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Mercury

Lending Through the Ripple Network

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I would be interested in participating in something like this. I've never quite figured out how to make it work, though.

This same model can also act as a gateway for buying XRP (or any other crypto). Many people don't have a direct way to buy XRP. As a New Yorker, it's very hard for me.

Hmm... This is kind of the opposite of what Mercury talked about, but I bet there's a lot of people who are Ripple rich and fiat poor. We could offer loans where you put up full collateral in XRP. Low risk, low trust, you can enjoy some of your XRP's value now and still win if it moons later. You CAN have your cake and eat it too.

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Background
This topic has come up through the years and remains without a satisfactory answer. Interest in the topic has waned as focus has shifted to XRP itself rather than the network as a whole and true value was deemed to be in the appreciation of the former. 
Lending could be a way to stimulate stale markets, provide a passive income and unlock frozen value, however, rather than debating the value this is more of an academic interest of how it could be done.
Members like [mention=68]brianwalden[/mention] and [mention=2216]TiffanyHayden[/mention] have mulled over such ripple features as demurrage and interest bearing IOUs working in tandem to act as redeemable collateral vouchers backed by real world value assets, but this system is complicated and unlikely to attract any users. 
I have looked into how other credit systems in past where created and found some similarities in the first cooperative unions formed in Germany in the early 19th century and the hawala network. 
A brief History
The pioneer Hermann Schulze-Delitzsch laid the groundwork for modern cooperative banking and credit unions. He focused on urban towns, trade associations and businesses that would provide credit and saving instruments to their members. Another pioneer Friedrich Wilhelm Raiffeisen adopted this model for rural towns and communities.
Most of members of the Raiffeisen credit union model were poor and had little collateral to secure credit or loans, irregular income or had seasonal pay. To counter this, the model focused on something called social capital; the closely bonded communities would apply social pressure to repay loans and would collectively underwrite the community’s total debt. This is somewhat similar to [mention=39]KarmaCoverage[/mention] ‘s micro insurance idea. An everyday parallel would be regulars enforcing each other to settle their respective bar tabs at the end of each month. 
Hawla networks are a sometimes used to help explain or compared to the Ripple. One of the oldest systems, hawla was created around the 8th century alone the Silk Road trade routes and was used to conduct long distance trade. 
In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, a network membership of family, village, clan, or ethnic group, and cheating is punished by effective ex-communication. 
It is the transfer of money without actually moving it, rather the promise, or IOU, is passed on until the end recipient cashes out the value.
It is important to note that in some modern regions the hawla networks are more established, cheaper and effective than banks. NGO and foreign aid use them as guaranteed delivery mechanism even as bank authorities try to crack down on them. 
Both systems rely on forms of social capital, honour and peer pressure to work.
Ripple Today
While originally designed as a p2p credit exchange system the focus on banks and the acquisition of XRP as an investment unto itself has devalued Ripple Ledger utility. I, however, still believe it is possible to establish instruments such as lending using the tools established.
Beside the use of Ripples more exotic features such as interest, demurrage and escrow- what all credit systems have in common is trust. Big banks/ FIs try to eliminate of manage the risk in trusting so many faceless customers by establishing and conducting background checks and compiling histories. New fintech try to hardcode trust with code and limited defined behavior. And the oldest systems used group pressure, honour and social credit as guarantees.
One method of establishing a credit system would be combining the best features of all the methods into a hybrid. An example would be a group of trusted members of an established ecosystem (ie. XRPCHAT active members of two or more years) forming a credit pool. They would collectively pool assets, then use the pool would lend out smaller amounts that would have to be returned with interest after a fixed time. Because there is no way to legally enforce collection and any collateral (as it would most likely be in the form of other crypto or fiat) would counterproductive the reliance of group pressure and ‘honour’ would be the main driving point. Penalties could range from increasing strictures and interest rates for subsequent loans to being blacklisted completely from the community. The returned amount would be returned to the pool and the collected interest distributed among all members as earnings (as they collectively share risk if the loan is absorbed by the pool).
This type of lending offers a co-operative style, enforced by shared goals and community, and verified able by technology (addresses and history is reviewable by all).
The actually setup (ie. who is the executive lender) would be another discussion (although again a combination of community – established, goals, limits, values and interest rates, and technology – multi-sig, DAO, voting, ect, could help).
Outside lending could be a means of establishing new members. Example could be offering ripple account funding from the pool to be repaid with 10% interest in a week.   Interest could drop overtime and official pool members have a fixed lower interest.
Just some ideas to spark a discussion.
@Mercury this sounds a lot like microlending. I am currently working on a microlending project in the Dominican Republic. These loans would be paid back in 18 to 24 months with interest. Any way, I have been trying to think of a way this could work with XRP...these individuals do not have access to bank accounts, etc. They are "unbanked" in the truest sense. Finding a way to encode everything in the loan contract, including payment terms and interest, are the more complex issues that will be exciting to see unfold.

