Re: [bitcoin-dev] Implementing Investment Aggregation
Good morning Hilda,
> Good Day ZmnSCPxj,
>
> Thanks for sharing the idea! I read through the doc and have some concerns
> that might be off the topic or outside the scope. Please bear with me.
>
> The traditional banking system provides more than custodial holding of funds
> in terms of lending & borrowing. One important function is to match long term
> investments with short or variable term deposits. Alice might be willing to
> make investments at time 0, but some emergency occurs and she may need (part
> of) her bitcoins back at time 1 before the loan due date.
This may be possible by using a Decker-Russell-Osuntokun ("eltoo") mechanism.
The laon-payback transaction (the one that is signed with `SIGHASH_ANYPREVOUT`)
can, instead of paying out directly to the investors, pay out to a
Decker-Russell-Osuntokun mechanism that is signed by a MuSig of the investors
plus the coordinator.
The initial state of this mechanism is the payouts of each investor, in
proportion to the amounts they lent out.
Thus, if none of the investors need to liquidate early, this initial state is
what gets posted on the blockchain ***if*** the loaning business successfully
pays back / does not default.
If one of the investors needs to liquidate its position in this loan agreement,
the coordinator can offer to buy its position (in whole or in part) for a
smaller amount (as the coordinator takes on more risk).
Then all the investors plus the coordinator sign a new state of the
Decker-Russell-Osuntokun mechanism, with the coordinator getting more funds,
and the liquidating investor losing all or part of its allocation.
The investor doing the liquidation can demand a pay-for-signature, so that its
signature share of the new state is only acquired by the coordinator if and
only if it actually gets paid with Bitcoins now.
The position need not be bought by the coordinator --- one of the other small
investors in the business can "double down" and purchase more of the share of
the eventual loan-payback by the same mechanism, from peer investors who need
to liquidate their position in the loan-payback early, increasing its risk
exposure but potentially getting even more profit in case the invested business
pays back the loan.
>
> Also, in the banking system, there are usually sophisticated risk analysis
> systems covering formulas, due diligence, and funds for loan defaults. Banks
> can reinvest partial of what they namely have and obtain profits to cover
> possible losses when borrowers cannot pay back 100%. In this way, they are
> more resilient to defaults & change of collaterals' value, and borrowers
> might be able to leverage 1 unit worth of collateral to get 3 units fund
> instead of 1.
Similar constructions could be done by the coordinator and / or the investors
directly; unfortunately I know too little of them to give an idea how this can
be done.
Regards,
ZmnSCPxj
___
bitcoin-dev mailing list
bitcoin-dev@lists.linuxfoundation.org
https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
Re: [bitcoin-dev] Implementing Investment Aggregation
Good Day ZmnSCPxj, Thanks for sharing the idea! I read through the doc and have some concerns that might be off the topic or outside the scope. Please bear with me. The traditional banking system provides more than custodial holding of funds in terms of lending & borrowing. One important function is to match long term investments with short or variable term deposits. Alice might be willing to make investments at time 0, but some emergency occurs and she may need (part of) her bitcoins back at time 1 before the loan due date. Also, in the banking system, there are usually sophisticated risk analysis systems covering formulas, due diligence, and funds for loan defaults. Banks can reinvest partial of what they namely have and obtain profits to cover possible losses when borrowers cannot pay back 100%. In this way, they are more resilient to defaults & change of collaterals' value, and borrowers might be able to leverage 1 unit worth of collateral to get 3 units fund instead of 1. Thank you, Hilda On Mon, 20 Jul 2020 at 23:40, ZmnSCPxj via bitcoin-dev < bitcoin-dev@lists.linuxfoundation.org> wrote: > Introduction > > > In a capitalist economic system, it is allowed for an entity to lend money > out to another entity, as long as both agree upon the conditions of the > loan: how long, how much interest, any collateral, etc. > This is a simple extension of basic capitalist economic thinking: that the > owner of funds or other capital, is the one who should decide how to > utilize (or not utilize) that capital, including the decision to lend (or > not lend). > > It has been observed as well that groups of people may have relatively > small savings that they can afford to put into investment (i.e. loaning out > for an interest rate), but as the technological capabilities of our shared > civilization have expanded, the required capital to create new businesses > or expand existing ones have grown much larger than most single individuals > can invest in. > > Thus, coordinators that aggregate the savings of multiple individuals, and > then lend them out for interest to new or expanding businesses, have also > arisen, in order to take advantage of the larger return-on-investment of > more capital-intensive but high-technology businesses, capturing the long > tail of small investors. > Traditionally, we call these coordinators "banks". > > However, this typically involves delegating the work of judging whether a > business proposal is likely to give a return on investment, or not, to the > coordinator itself. > Further, the coordinator typically acts as a custodian of the funds, thus > adding the risk of custodial default to the small-time investors in > addition to loan default. > (In this view-point, central banks that provide fiscal insurance in case > of loan default by printing new money, are no different from custodial > default, as they degrade the monetary base in doing so.) > > This writeup proposes the use of features that we expect to deploy at some > point in the future, to allow for a non-custodial coordinator of multiple > small investors. > > This is not a decentralized system, as there is a coordinator; however, as > the coordinator is non-custodial, and takes on the risk of default as well, > the risk is reduced relative to a centralized custodial solution. > > Note that custodiality is probably a much bigger