Decentralized lending = Peer-to-Peer = Islamic banking
(Being rewritten April 3, 2023.)
This work in progress aims to introduce a new lending and funding solution and platform that is genuinely decentralized.)
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Added: April 5, Asked gpt3.5:
Critique the following hypothesis:
“When we deconstructed decentralized, we concluded that it can only be peer-to-peer. Peer-to-peer or equal relationship and rank. And this by extension that the lending of the money (the present value) and the future profit or payments (future value) are equal as well…. In theory, this means to not value to the present loan amount more than the future performance potential of the profit or payments. But in practice to treat them equally is not practical as the market and investors historically and into the foreseeable future values the tangible present value more than the intangible future value which is promised and is a potential…. Unexpectedly, the deconstruction of “decentralized lending” took us to very similar place as Islamic finance and Sharia principles. Islamic finance prohibits the charging of interest (riba) and encourages risk-sharing between the lender and the borrower. This is the system and principles we will build to. Our solutions will fit the Islamic lending and the regular lending uses.”
gpt3.5 critique:
The hypothesis that decentralized lending can only be peer-to-peer and that lending should treat the present loan amount and future performance potential of the profit or payments equally is not necessarily accurate.
While decentralized lending often involves peer-to-peer transactions, it can also involve other types of lending models and relationships. Additionally, while it is important to consider the potential future value of a loan or investment, it is also important to consider the risk and uncertainty associated with that future value. In practice, lenders and investors often place a greater emphasis on the present value of a loan or investment because it represents a more tangible and immediate return.
Furthermore, the connection drawn between decentralized lending and Islamic finance principles is not necessarily a direct one. While both decentralized lending and Islamic finance prioritize risk-sharing and emphasize ethical considerations, they operate in different contexts and have different underlying principles and practices.
In conclusion, while there may be some similarities and overlaps between decentralized lending and Islamic finance principles, it is important to approach each concept on its own terms and to avoid making overly simplistic or sweeping generalizations about their nature and applicability
In conclusion, while there may be some similarities and overlaps between decentralized lending and Islamic finance principles, it is important to approach each concept on its own terms and to avoid making overly simplistic or sweeping generalizations about their nature and applicability
PS/ There are probably some 100 or (much) more DeFi lending/investing solutions and smart contracts based on the western model of finance and lending (e.g. interest or fee on the money) and available to a such typical DeFi user … and yet some 1.9 billion (2020) people are excluded from using such … AFAIK, such DeFi based lending/investing solutions are nearly non-existent for their use, and this is a huge and extraordinary opportunity for a protocol to serve.
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Decentralized lending = Peer-to-Peer = Islamic banking
(This is the main article.)
The original “problem to be solved” is to enable the liquidity in DeFi (and the coming trillions in tokenized real-world assets) to be lent out and used to earn income and profits in the real world. In other words, we pick an opportunity or a problem to be solved from the aspect of — does this seem like a must-be in the near future and even if not immediate future, is it big enough that there will be support to solve for this.
But… trying to solve for this, we ran into barriers and challenges which we did not anticipate. TradFi lending is complex and complicated, with a long process, paperwork, underwriting, and it has the advantage of being able to inflict punishment if the borrower does not perform. And, in the real world, nothing is ever “final”. But where the DeFi only does 100% collateralized lending, but also has only-click control.
We were seeking inspirations and not getting any, turned to nature. And we drew the analogy of the water (DeFi) and the oil (real world TradFi) don’t naturally mix but once they are held together we get the creams, butter, and ice cream. So we choose to look for and approach from finding the emulsifier-strategy for the DeFi and the TradFi to be held together.
This emulsifier strategy is not that obvious. As FYI, the following talks about the challenges for replicating the TradFi or the real-world loan processes in a decentralized lending platform:
Plus, there are things in the TradFi which is taken for granted but in DeFi results in possibly catastrophic losses. And most people do not want to be bothered with stringent and demanding self-custody, the finalities, the self-governance, etc. which are actually the core basis of the DeFi. Thus, we have to solve to serve both. This means to create a new hybrid financial and compliant system and solutions that will allow for the very human fat thumb tolerant experience but to have the extraordinary efficiencies, benefits, and advantages of the blockchain, DeFi, and the smart contract technologies. We need to humanize the DLT because the people will not come to us, therefor we need to go to their mountain.
Thus, we needed to come up with and create new and pioneering mechanisms — the technical solutions, decentralized protocols, and business models — on multiple levels. This includes for example that we needed a way that when the borrower loses keys to their wallet, they don’t lose their funds for their loan, whereas in DeFi, if one loses their self-custody wallet, they lose the funds. Etc. etc.
