13 ms·

Show HN: Collateralized Debt Agreements Using Smart Contracts and Virtual Cats

97 points by nahollander 9y ago

nahollander 9y ago
Hey HN! We're the team behind Dharma protocol, building the infrastructure for the tokenized debt agreements on the Ethereum blockchain. In this code school, we teach you how to build a loan collateralized by a CryptoKitty. We hope you enjoy! If you're interested in learning more visit us at dharma.io or join our chat.
- meri_dian 9y ago
  Hi, let's say someone wanted to work at dharma.io. What sort of Ethereum skills would you look for?
  - SkyMarshal 9y ago
    https://dharma-labs.workable.com/ https://dharma-labs.workable.com/
- SkyMarshal 9y ago
  This is a clever idea. I've long been skeptical of debt on blockchains b/c there aren't good means of enforcing repayment without resorting to trusted irl/off-chain components, and then why bother doing it on chain in the first place. But collateralizing with digital assets created on-chain is a really interesting approach, obvious in hindsight, but perhaps requiring the prerequisite of real implementation of unique collectible digital assets that retain value. Collateral can be cryptographically locked up and payment enforced in the event of default, all trustlessly. Are you guys the first to do this or are there any others doing this too?
  - stanleydrew 9y ago
    Couldn't you just collateralize with blockchain tokens themselves? Why do you need on-chain "unique collectible digital assets that retain value"?
    - foota 9y ago
      Probably because collateralizing with the thing your borrowing is kind of pointless, yeah?
      - arcticfox 9y ago
        I agree, but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan? If these crypto "assets" like Kitties are rather unfungible for crypto "coins", then I suppose it would make sense, but then I'd be confused why the lender would accept the collateral.
        hathathat 9y ago
        Borrowing against collateral means the lender has something to seize if you fail to pay them back. The more valuable the collateral, the more money the lender will recover when they repossess and sell the collateral. This likelihood of recovery (if you default!) may make them willing to lend you more money, or give you a better interest rate.
        SkyMarshal 9y ago
        >but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan? Close, you can abstract "utility" one layer higher to "demand", or more accurately demand relative to supply. The thing you collateralize needs to be in demand by enough people to ensure it remains valuable over at least the life of the loan, but realistically much longer (so the lender is assured it will always be perceived by the market to have current and future value over any period during which the lender may need to reposses and resell the collateral). Utility gives things value which gives them demand, but it's really the demand that matters. There must always be a ready buyer for the collateral. Scarcity, like with Cryptokitties, gives things value too (rationally or not, but welcome to the human race).
      - stanleydrew 9y ago
  - bpforster24 9y ago
    Your first point is well taken - without some sort of identity layer on the blockchain to create either social or reputational accountability, unsecured loans probably will not flourish. Regarding you second comment, what's cool is that we can collateralize not just collectibles, but any ERC20 token as well, which makes the protocol substantially more attractive.
  - mbrock 9y ago
    The MakerDAO system (which I contribute to) issues a token called dai against Ethereum token collateral. The dai token is meant to have low volatility measured against fiat money. There's roughly 9 million USD worth of outstanding dai tokens at the moment, all representing a form of debt to the MakerDAO system with ETH as collateral. The first version uses only ETH as collateral, with a high degree of overcollateralization. The next version is supposed to use different collateral types. One interesting type of collateral is tokenized gold, as will be issued by the Digix project.
- mempko 9y ago
  In fiat money systems, banks create new money when they make a loan. If you take a loan from a non bank entity, they clearly can't make new fiat money, so money supply stays fixed. My question is, should these loans be interest free? Because if they are not, there is an obvious systemic issue of economic musical chairs... Or is the idea these contracts live within the broader fiat systems? I suppose you can use a crypto currency with a growing money supply.
- thisisit 9y ago
  I have question on this tutorial - How are you ensuring the value part of the equation. Lets say I own one of the cryptokitties worth $100k: https://www.cnbc.com/2017/12/06/meet-cryptokitties-the-new-digital-beanie-babies-selling-for-100k.html https://www.cnbc.com/2017/12/06/meet-cryptokitties-the-new-d... What happens if the cryptokitty loses 10% of its value? And how does the contract know this loss in value?
JumpCrisscross 9y ago
Whitepaper https://whitepaper.dharma.io/#faq https://whitepaper.dharma.io/#faq
evbots 9y ago
