual interest rate (guaranteed = you know you will receive the money)

How I would like to use Bitsquare:

1- I will create an offer to borrow 10 bitcoins.
2- I will pay 5% of annual interest rate on the 10 bitcoins that I want to borrow
3- I will put 10 bitcoins + 5% of 10 bitcoins that is = 10,5 bitcoins, in a 2-of-3 multi-signature bitcoin transaction with the keyholders consisting of:
borrower = Me
lender
arbitrator
4- Someone take my offer and accept to lend me 10 bitcoins with 5% of annual interest rate.
5- So now the 2-of-3 multi-signature bitcoin transaction with the keyholders consisting of:
borrower: I deposit 10,5 bitcoins
lender: deposit 10 bitcoins
arbitrator: none
6- Arbitrator release the 10 bitcoins from lender to me.
7- After a period of 12 months I will have to repay the lender 10,5 bitcoins.
7.1 – Remember that in my case I would like to submit a loan request like what btcjam.com offer:
Linked loans means that you are effectively taking out a Bitcoin loan that is indexed with the market price of BTC in the date of the loan activation.
If the price of 1 BTC is $500 USD and you borrow 10 BTC for 180 days, you will owe $5,000 plus the interest, paid back over the 6 months, regardless of what the BTC price is. If the BTC price rises to $1,000 right after you activate your listing, you only owe 5 BTC, equivalent to the $5,000 plus the interest you selected.
This makes a lot of sense if your income is in fiat currency and you do not want to expose yourself to Bitcoin volatility. This rule applies to both borrowers and investors. Therefore, unless you are planning to buy mining hardware, we strongly recommend that you take a loan linked to an exchange rate. For example, CoinDeskUSD.

7.1.1 – So the 10,5 bitcoins only will be paid, If I choose to not pay in the terms of (Linked loans).

Sorry for the english. Do you understand? What do you think?

3

Hello Leo,

I’m thinking of the lending primarily from a margin trading use case where lenders would be offering loans in crypto-currencies (such as BTC, ETH, LSK, XMR, etc.) so that traders can perform short sales on the Bitsquare platform. I suppose, other uses for borrowed funds would be possible. However, I was not thinking of linking or indexing to any specific fiat currency. I was also thinking that the lending would be P2P much like how trading is done on Bitsquare today, and that the arbitrator would be involved only when there is a problem or dispute.

For example, If I were to lend ETH, I would expect interest payment in units of ETH. If I were to lend XMR, I would expect interest payment in XMR, if I lend BTC, I expect interest payment in BTC. I would not want to involve any fiat currency.

As a borrower,for example, if I thought ETH was heading down in price and I wanted to profit from that, I would borrow say 1000 ETH with the expectation of paying back 1000 ETH after the trade. On Bitsquare, I would sell 1000 ETH (receiving bitcoin), wait for the price to drop and then buy back 1000 ETH (with bitcoin), then repay the loan plus interest and get back my collateral (bitcoin).

Does that make sense? Your thoughts?

4

Hi dougbebber,

I have been thinking in similar terms and I think it will work and be popular. There are some other schemes possible also, similar to call options.

Alice wants to buy an option on btc and Bob wants to sell one.

i) Bob sets a future date, the strike date, the price, a premium and deposits btc into a 2of3 multisig and probably also deposits a security.
ii) Alice decides she likes the option and pays the premium which immediately goes to Bob. She then has the right, but not obligation, to buy the btc for the price until the strike date. As usual Bob has to confirm receipt of the payment.
If she does not buy the btc it goes back to Bob. It would be nice if this could be done automatically without arbiter. Maybe the new timedependent multisig transactions can be used.

Manfred is too occupied to implement this at this stage, but the thoughts do exist.

mepistol

5

I agree and yes, I realize Manfred is very busy (and he is doing a great job!). I’m reviewing the source code and learning the internals of Bitsquare so that I can try to help out. I’m an IT architect and used to develop code for a living, I also have many friends that are professional software developers and traders. I am always trying to get them interested in crypto-currencies and encouraged to participate in the Bitsquare project.

I just wanted to mention the lending feature and see what interest there is for such a feature. If there is interest maybe it could find its way on to the roadmap in the future.