There is so much potential with XRP and the XRPL....it will be exciting to see the uses we aren't even imagining right now.

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I was also thinking about how ILP could revolutionize the gift card/loyalty point market last night before bed. It’d create a seamless market of transferable and cashable utility.

You could even create a structure where a user loans XRP to a gateway and instead of becoming a debt holder, the gateway could issue loyalty points that could later be cashed for XRP at fair open market rates

Edited by Atomic1221

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@buckor what are your thoughts on interest rates and lending risk to unbanked and/or traditionally high-risk groups?  Standard lending model tends to fail these groups as elevated risk translates into elevated interest rate which is then imposed onto the very groups least able to cope with high interest rates.  Seems that a different model is required, but I haven't quite been able to figure out how to solidify it into a repeatable process.  Interest rate as an expression of risk needs to be replaced with something else;  "time" in conjunction with resource pooling as a hedge against risk both seem like the right ingredients, but the exact model would need some further pondering.

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13 minutes ago, buckor said:

@Mercury this sounds a lot like microlending. I am currently working on a microlending project in the Dominican Republic. These loans would be paid back in 18 to 24 months with interest. Any way, I have been trying to think of a way this could work with XRP...these individuals do not have access to bank accounts, etc. They are "unbanked" in the truest sense. Finding a way to encode everything in the loan contract, including payment terms and interest, are the more complex issues that will be exciting to see unfold.

There is so much potential with XRP and the XRPL....it will be exciting to see the uses we aren't even imagining right now.

I'm wholly ignorant to this particular topic, but it strikes me as somewhat of an impossible task given the fact that property rights are such an issue in the third world. Wouldn't using blockchain to secure property rights be more of a first step towards possibly fixing some of the social issues in these more unstable countries? 

How does one derive value and ownership when the political landscape is so messed up, and therefore how do you secure loans or collateral? Genuinely curious here. 

 

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asdf

48 minutes ago, Mercury said:

Hawla networks are a sometimes used to help explain or compared to the Ripple. One of the oldest systems, hawla was created around the 8th century alone the Silk Road trade routes and was used to conduct long distance trade. 

In the most basic variant of the hawala system, money is transferred via a network of hawala brokers, a network membership of family, village, clan, or ethnic group, and cheating is punished by effective ex-communication. 

It is the transfer of money without actually moving it, rather the promise, or IOU, is passed on until the end recipient cashes out the value.

This is effectively how ILPv4 now works, with Connectors holding a balance on 2+ ledgers, and enabling the change of ownership to link across ledgers. The value never actually moves ledgers though.

On ledger 1 the Connector receives some value from another account on ledger 1... then on ledger 2 the Connector sends some value to another account on ledger 2. Only beneficial ownership of the value has changed. This is Hawla methods.

@Mercury fyi, spurred by our previous conversation, I have been thinking about adding in some form of lending to the KarmaCoverage service offering. Considering making the seigniorage available to be lent out by the community.

One key thing to lending is WHY lend?

There must be some purpose, some gain, that is in excess of the interest rate. With KamraCoverage you have a loss event to finance, but if you want to get lending activity going and be successful, you first need a real reason to lend.

18 minutes ago, buckor said:

I am currently working on a microlending project in the Dominican Republic. These loans would be paid back in 18 to 24 months with interest.

What is the purpose of these loans? You could easily spin up your own RCL.DR and there are wallet apps with QR codes etc on github, if the people have smart phones.

Now that we have Escrow, and PayChan, and IOUs with demurrage that can be tied via orderbook to XRP (if desired) I think mechanically you can make a "loan" on ledger. Probably in 1 or 2 different ways. Lets see what finally comes out with ILPv4, I have a feeling this will unlock smart contracts in a big way.

 

 

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33 minutes ago, brianwalden said:

I would be interested in participating in something like this. I've never quite figured out how to make it work, though.

This same model can also act as a gateway for buying XRP (or any other crypto). Many people don't have a direct way to buy XRP. As a New Yorker, it's very hard for me.

Hmm... This is kind of the opposite of what Mercury talked about, but I bet there's a lot of people who are Ripple rich and fiat poor. We could offer loans where you put up full collateral in XRP. Low risk, low trust, you can enjoy some of your XRP's value now and still win if it moons later. You CAN have your cake and eat it too.

SALT lending

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4 minutes ago, automatic said:

@buckor what are your thoughts on interest rates and lending risk to unbanked and/or traditionally high-risk groups?  Standard lending model tends to fail these groups as elevated risk translates into elevated interest rate which is then imposed onto the very groups least able to cope with high interest rates.  Seems that a different model is required, but I haven't quite been able to figure out how to solidify it into a repeatable process.  Interest rate as an expression of risk needs to be replaced with something else;  "time" in conjunction with resource pooling as a hedge against risk both seem like the right ingredients, but the exact model would need some further pondering.