I found this project the other day after doing a deep dive into the 0x project. This is a cool project and I am impressed with the level of thought and detail gone into planning this protocol. I have a question about governance. The 0x project essentially plans to set up a DAO that will promote/depricate old/new versions of their protocol, and stakeholders will have a say using the 0x protocol token. How do you plan to implement governance? Through some sort of token model similar to 0x? Thanks!
elmar 9y ago
next step a stable coin based on collateralized cats.
- trfergus 9y ago
  Proof of Kitty
- elmar 9y ago
  People will buy kitty's, borrow against them and use funds to buy more kitty's building a leverage position on Kitty's.
- nahollander 9y ago
  In all seriousness, this isn't a _totally_ unreasonable proposition -- Vitalik proposed an interesting route for creating stable tokens using baskets of debt obligations in a CDO format: https://ethresear.ch/t/collateralized-debt-obligations-for-issuer-backed-tokens/525 https://ethresear.ch/t/collateralized-debt-obligations-for-i... Perhaps unfeasible to appraise given that CryptoKitties haven't coalesced around any sort of stable value, but it'd be interesting to see what the volatility of NFTs like CryptoKitties is in comparison to normal tokens.
foota 9y ago
Maybe PoS will accept crypto kitties
kang 9y ago
I have looking deeply into lending smart contract protocols - dharma, ethlend, salt, paypie, etc. My biggest complaint is all of them are so-called 'blockchain' products but not only can they be done better without blockchain, but that despite their product being all about decentralization, none of these projects are decentralised!
- arcticfox 9y ago
  Every time blockchain has had a hype cycle over the years I start thinking of ideas to build on it. Then I realize all of my ideas would just be simpler, better, and more monetizable (minus Ponzi hype) if I just built them on traditional technologies.
  - watoc 9y ago
    That's usually the issue I have when selecting a technology before knowing what problem I want to solve.
  - splintercell 9y ago
    I think the problem here is that you're attacking the wrong part of the problem. Otherwise, why did you even get excited by the original idea being built on the blockchain, to begin with? Imagine if you thought that it would be a great idea to create decentralized payment system on the internet where people can accept and make payments in a peer to peer manner. Except, this is 2001. There is no such thing as a blockchain. You face the problem of double spend, and soon enough, you come to the realization that you could create a peer to peer accept/send online payment system much better if it is centralized. Thus, Paypal is born. But does that mean a blockchain based decentralized payment system was completely useless? Not really, it is clearly demonstrated by the popularity of bitcoin in a world with capital controls, WikiLeaks payment sanctions etc. The real reason behind this effect is that the tech world is excited about decentralization, but it doesn't fully understand that there are a lot of missing components required to create say "a censorship-resistant online forum" or "decentralized blah blah service". On the top of that, nobody except for the people who are being actively censored or prevented from doing things by the centralized institutions truly need the decentralization. Most SV technologists would be really excited by the idea of a decentralized, censorship proof forum. Except, you will only attract the alt-right (as of now) to it. Why? Because the non-alt-right is perfectly fine with the censorship, as it favors them currently.
jnordwick 9y ago
Too bad nobody I their right mind would borrow or lend such an obscenely volatile and deflationary instrument (unless they were going to scam it somehow).
- bpforster24 9y ago
  I work at Dharma with Nadav and am happy to shed some light here. Your point is well-taken and definitely a risk. What lenders plan to do, for loans collateralized by crypto, is overcollateralize substantially. So, for instance, in order to take out a 50k USD loan, you may need to put up 2.5-3x of the value in ETH, say 150K USD worth of ETH. This protects against some of the volatility (though definitely not completely).
  - mccoyspace 9y ago
    Similar to what is required for bitcoin futures on cboe
    - whatok 9y ago
      CBOE margin requirements are nowhere near that. 40-44% depending on what kind of client as of 01-17-18. http://cfe.cboe.com/margins/cfe-margins http://cfe.cboe.com/margins/cfe-margins
  - jnordwick 9y ago
    Why wouldn't you just sell the eth in the first place? I havent read the whitepaper yet (i will this weekend), but it seems like the collateral is essentially locked up in the contract, so you lose any interest or other opportunity cost. Even with only current instruments you could synthetically create this loan for cheaper: sell the BTC collateral for USD, buy futures to cover the BTC, invest the unused USD to collect interest.. The problem is that the collateral is locked in the contract and that collateral is another liquid currency.
  - runeks 9y ago
    > So, for instance, in order to take out a 50k USD loan, you may need to put up 2.5-3x of the value in ETH, say 150K USD worth of ETH. Why on earth would someone borrow $50k if they have $150k on hand?

