Uncollateralized Lending: Leveraging Friendships for Fun and Profit

Transcript

all right so our next speaker is ready to go uh this is a talk called unic collateral lending leveraging friendships for Fun and Profit sounds good right so give a round of applause for your speaker Jacob Shia sh but [Applause] yeah how do y'all uh this is a bit Overkill um well cool so my name is Jacob Shay um I'm the founder of Union protocol um the name of the talk is a bit tongue and Chic uh because everyone thinks unscared lending or credit is only for super super risky leverage uh and things like that cool um but in reality like before

we had money uh before we had literal money or cash we had credit uh because you would need like when you're in the village you would need to go borrow like like pretty much everything um y um but today you have money uh you have credit you get productive Capital uh if you only have money um and you're just sitting on a bunch of cash uh it's just going to sit there it's going to do nothing um that's not productive uh if you have the means of production uh but you don't have any like money to provide inputs you're just going to sit there and then you're not going to have any sort of productivity so money Plus Credit equals like productive capital equal growth um and credit is the

mechanism so just some Basics um like when you lend to someone you have to take interest you have to pay interest uh so that they'll actually lend to you uh and then how you determine how much of that interest uh in order to cover the default rate is just called underwriting and then from the borrows view uh credit is the mechanism by which you can pull money from like the future uh into the present and ideally you use that money for something productive so you have even more money in the future uh if you use it to buy like something nonproductive you have even less money in the future so it's good and bad uh so a few myths uh credit is zero sum uh credit is risky uncollateralized lending is an actual thing that exists uh and

underwriting must be complex um so the first one uh with credit being positive sum or zero sum um this is just a very simple example um but so you have a farmer uh farmer goes to so drought uh they paid like $387 an acre so these are actual numbers just if you're thinking about getting into farming don't um so farmer pays 387 an acre uh to plant that's going to earn him $400 at Market um but then a drought happens uh and if he doesn't get water like he loses the entire like crop um so this happens uh uh with credit uh all he has to do is pay five bucks an acre we're using credit uh and then as long as he pays

that $5,000 plus interest he can take the crops uh but if he doesn't have credit uh he loses the entire farm this is a bit of a toy example uh but it's a real one uh so to that farmer getting that access to that Capital at that one specific time uh is worth way more than like 5,000 bucks uh it's worth $387,000 um well 387 minus 4,000 so like 13,000 um it starts getting Zero Sum uh if the interest being charged is basically eating into that Farmer's profit um but if it's just a nominal fee of like 10% or something like you basically have a win-win um uh and then credit is risky um so

credit literally just means risk gr um and then I like I really like this example because this is a literal guy jumping out of a plane without a parachute uh and he survived um so if you know what the risk is you can account for the risk uh and then either charge for it or avoid it if you don't know what the risk is uh like this is what happened in like crypto and like a few years back uh everyone thought they were lending over collateralized um but turns out they were lending uncollateralized so it's better to lend uncollateralized and know that you're like fully unsecured uh so you can account for that and charge for that um and then if you're not doing any sort of underwriting or like

accounting uh or the expected value of like you lending uh is negative so negative EV that's not credit it's just gambling um which is what most people like what name names but like um that's what a lot of people are doing uh so credit drives the the real economy um it can also be used for leverage so like hedge funds get this is how hedge funds make a ton of money they get like basically infinite leverage uh via lines of credit um uh and so this is also what what most credit uh is used in crypto today which is over collateralized it's mostly just used for leveraging up on like mostly just to take your $150 worth of ethereum

borrow 100 bucks buy ethereum and then you just keep going uh and then the opposite if you think the price is going down so that's the financial economy um the thing I'm super excited about or interested in is the real economy uh and this is where the real economy is basically just instead of asset and price speculation it's the things that where you're producing real goods and services um and so credit can drive this through a number of ways uh this is just kind of how I like to think about it one is time travel like having access to money like today uh instead of in like a year um so like if you have a business your business makes like a hundred bucks a month uh it doing certain things using credit can pull like rather than like

