Powering loans and securing the LendLedger network
In this article we talk about a specific aspect of the Technical Paper:
Section 5. LedgerCredit, LOANtokens, and Credit Nodes.
Section 5. LedgerCredit, LOANtokens, and Credit Nodes.
This article will help prospective owners of LOANtokens understand the role that LOANtokens play in the LendLedger protocol.
What a decentralized lending network requires
At LendLedger, we’re doing something brand new: creating a lending platform that operates without a coordinating, central intermediary.
This implies a few important requirements:
- Trusted Reporting — All participants must trust that transactions happened as reported. A Lender and Borrower cannot be allowed to disagree on whether a loan was disbursed or repaid.
- Stable Value — Transactions within the network must happen in a currency that is stable relative to the fiat currency Lenders and Borrowers use every day. Volatility in the value of a transaction can kill the financial viability of a loan for a Borrower or Lender.
- Authorized Use — Borrowers and other participants should be protected from the risk of dealing with Lenders that are not authorized under regulation.
- Decentralized Access — Rights to access the network should be universally available to any authorized lender. No central authority should control or restrict this access.
How LendLedger satisfies these requirements
The LendLedger Protocol satisfies these four requirements by leveraging the properties of blockchain technology and implementing a unique crypto-economic model.
Requirements 1 and 2 are met through an internal accounting unit called LedgerCredits. Think of LedgerCredits as an internal stablecoin that can be pegged to any fiat currency. All parties can see the flow of LedgerCredits between a Lender and a Borrower on the Stellar ledger. So there is consensus about whether any given loan repayment or disbursement happened.
Requirements 3 and 4 are satisfied by combining LendLedger’s digital asset on Stellar, LOANtokens, with a special kind of network participant, called a Credit Node.
How LOANtokens make LendLedger work
In simple terms, the LOANtoken has two key uses:
I. When staked by a Credit Node, it unlocks LedgerCredits.
LedgerCredits are the internal accounting unit, pegged to fiat, which Lenders send to Borrowers to represent a loan disbursement (and which Borrowers send back to Lenders from time to time, representing a loan repayment).
LedgerCredit exists only within the LendLedger ecosystem. LedgerCredit is similar to a stablecoin, except it has the added flexibility of being pegged to any kind of fiat money. This allows LendLedger to operate in any market where a Lender and Borrower agree on the value of the local currency. When Credit Nodes convert fiat into LedgerCredits by staking their LOANtokens, they protect Borrowers and Lenders from the volatility of cryptocurrency.
II. When staked by a Credit Node in a Surety Bond, it keeps the Credit Node’s incentives aligned.
Credit Nodes lock up LOANtoken in a Surety Bond for the duration of every loan they have enabled by unlocking LedgerCredits. This keeps them honest and incentivized to continue doing their job.
(NB: Market participants also stake LOANtoken in small amounts, to gain access to LendLedger’s network of data providers, lenders, borrowers and other service providers.)
Let’s look at each of these uses in detail.
Use I: Unlocking LedgerCredit
(For simplicity, we’ll skip the loan arrangement process here. For details on how Data Providers, Lenders, and Borrowers initiate a loan, read Sections 3 and 4 of our technical paper. )
Once a loan has been agreed upon and created, the token processes of LendLedger begins.
- Lenders send fiat to a Credit Node.
- The Credit Node stakes the appropriate amount of LOANtokens with the LedgerCredit Smart Contract, and specifies which Lender account should receive the LedgerCredit.
- Having received LedgerCredit, the Lender disburses it to the Borrower through an Escrow Account.
- Since the Borrower requires fiat, over a disbursement of LedgerCredit, they send the LedgerCredit to the Credit Node, redeeming it for the available fiat.
- The Credit Node in turn sends the LedgerCredit back to the LedgerCredit Smart Contract, and this releases the LOANtokens it initially staked.
For example, say a Lender wants to issue a $100 loan, and the current price of LOANtokens is $0.20 per token. To receive $100 of LedgerCredit to disburse to the Borrower, the Lender sends $100 in fiat to a Credit Node, which stakes 500 LOANtokens ($100 x $0.20) to the LedgerCredit Smart Contract. The LedgerCredit Smart Contract then sends 100 LedgerCredit (each worth $1) to the Lender. As per steps 3 onwards above, the Lender then sends this LedgerCredit to a borrower who instantly trades it for fiat with the Credit Node.
Use II: Aligning Credit Node Incentives
Each time it issues LedgerCredit, a Credit Node must stake LOANtokens to a Surety Bond Smart Contract. The Surety Bond acts as an incentive to the Credit Node to fulfill its obligations. If it does not, its entire Surety Bond may be forfeit.
The Surety Bond is maintained at all times in an amount proportional to the Credit Node’s issuance activity (e.g. 10%). So, if a Lender gives $100 USD to a Credit Node, the Credit Node would stake $100 USD worth of LOANtokens to the LedgerCredit Smart Contract and $10 USD worth of LOANtokens to the Surety Bond.
The timeframe for most loan disbursements and other payments will be relatively short (e.g. seconds). Because of this, the Credit Node will have access to a limited amount of fiat currency from customers at any given moment. Thus, the amount to be gained by defrauding a few customers should pale in comparison to both the long-term value of acting as a Credit Node, and the amount locked up in the Surety Bond.
In summary
LOANtokens are the native asset on the LendLedger platform. LOANtokens are tokens that crypto-enthusiasts will be most familiar with. These are the tokens that are being sold for use in the network.
All market players will need some amount of LOANtoken to access LendLedger’s network. Credit Nodes will need a substantive balance (especially when the LOAN price is low) to be able to lock up a percentage of every loan they power in a Surety Bond.
LOANtokens are the digital asset that make LendLedger decentralized, permission-less, and resistant to attack, instead of centrally-run.
ETH and BTC create incentives for community members (i.e. miners) to do important work for users. Similarly, LOANtokens create incentives for Credit Nodes to power decentralized fiat-based lending markets for Lenders and Borrowers. And by forcing the lockup of LOANtokens in a Surety Bond, LendLedger ensures that Credit Nodes have a long-term interest in continuing this role and growing the network.
Coming up next…
More details on Credit Nodes and other exciting expositions of LendLedger’s Technical Paper!
LendLedger.io
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