97 points by nahollander 9y ago

Hey HN! We're the team behind Dharma protocol, building the infrastructure for the tokenized debt agreements on the Ethereum blockchain. In this code school, we teach you how to build a loan collateralized by a CryptoKitty. We hope you enjoy! If you're interested in learning more visit us at dharma.io or join our chat.

meri_dian 9y ago
Hi, let's say someone wanted to work at dharma.io. What sort of Ethereum skills would you look for?
- SkyMarshal 9y ago
  https://dharma-labs.workable.com/ https://dharma-labs.workable.com/
SkyMarshal 9y ago
This is a clever idea. I've long been skeptical of debt on blockchains b/c there aren't good means of enforcing repayment without resorting to trusted irl/off-chain components, and then why bother doing it on chain in the first place. But collateralizing with digital assets created on-chain is a really interesting approach, obvious in hindsight, but perhaps requiring the prerequisite of real implementation of unique collectible digital assets that retain value. Collateral can be cryptographically locked up and payment enforced in the event of default, all trustlessly. Are you guys the first to do this or are there any others doing this too?
- stanleydrew 9y ago
  Couldn't you just collateralize with blockchain tokens themselves? Why do you need on-chain "unique collectible digital assets that retain value"?
  - foota 9y ago
    Probably because collateralizing with the thing your borrowing is kind of pointless, yeah?
    - arcticfox 9y ago
      I agree, but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan? If these crypto "assets" like Kitties are rather unfungible for crypto "coins", then I suppose it would make sense, but then I'd be confused why the lender would accept the collateral.
      - hathathat 9y ago
        Borrowing against collateral means the lender has something to seize if you fail to pay them back. The more valuable the collateral, the more money the lender will recover when they repossess and sell the collateral. This likelihood of recovery (if you default!) may make them willing to lend you more money, or give you a better interest rate.
      - SkyMarshal 9y ago
        >but isn't the point of borrowing against collateral that you have some utility from the collateral (e.g. a car you drive, a house you live in, part of a business you own) while you carry the loan? Close, you can abstract "utility" one layer higher to "demand", or more accurately demand relative to supply. The thing you collateralize needs to be in demand by enough people to ensure it remains valuable over at least the life of the loan, but realistically much longer (so the lender is assured it will always be perceived by the market to have current and future value over any period during which the lender may need to reposses and resell the collateral). Utility gives things value which gives them demand, but it's really the demand that matters. There must always be a ready buyer for the collateral. Scarcity, like with Cryptokitties, gives things value too (rationally or not, but welcome to the human race).
    - stanleydrew 9y ago
- bpforster24 9y ago
  Your first point is well taken - without some sort of identity layer on the blockchain to create either social or reputational accountability, unsecured loans probably will not flourish. Regarding you second comment, what's cool is that we can collateralize not just collectibles, but any ERC20 token as well, which makes the protocol substantially more attractive.
- mbrock 9y ago
  The MakerDAO system (which I contribute to) issues a token called dai against Ethereum token collateral. The dai token is meant to have low volatility measured against fiat money. There's roughly 9 million USD worth of outstanding dai tokens at the moment, all representing a form of debt to the MakerDAO system with ETH as collateral. The first version uses only ETH as collateral, with a high degree of overcollateralization. The next version is supposed to use different collateral types. One interesting type of collateral is tokenized gold, as will be issued by the Digix project.
mempko 9y ago
In fiat money systems, banks create new money when they make a loan. If you take a loan from a non bank entity, they clearly can't make new fiat money, so money supply stays fixed. My question is, should these loans be interest free? Because if they are not, there is an obvious systemic issue of economic musical chairs... Or is the idea these contracts live within the broader fiat systems? I suppose you can use a crypto currency with a growing money supply.
thisisit 9y ago
I have question on this tutorial - How are you ensuring the value part of the equation. Lets say I own one of the cryptokitties worth $100k: https://www.cnbc.com/2017/12/06/meet-cryptokitties-the-new-digital-beanie-babies-selling-for-100k.html https://www.cnbc.com/2017/12/06/meet-cryptokitties-the-new-d... What happens if the cryptokitty loses 10% of its value? And how does the contract know this loss in value?