A Raiffeisen model cooperative/ credit union address some of these very issues. More modern examples would be farmer cooperatives formed during the peak of the Depressions and/ or credit unions based around a certain profession. 

In Raiffeisen's case the typical member was 'underbanked', they were below the cutoff for most banks. They were also poor and had no collateral (most were recently freed serfs and had no rights to land).

His model was based on a community backed lending- everyone knows everyone, their situation and ability to pay. Various social credit schemes have also addressed the issue, most have found success in being hyper local focused and sometimes using alternative value (LETs, Work Hours, etc.)

The second biggest RISK is over-loans which is how some pay-loans work, offering more credit than can be repaid necessitating a costly extension or another loan.

 

I should mention that this whole scheme could be similar to some LETs systems.

Quote

LETS networks facilitate exchange between members by providing a directory of offers (and wants) and by allowing a line of interest-free credit to each. Members' IOUs are logged in a centralised accounting system which publishes a directory and balances visible to all members. In case of a default, the loss of value or units is absorbed equally by all members, which makes it a mutual credit exchange. For instance, a member may earn credit by doing childcare for one person and spend it later on carpentry with another person in the same network, or they may spend first and earn later.

https://en.wikipedia.org/wiki/Local_exchange_trading_system

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[mention=10253]buckor[/mention] what are your thoughts on interest rates and lending risk to unbanked and/or traditionally high-risk groups?  Standard lending model tends to fail these groups as elevated risk translates into elevated interest rate which is then imposed onto the very groups least able to cope with high interest rates.  Seems that a different model is required, but I haven't quite been able to figure out how to solidify it into a repeatable process.  Interest rate as an expression of risk needs to be replaced with something else;  "time" in conjunction with resource pooling as a hedge against risk both seem like the right ingredients, but the exact model would need some further pondering.


With microlending, especially to the unbanked, the decreased amount of the loan is how risk is mitigated. If you have someone without credit who wants to borrow $100k, you charge a higher interest rate for the risk. However, if you have 1000 people who each want to borrow $100, the risk is spread out, thus, the interest rate can be more "normalized." While some of those 1000 may never pay the money back, the vast majority will.

So, yes, standard lending practices will not work with the unbanked. However, microlending practices will. Most people who need microloans only need a few hundred dollars to finance inventory for a new shop or business. Once that inventory is purchased they keep rolling the cost of goods into more inventory, paying themselves and the loan with the profits.

From what I have learned, they are very proud to pay their loans and to pay them off. The reward for them is the ability to support their families without outside help.

In short, the microloan itself is the hedge against defaults due to its size and risk being spread among multiple individuals.

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I'm wholly ignorant to this particular topic, but it strikes me as somewhat of an impossible task given the fact that property rights are such an issue in the third world. Wouldn't using blockchain to secure property rights be more of a first step towards possibly fixing some of the social issues in these more unstable countries? 
How does one derive value and ownership when the political landscape is so messed up, and therefore how do you secure loans or collateral? Genuinely curious here. 
 
We've encountered issues with property rights, too. In the area we work, squatters rights are very valid and legal. All the squatter has to do is show proof they have lived on the property for "x" amount of time, which is usually confirmed by the community at large via written affidavits. Those affidavits form part of the "title" to the property the squatter holds. Once the title is taken care of, the squatter can sell his property.

We have been able to purchase property in the DR, even working through squatters rights, within a couple of months.

With smart contracts, all of this can be encoded on the Ledger.

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6 minutes ago, KarmaCoverage said:

One key thing to lending is WHY lend?

There must be some purpose, some gain, that is in excess of the interest rate. With KamraCoverage you have a loss event to finance, but if you want to get lending activity going and be successful, you first need a real reason to lend.

 

Yeah, this is the biggest issue I also keep coming back to.

The reason to lend is simple- make more, or if you altruistic- expand the ecosystem. The reason to take a loan is harder to define.

Ripple is not yet a payment system, so reasons to finance through it are minimal. I have come up with a few ideas:

  • business looking to XRP linked products (ie. vouchers)
  • wallet activation
  • ripple related projects (ie. investment)

I could argue a case for any of them, but the truth is there is just not enough demand. Of course this might change if loans were offered (ie. XRP becoming a entry way to secure other cryptos)

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3 minutes ago, buckor said:

With microlending, especially to the unbanked, the decreased amount of the loan is how risk is mitigated.

While I believe this, this is not good enough for a "next level" service. We can do better, and actually improve the loss ratio. I think having an fully transparent RCL deployed for the users themselves to network with each other would help.

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