Thanks for your feedback.

6

Hi dougbebber,

I would like to read a whitepaper, describing the lending, trading on the margin and derivatives that can be implemented in Bitsquare in a trustless way. I think there is a world of possibilities.
I don’t think these things can be avoided, there is just such a need to be able to hedge also in cryptoland. These are early days.

mepistol

7

@mepistol That is actually very close to the situation when a trader does not do the fiat payment because the price was moving in the other direction and he will lose more money with the changed price and if he continues the trade than if he loses the security desposit.
Actually it seems that I got the first cases in arbitration where people acting like that, specially ETH/ETC due the high volatility.
It is planned that we pay the security deposit in future to the other trader as compensation. And that sounds very much like that option model, right? Though I am not very familiar with all those financial instruments…
We can maybe even use a user (offerer) defined security deposit (in a certain range). Have not though about all that but might be reasonable to do.

1 Like
8

Yes, it is very close to the present situation, but the premium (deposit which goes to the btc-seller) and the end of the trade period should be defined by the btc-seller. The ability to lend without needing trust, as suggested by dougbebber is also important and widely used in normal stockmarkets for shortselling.

I have no idea if these instruments will be popular, but they might.

9

@dougbebber:
I appreciate a lot that you are diving into the code base. Hope it is somehow understandable, there is not much documentation and some parts would need probably a bit of extra info. We can have a chat any time you like so I can explain a few bits more in details. For the P2P network there is a doc out but it is outdated but might help to get a basic overview. Let me know if you want a link to it.

Thanks for your proposal and it reminds me on 2 future ideas which are loosely planned after we have all the basics in place (Synergetic cooperation, decentral. arbitration, automated altcoin trading, maybe CoinJoin).

Your idea sounds to me more in direction of a CFD (contract for difference) and that I was considering to offer the specultators/daytraders as alternative. They are not interested in holding Fiat or any currency but only want to bet on price movements. So for that use case CFD is much better suited than an actual currency exchange. I had not though deeper on the topic how to do it in details, but there will be probably ways. Micro payment channels, atomic cross chain transactions might be an alternative to the arbitrator based security model.

Regarding lending:
I had the idea to add a micro credit (only BTC) market to solve the problem for new users who don’t have any BTC and need to pay the securitys deposit and fees.
They could exchange their reputation against a small amount of BTC. That way we can use the benefits of repuation but keep Bitsquare exchange without it as it is never really safe. So if we separate it out and convert it to BTC which gets used in the exchange we get the benefits but avoid the problems or keep them firewalled in a sub system.

How does that work? It would be very simple:
Just a offerbook for lending offers. A lender can add an offer:
E.g. I lend 0.1 BTC for 1 week for 2% interest rate, I require that the borrower sends me min. 2 different social media accounts so I can rate the risk and check his repuation. The lender can require whatever he wants (real life ID verification, WOT,…). He takes 100% risk if the borrower does not pay back.
It is a simple deal between 2 persons who can interconnect and evaluate if the risk is worth the interest rate. The BTC transfer is a simple transaction as well as the payback tx.

Bitsquare only provides the communication platform (a chat like the one used in the arbitration) and credit offerbook (both sides) so lender and borrower can find each other. No MultiSig or whatever.
All the risk needs to be mitigated by the rating process done by the lender. If he get scammed he need do improve his repuation check. External reputation systems like Bitrated can be used as well.

I am not really sure if there is a market though for such a feature.
To check if there is a market I was considering to add a post in the forum where we can offer micro credits for new users who are in that problem situation of not having BTC. Then we can see if there is actually a market for that and if the scam rate is low enough so that it can work.
Fiat mircolending is for sure a market I am just not sure if there is one for BTC.
Though I might be very wrong here, hard to estimate…
If anybody want to work on that, I think it would be a relative easy task. It would be mostly UI work.

After reading again your first comment:
I think that this would be very close to the options model @mepistol was describing and it is in the same line I responded to @mepistol.
If so (I might be wrong have not though too much on it and need to get more familiar with those financial instruments) then I think that could be relatively easy implemented by giving the security deposit to the other trader and by allowing the user to define the trade period and height of the deposit. They can bet on price movements of any counter currency to BTC in a certain time period and with a certain amount. We could also add the option to settle the trade any time (like now) or to block it until the end of the time period. I think to simply hide the receivers BTC address might be enough, otherwise some time locking would be needed.

