The market for cryptocurrencies and digital blockchain assets has developed into a vibrant ecosystem of investors, speculators, and traders, exchanging thousands of blockchain assets. Unfortunately, the sophistication of financial markets hasn’t followed: participants have little capability of trading the time value of assets.
Interest rates fill the gap between people with surplus assets they can’t use, and people without assets (that have a productive or investment use); trading the time value of assets benefits both parties, and creates non-zero-sum wealth. For blockchain assets, two major flaws exist today:
● Borrowing mechanisms are extremely limited, which contributes to mispriced assets (e.g. “scamcoins” with unfathomable valuations, because there’s no way to short them).
● Blockchain assets have negative yield, resulting from significant storage costs and risks (both on-exchange and off-exchange), without natural interest rates to offset those costs. This contributes to volatility, as holding is disincentivized.
Centralized exchanges (including Bitfinex, Poloniex…) allow customers to trade blockchain assets on margin, with “borrowing markets” built into the exchange. These are trust-based systems (you have to trust that the exchange won’t get hacked, abscond with your assets, or incorrectly close out your position), are limited to certain customer groups, and limited to a small number of (the most mainstream) assets. Finally, balances and positions are virtual; you can’t move a position on-chain, for example to use borrowed Ether or tokens in a smart contract or ICO, making these facilities inaccessible to dApps.
Peer to peer protocols facilitate collateralized and uncollateralized loans between market participants directly. Unfortunately, decentralization forces significant costs and frictions onto users; in every protocol reviewed, lenders are required to post, manage, and (in the event of collateralized loans) supervise loan offers and active loans, and loan fulfillment is often slow & asynchronous (loans have to be funded, which takes time).
In this paper, we introduce a decentralized system for the frictionless borrowing of Ethereum tokens without the flaws of existing approaches, enabling proper money markets to function, and creating a safe positive-yield approach to storing assets.
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