New Crypto-Secured Lending System with a Two-Way Collateral Function

Abstract

All existing secured loans, including crypto-secured loans, are provided under the condition that the collateral entrusted by the borrower is kept safe during the loan term. In other words, they use a one-way collateral function. Thus, a frequent drawback of these loans is that the collateral value increases if and only if the collateral price increases. To resolve this problem, this paper proposes a new crypto-secured lending system incorporating a new two-way collateral function. It would allow a borrower to invest proportions of their own collateral by predicting the market in both directions to make profits irrespective of whether the price of the collateral increases or decreases. This benefits the borrower since profit can be made even if the price of the collateral drops, by betting on the price decrease. This new lending system could include a new hedged portion, unlike traditional secured lending systems. As a result, larger loans can be made under this arrangement; further, this portion provides the advantage of reducing the underlying collateral price volatility risk.

A Taxonomy for Decentralized Finance

“…As DeFi is an enabler of networked ecosystems (Schär 2021), research on such networked (Buterin 2014;Chen et al 2020;Cherecwich 2021;Cong et al 2021;(Buterin 2014;Chen et al 2020;Cherecwich 2021;Cong et al 2021;Cousaert et al 2021;Domingo et al 2020;Egelund-Cousaert et al 2021;Domingo et al 2020;Eskandari et al 2020;Grant et Müller et al 2017;Eskandari et al 2020;Grant et al 2020;Guerar et al 2020;Halden et al 2021;Harz al. 2020;Guerar et al 2020;Halden et al 2021;Harz et al 2019;Jensen et al 2021;Jung et al 2019;Kaal et al 2019;Jensen et al 2021;Jung et al 2019;Kaal 2021;Kim 2021;Kumar et al 2020;Lei et al 2019;Kim 2021;Kumar et al 2020;Lei et al 2019;Merwe 2021;Merwe 2021;Mikhalev et al 2021;Nakamoto 2008;Ojog Merwe 2021;Merwe 2021;Mikhalev et al 2021;Nakamoto 2008;Ojog 2021;Pop et al 2018;Popescu et al 2020;Qin et al 2021;Pop e...…”

“…Chen et al 2020; Cong et al 2021; Cousaert et al 2021; Fusion Foundation 2017; Guerar, M. et al 2020;Guerar et al 2019; Halden et al 2021;Harz et al 2019; Jensen et al 2021;Jung et al 2019;Nakamoto 2008) Chen et al 2020;Cherecwich 2021; Cousaert et al 2021; Domingo et al 2020; Eskandari et al 2020; Grant et al 2020; Gudgeon et al 2020;Guerar et al 2019; Guggenberger et al 2021; Jensen et al 2021; Kaal 2021;Kim 2021;Lei et al 2019; Merwe 2021; Meyer et. al 2021; Ojog 2021; Qin et al 2021) …”

Decentralized Finance—A systematic literature review and research directions

“…While the so far discussed loan protocols enable short selling and leveraged long trading, the collateral impedes 'true' borrowing, i.e., entering a position of net debt (Gudgeon et al, 2020b) 3 . Moreover, locked collateral incurs opportunity costs, i.e., the inability to compile returns beyond price changes in the collateral itself (Harz et al, 2019;Kim, 2021). Hence, Harz et al (2019) present Balance, an incentive-based, dynamic collateral design which they show can reduce overcollateralization by 10% while maintaining the same level of utility and security.…”

“…Tien et al (2020) implement a solution in which capital locked in smart contracts is supplied to the liquidity pools of Compound, providing an historical average annual percentage yield of 4%. Kim (2021), on the other hand, proposes a loan system in which borrowers can increase collateral utility by betting on price movements of their collateral position; yet acknowledging that the approach requires further research to cope with changed scenarios for forced liquidations.…”

A DLT-based Smart Contract Architecture for Atomic and Scalable Trading

“…For example, Yang et al [36] proposed a lending system based on blockchain technology in which the transaction process can be enforced as well as improve insufficient supervision ability and loan efficiency in a transaction process. Furthermore, Kim [37] proposed a two-way collateral cryptocurrency lending system which allows a borrower to invest parts of their own collateral by predicting the market movements in both directions to make profits irrespective of whether the price of the collateral increases or decreases. The proposed system ensures that the borrower does not loose but might also gain while providing collateral.…”