As said rough thoughts, but if you want to work on that you are welcome. I cannot contribute more soon as the other open issues have higher prio to me.
Of course if I misunderstood your idea please let me know.

10

I don’t see it as lending if you need to lock up the BTC to cover any possible losses. I see it as betting on the counter currencies future price.

11

@leo
I don’t understand the reason why to lend 10 BTC when I have to lock up 10 BTC for that period.
I understand that you can make profit when the price changes to your favor. But for such I would not use the term lending but betting or speculating.

12

Hi @ManfredKarrer,

My English is not good. The idea is borrow from people of countries that the interest rate is not as high as it is in my country. (The interest rate in Brazil is 14% annual) I can lend this money in Brazil and I’m sure I’ll receive it.
So, maybe people from other countries wants to buy bitcoins and lend this bitcoins for 5% for 12 months, knowing they will receive 10,5 bitcoins or their national currency + 5% of interest.
Obs: The person needs to accept to receive bitcoins or their national currency
So I can take the bitcoins from the borrower, convert to brazilian currency and lend in my country for 14% annual interest. After 12 months, I see if it’s more interesting pay the borrower 10,5 bitcoins or the quantity of bitcoin linked to their national currency.

I don’t know if this idea makes sense for you. Just posting.

13

Hi leo,

I don’t see how it can work. If you want to borrow 10 btc you need to put up a collateral worth 10 btc + interest. So I don’t see how you can borrow in this way. In Bitsquare you cannot put altcoin, fiat or anything else except btc as collateral.

But it certainly would be good if one could find a way to make a bitcoin-bank, where lending can occur against e. g. a flat as collateral. Mortgages and everything else.

br,
mepistol

14

Hi @mepistol

I will put up a collateral of 10,5 bitcoins. So If in the end of 12 months, I can’t repay the bitcoins value (linked to their fiat currency) the person who lent me the bitcoins will receive from arbitrator the 10,5 bitcoins, that was put by me as collateral.

15

OK leo, I misunderstood. I guess you want to pay back in fiat a year after getting the btc. I think this is close to a forward trade and can be implemented, afaik. And I see the use of it.

16

If I understand it right it is based on arbitrage between foreign fiat and REAL.
So I lend you 10 BTC for 0.5 BTC interest rate for 1 year.
You lock up 10,5 BTC
You sell the 10 BTC for REAL
You lend the REAL to anybody in Brazil for 15% interest rate
If the BTC/REAL price is the same you made a gain of 10% (15%-5%).

But I think you carry a lot of currency risks here, both BTC and REAL.
I would not lock up 10 BTC 1 year for only 5%. I think I would expect about 30% or even more.
The possible trading opportunities in BTC outperform the 10% u can make IMO.
But I am not a trader…

1 Like
17

Hi @ManfredKarrer,

You wrote exactly what I wanted to say.
I thought people in some countries might find interesting receive 5%, 6% or 7% of of anual interest rate without fear of not being paid.
Remember that for me, as borrower, I could specify in the contract the maximum period, something like 12 months, but I could pay earlier. So for example: if take a loan linked in dollar, and the price of the dollar falls against the brazilian real, this will be interesting to me. So I could stop the loan and pay the lender.

What do you think?

18

I think that the options or CFD concept cover a lot of that. Though in your idea you add arbitration between counties with lower interest rates. I just don’t think that BTC is the right vehicle as it is too volatile IMO. But just my opinion…

19

Beside that there are reasons why the interest rate is higher, it reflects a higher riks (currency, economy,…) So I am not sure if you will really gain something. I think you could if the rate is artificial but I assume that is not the case here.

20

A high interest rate usually means that the risk of default is higher. Possibly capital restrictions can cause different interest rates in different countries and Brazil is a country which may have high economic growth.
Ukraine had the same situation (15% interest for local currency, much less in dollar) and as expected the hryvnia lost a huge amount in value against the dollar all of a sudden.

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