save very incrementally over time credit can pull that money into the present uh and then scale so almost all the time like it's cheaper to scale uh and then technology uh this is just like the right technology in the right hands equals more productivity so like uh like a sewing machine in the hands of seamstress equals more productivity um this is also why credit is important because sewing machine in the hands of a banker uh is not going to give anybody like more growth uh and then the other one which is kind of the farmer example which is the lifeline um and all of these examples are both for business and personal uh so like we've all been in well a lot of people have been in situations where

like uh like I like using the tire example like if you don't have any money uh and then your tire pops you have to buy like this really shitty tire that's going to last you a year for like 50 bucks whereas if you had money you could just or credit you could buy one that cost a 100 bucks to last you like four years um and so like that's an inefficient decision that you have to make because you don't have access to Capital um and like credit can drive that those type of like more efficient decisions and then in terms of underwriting um it can be very complex uh and like current model current modern credit underwriting is very complex um but that's mostly because they're underwriting to random people uh

and if you lend to a thousand strangers uh you have to get smart about it um but really it's as simple as like can they pay you back will they pay you back back uh so one do they have the means to pay you back so like if you're lending to someone who's has no Revenue uh they're not going to pay you back because they can't uh even if they want to and then the will they pay you back um and then this also gets into the is unclouded lending a thing uh it's not because you always need some sort of collabor role even if that's the reputation um uh in this example which is what is the cost to defect uh so this is just the prisoners dilemma so like if anyone's familiar with this uh it's just if both prisoners rat each other

out they both get one year of prison uh if one remains silent uh and the other one rats it out one goes free one like gets five years uh and then if they both get silent they both get six months um so this game is different if you have to play it again or you're going to see those people again in six months and play the game again uh and that's those are good opportunities for like credit uh where if you're just seeing a person on the street you give them 100 bucks say meet me here tomorrow you're probably not going to see that person um um and so this is just a kind of toy diagram of what credit is today so uh you have money you deposit in a

bank uh and then your friend wants to borrow money goes to the same bank uh has to convince a banker uh to lend them the money uh but the banker Bankers nowadays don't actually do any underwriting themselves um most of that is outsourced to a credit agency and then the credit agency spends a lot of time and money and effort making sure that they know everything about Joe um and then at the end of the day like even if Joe's like a good person if he just doesn't falls through cracks of like the underwriting model of that day he won't get the loan um so uh this is just kind of to revisit this example is like should Bankers decide like uh who gets to have like basically who has water and who doesn't

uh is what they're deciding with credit um and if you see the little examp little answer is no uh or uh enter uh what I'm excited about which is permissionless credit which is just simply Alice deposits her money in the bank uh in this case protocol which is a smart contract uh and then Joe and then she trusts Joe uh and then she underwrites Joe and then Joe borrows and then presumably he repays uh if he's trustworthy if he doesn't Alice is out the money um so it's a bit more risky uh in theory but in reality like if Alice is trust if Joe is trust worth it's less risky than

the bank um enter what we spent uh like bit time building which is Union protocol uh which is a permissionless credit protocol uh and it's in use it's very simple it's literally just like address a vouches for address B address B can borrow that amount um and then the key benefit that you get from that is like coordination because if you're just like if I just give you 100 bucks and then you repay that 110 die like that's not a you don't need a lot of coordination for that but if you want to borrow from like a 100 different people uh like every month uh and then repay them like fairly like that takes a lot of coordination costs even if all

those those people in theory would trust you um um and the cool bit of this uh since it's all addresses uh it can be people Dows like what's the other one contracts so I like people Dows contracts underwriting like groups individual people contracts so like a contract can now have a credit line uh from a contract or from people and like so there's a bunch of different ways in which you can start like using the this protocol to just create new coordination structures um so an important thing is like the the protocol itself doesn't actually like create trust or underwrite all it's doing is

like taking the trust that exists like so within this room like there's probably some amount of available credit like just B based on everyone's like trust uh but it's currently like un kind of just sitting there um and so so this is the most simple structure in which you start kind of to see why this is pretty cool uh so like you can have three people vouch for the fourth person uh and then they now have like a com a combined credit line uh and then you can start getting very complex um so you can do things like have an inter a dow so like that's this example so like a dow giving credit to its members uh and then you can have a