One of the first steps in our search for the emulsifier strategy solution was to take another look the obvious or what we all took for granted. Thus, we decided to really deconstruct “decentralized lending”, i.e., its meaning.
When we deconstructed decentralized, we concluded that it can only be peer-to-peer. Peer-to-peer or equal relationship and rank. And this by extension that the lending of the money (the present value) and the future profit or payments (future value) are equal as well.
In theory, this means to not value to the present loan amount more than the future performance potential of the profit or payments. But in practice to treat them equally is not practical as the market and investors historically and into the foreseeable future values the tangible present value more than the intangible future value which is promised and is a potential.
Unexpectedly, the deconstruction of “decentralized lending” took us to very similar place as Islamic finance and Sharia principles. Islamic finance prohibits the charging of interest (riba) and encourages risk-sharing between the lender and the borrower. This is the system and principles we will build to. Our solutions will fit the Islamic lending and the regular lending uses.
Secondly, in the fractional reserve banking system, the bank approves the loan based on the future ability of the borrower and the money for the loan is created. We see this to be exchange of the present value liquidity for the future value payments and profit and we want to emulate this present value liquidity for future value creation process. Thus we created to have types of FV tokens to be given to the investors and lenders and where we will have marketplace for their valuation and trading. This unique FV tokens concept is a key innovation with lot of uses.
Thirdly, we converted the loan underwriting process into a modified type of project financing process. A top reason is that this is closer to the decentralized and the Sharia law. Project finance is secured by the project itself and its expected future cash flows. In project finance, a special purpose vehicle (SPV) is created to own and operate the project, and the financing is provided by a group of lenders known as the syndicate. The lenders evaluate the project’s feasibility, risks, and potential cash flows, and provide financing based on the project’s expected performance. The loans are typically long-term and structured with repayment schedules that match the project’s cash flow. Our difference include to have the borrower be the project owner and manager, and to have a bank or lender of record to come between the investors and the borrower and the project. Project finance is a type of financing that is specifically designed for large-scale infrastructure or development projects. It differs from other types of loans in that it is secured by the project itself, involves complex structuring, and is typically high-risk and long-term. However, we will modify the process from application to payments … for small business loans and reduce the risks.
We call our initial form of lending solution White Label Liquidity™ as the investors’ funding will be used by loan underwriters and lenders such as Shopify, AmEx (merchant loans), factors, small business finance companies, etc. to lend to their merchants, customers, and clients.
Fourthly, to take the DeFi liquidity to the real world and then bring the profits and income back there are quite a few challenges we came across as we chased all the threads and ends. The main ones are the following:
- The difference in finality between DeFi and TradFi. In DeFi, there is 100%+ collateral for all lending usually put up by the borrower, one-click control, end-to-end tracking (from one ledger to another, or wallet to wallet), and ownership, and control are equated. In the real world, the contracts and legalities are not 100% final. Therefore, we tried to solve for bringing the DeFi technology to the real world as much as possible. For example, we can take payments from the point of sales payment revenue of the merchant-borrowers, etc.
Fifth:
MxM (Meeting of Minds) seeks to build a protocol and marketplace to enable the crypto asset-backed liquidity and values to fund real-world economy projects –- and then to bring the profits back and also extend the decentralization ethos and the smart programmable advantages and utility directly into the real-world economies.
A signature mechanism of MxM is to enable the future value of the project to be convertible into present value and be part of the security to fund the project.
Broadly, MxM’s goal is to enable the coming trillions (10s?) of values held in the crypto space to be used to fund income and revenue-creating projects in the real world and then to harvest/bring them back. This service also is an alternative to the largely self-referential earning options of the current crypto space and can help to stabilize/normalize the yields between the crypto and the real-world economies.
The funding and the loan repayment mechanisms:
The MxM is designing two systems for the funding to be paid back.
The first is to repay in the traditional principal and interest.
The other is to repay based on an Islamic banking-based profit-sharing mechanism.
The Islamic banking-based mechanism creates a partnership-like relationship between the lender/investor and the borrower/user of the loan/funding. There is no interest, instead, there is profit sharing. And there is no debt, instead, there is risk sharing in the venture. https://www.investopedia.com/terms/i/islamicbanking.asp
There are to be two types of tokens that represent the future value (FV) of the payments for the funding. One type is equal to the principal or the funding units. And the other type represents the profit or equity in the project being funded. These future value tokens are exchanged for the present value stablecoins at the time the project is funded. The FV tokens’ price will reflect the success of the project and the funding. The FV tokens can have additional guarantees, collateral, or security to reduce risks.
We are seeking feedback and cofounders.