risk than centralization, > and a centralized non-custodial probably has fewer risks than a > decentralized custodial setup. > In particular, a decentralized custodial setup can be emulated by a > centralized custodial setup using sockpuppets, and without any decent sybil > protection (which can be too expensive and price out investments by the > long tail of small investors, thus leading to centralization amongst a few > large investors anyway), is likely no better than a centralized custodial > setup. > Focusing on non-custodiality rather than decentralization may be a better > option in general. > > A group of small investors may very well elect a coordinator, and since > each investor remains in control of its funds until it is transferred to > the lendee, the coordinator has no special power beyond what it has as one > of the small investors anyway, thus keeping decentralization in spirit if > not in form. > > Non-custodial Investment Aggregation > > > In principle, if a small investor finds a potentially-lucrative business > that needs capital to start or expand its operation, and promises to return > the loaned capital with interest later, then that small investor need not > store its money with anyone else: it could just deal with the business > itself directly. > > However, the small investor still needs to determine, for itself, whether > the business is expected to be lucrative, and that the expected return on > investment is positive (i.e. the probability of non-default times (1 plus > interest rate) is greater than 1, and the
[bitcoin-dev] Implementing Investment Aggregation
Introduction In a capitalist economic system, it is allowed for an entity to lend money out to another entity, as long as both agree upon the conditions of the loan: how long, how much interest, any collateral, etc. This is a simple extension of basic capitalist economic thinking: that the owner of funds or other capital, is the one who should decide how to utilize (or not utilize) that capital, including the decision to lend (or not lend). It has been observed as well that groups of people may have relatively small savings that they can afford to put into investment (i.e. loaning out for an interest rate), but as the technological capabilities of our shared civilization have expanded, the required capital to create new businesses or expand existing ones have grown much larger than most single individuals can invest in. Thus, coordinators that aggregate the savings of multiple individuals, and then lend them out for interest to new or expanding businesses, have also arisen, in order to take advantage of the larger return-on-investment of more capital-intensive but high-technology businesses, capturing the long tail of small investors. Traditionally, we call these coordinators "banks". However, this typically involves delegating the work of judging whether a business proposal is likely to give a return on investment, or not, to the coordinator itself. Further, the coordinator typically acts as a custodian of the funds, thus adding the risk of custodial default to the small-time investors in addition to loan default. (In this view-point, central banks that provide fiscal insurance in case of loan default by printing new money, are no different from custodial default, as they degrade the monetary base in doing so.) This writeup proposes the use of features that we expect to deploy at some point in the future, to allow for a non-custodial coordinator of multiple small investors. This is not a decentralized system, as there is a coordinator; however, as the coordinator is non-custodial, and takes on the risk of default as well, the risk is reduced relative to a centralized custodial solution. Note that custodiality is probably a much bigger risk than centralization, and a centralized non-custodial probably has fewer risks than a decentralized custodial setup. In particular, a decentralized custodial setup can be emulated by a centralized custodial setup using sockpuppets, and without any decent sybil protection (which can be too expensive and price out investments by the long tail of small investors, thus leading to centralization amongst a few large investors anyway), is likely no better than a centralized custodial setup. Focusing on non-custodiality rather than decentralization may be a better option in general. A group of small investors may very well elect a coordinator, and since each investor remains in control of its funds until it is transferred to the lendee, the coordinator has no special power beyond what it has as one of the small investors anyway, thus keeping decentralization in spirit if not in form. Non-custodial Investment Aggregation In principle, if a small investor finds a potentially-lucrative business that needs capital to start or expand its operation, and promises to return the loaned capital with interest later, then that small investor need not store its money with anyone else: it could just deal with the business itself directly. However, the small investor still needs to determine, for itself, whether the business is expected to be lucrative, and that the expected return on investment is positive (i.e. the probability of non-default times (1 plus interest rate) is greater than 1, and the absolute probability of non-default fits its risk profile). We will not attempt to fix this problem here, only the requirement (as with the current banking system) to trust some bank **in addition to** trusting the businesses that are taking on loans to start/expand their business. (again: not your keys not your coins applies, as always; investors are taking on risk of default.) The coordinator need only do something as simple as find a sufficiently large set of entities that are willing to indicate their Bitcoin UTXOs as being earmarked for investment in a particular business. The coordinator, upon finding such a set, can then create a transaction spending those UTXOs and paying unilaterally to the business taking the loan. The business provides proof that the destination address is under its unilateral control (so that investors know that they only need to trust that the business itself will do everything in its power to succeed and pay back the loan, without having additional trust in the coordinator to hold their funds in custody). Then the individual investors sign the transaction, releasing their funds to the business. However, the issue now arises: suppose the business succeeds