JumpCrisscross 9y ago

Whitepaper https://whitepaper.dharma.io/#faq https://whitepaper.dharma.io/#faq

evbots 9y ago

I found this project the other day after doing a deep dive into the 0x project. This is a cool project and I am impressed with the level of thought and detail gone into planning this protocol. I have a question about governance. The 0x project essentially plans to set up a DAO that will promote/depricate old/new versions of their protocol, and stakeholders will have a say using the 0x protocol token. How do you plan to implement governance? Through some sort of token model similar to 0x? Thanks!

elmar 9y ago

next step a stable coin based on collateralized cats.

trfergus 9y ago
Proof of Kitty
elmar 9y ago
People will buy kitty's, borrow against them and use funds to buy more kitty's building a leverage position on Kitty's.
nahollander 9y ago
In all seriousness, this isn't a _totally_ unreasonable proposition -- Vitalik proposed an interesting route for creating stable tokens using baskets of debt obligations in a CDO format: https://ethresear.ch/t/collateralized-debt-obligations-for-issuer-backed-tokens/525 https://ethresear.ch/t/collateralized-debt-obligations-for-i... Perhaps unfeasible to appraise given that CryptoKitties haven't coalesced around any sort of stable value, but it'd be interesting to see what the volatility of NFTs like CryptoKitties is in comparison to normal tokens.

foota 9y ago

Maybe PoS will accept crypto kitties

kang 9y ago

I have looking deeply into lending smart contract protocols - dharma, ethlend, salt, paypie, etc. My biggest complaint is all of them are so-called 'blockchain' products but not only can they be done better without blockchain, but that despite their product being all about decentralization, none of these projects are decentralised!

arcticfox 9y ago
Every time blockchain has had a hype cycle over the years I start thinking of ideas to build on it. Then I realize all of my ideas would just be simpler, better, and more monetizable (minus Ponzi hype) if I just built them on traditional technologies.
- watoc 9y ago
  That's usually the issue I have when selecting a technology before knowing what problem I want to solve.
- splintercell 9y ago
  I think the problem here is that you're attacking the wrong part of the problem. Otherwise, why did you even get excited by the original idea being built on the blockchain, to begin with? Imagine if you thought that it would be a great idea to create decentralized payment system on the internet where people can accept and make payments in a peer to peer manner. Except, this is 2001. There is no such thing as a blockchain. You face the problem of double spend, and soon enough, you come to the realization that you could create a peer to peer accept/send online payment system much better if it is centralized. Thus, Paypal is born. But does that mean a blockchain based decentralized payment system was completely useless? Not really, it is clearly demonstrated by the popularity of bitcoin in a world with capital controls, WikiLeaks payment sanctions etc. The real reason behind this effect is that the tech world is excited about decentralization, but it doesn't fully understand that there are a lot of missing components required to create say "a censorship-resistant online forum" or "decentralized blah blah service". On the top of that, nobody except for the people who are being actively censored or prevented from doing things by the centralized institutions truly need the decentralization. Most SV technologists would be really excited by the idea of a decentralized, censorship proof forum. Except, you will only attract the alt-right (as of now) to it. Why? Because the non-alt-right is perfectly fine with the censorship, as it favors them currently.

jnordwick 9y ago

Too bad nobody I their right mind would borrow or lend such an obscenely volatile and deflationary instrument (unless they were going to scam it somehow).

bpforster24 9y ago
I work at Dharma with Nadav and am happy to shed some light here. Your point is well-taken and definitely a risk. What lenders plan to do, for loans collateralized by crypto, is overcollateralize substantially. So, for instance, in order to take out a 50k USD loan, you may need to put up 2.5-3x of the value in ETH, say 150K USD worth of ETH. This protects against some of the volatility (though definitely not completely).
- mccoyspace 9y ago
  Similar to what is required for bitcoin futures on cboe
  - whatok 9y ago
    CBOE margin requirements are nowhere near that. 40-44% depending on what kind of client as of 01-17-18. http://cfe.cboe.com/margins/cfe-margins http://cfe.cboe.com/margins/cfe-margins
- jnordwick 9y ago
  Why wouldn't you just sell the eth in the first place? I havent read the whitepaper yet (i will this weekend), but it seems like the collateral is essentially locked up in the contract, so you lose any interest or other opportunity cost. Even with only current instruments you could synthetically create this loan for cheaper: sell the BTC collateral for USD, buy futures to cover the BTC, invest the unused USD to collect interest.. The problem is that the collateral is locked in the contract and that collateral is another liquid currency.
- runeks 9y ago
  > So, for instance, in order to take out a 50k USD loan, you may need to put up 2.5-3x of the value in ETH, say 150K USD worth of ETH. Why on earth would someone borrow $50k if they have $150k on hand?