friend group all vouching for each other um except for w vouching for z uh I guess they don't like each other um and then because it's all like onchain and networked uh all of these disparate little credit networks that would normally be like siloed um can start kind of combining uh and then you can get even more complex structures uh so like uh a common structure is this thing called a rotating Savings in credit association which is the traditional form of credit prior to Banks um and these would mostly just be local thing very very hyper local things like 50 people in the community get together put money in the bank uh or money in a box really and

then they decide B uh who gets to kind of take the money out of the box that month um but if you move to like just down the street you no longer have access to that credit facility um so you can start taking these like hyper local credit like organizations and structures uh and then putting in the B chain um uh and then this is just another example like you can have a bunch of people vouch for a dow uh vouch for like a multisig and then the multisig gives credit based on like however the Dow decides um and this is just if you're if you're going to be at the hackathon um you can build Underwriters like that just take

any arbitrary thing uh this is just a fun example because you can literally just take anyone who has a like a Frank Frank nft and it vouches for them um you can also take do other things like if you really want to like pull in a credit score you could pull in a credit score uh uh it's entirely up to like you um I do have to say it does have one flaw which is like because it's permissionless we can't it can't stop you from trusting untrustworthy people uh like yep uh and then I'll just end with uh we're doing this thing uh called a trustfall game uh which is uh a fun little game where like to enter it you just um and then in order to play you'd have to conv miss the other players to vouch

for you um which adds a little game theory because if you vouch for them uh you're giving them points um uh and then the winner wins a prize uh and then there's also a team game um so like player versus player and then Team game and then that's it um any questions yeah if a vouches for B can they use the same money for to vouch for multiple people at the same time uh so if address a vouches for like basically they can so they put a $1 up

uh and they can create like um because of the gas limit it's only a th000 well not only thousand it's quite a bit to fit in gas limit uh but you can voucher up to a th people or addresses rather um so like $1 can create $1,000 uh across a thousand different people in available credit but if someone borrows like obviously like that dollar like we sadly don't have the ability to do fractional Reserve yet uh so like it does kind of decrease everyone's available credit when one person borrows um but the cool thing is like that available credit like is now like basically in a thousand different like wallets yeah um do do you have a feature where where

users kind of like have a a credit score so the borrowers can you know evaluate the people that are asking for for for these loans so so Union is like one layer below where like that uh so it's so union doesn't have a credit score uh the credit score is entirely up to you and your trust model so like it can be as arbitrary as oh was stuck um it can be arbitrary as like oh do you have like this nft like that I like um and it doesn't have to have anything on train as well it can literally be just you go to your friend

ask for their address vouch for that address so it doesn't have to be like you don't have to docs um like no one else needs to know because it's just between you and that person and it's like very point to point um if you did want to do something with credit scoring um like there's a lot of cool experiments um not so much with like like the US credit score um but there is a lot of like data on chain uh so it would be cool to since you can now vouch for a th people you do get statistically significance so if you do want to run any like underwriting models to where you just vouch for like a thousand people like let me know any other

questions um oh so yeah this is this is just kind of a gift of Union um and someone vouching um and all this is live and on optimism um and we've been live for about like two months on optimism um and so far it's working which is cool uh cool oh one more question I'm wondering um in the blockchain space because one person can vouch for another and then the second person can vouch for a third one you can have pretty complex graphs and I'm wondering how you solve this um infinite

graph problem because even outside of blockchain it's a it's a pretty difficult problem to solve yeah so the so we don't do we don't let trust be transitive um we did have a lot of like fun discussions early on uh because like if I trust you and you trust him uh it's likely that I can trust him um and so like my $1 now like creates like 1.95 times available credit um but it's just kind of a bad user experience to have like someone you don't know like lock your funds um and then it it doesn't really need even if you did want you can still do that um but it kind of breaks down at like if I trust you and you trust him and he

trusts her uh I probably shouldn't trust her uh because it breaks down almost like precipitously at like the third order yeah cool thank [Applause] you