By AltFi on Monday 10 November 2014
The latest fusion of digital currency and peer-to-peer lending is attempting to solve some of the inefficiencies of the alternative finance market.
The platform is called Lending DApp. It is – or rather will be – a global, decentralized crowdlending network that will be powered by LoanCoin. LoanCoin is an asset-backed, income-producing cryptocurrency. According to Lending DApp's creators, the impetus for the launch of this innovative new platform lies in the supposed shortcomings of some of the world’s largest peer-to-peer lenders. These issues include the fact that volume is constrained by the supply of borrowers, that the best P2P loans are often snapped up by institutions and that the secondary market for most platforms is highly illiquid. Lending DApp will aim to increase the flow of borrowers and to provide increased secondary market liquidity via LoanCoin. The value of LoanCoin will track the value of Lending DApp’s underlying loan portfolio.
Sounds good in theory – but how will it work on a practical level? Investors will unlock new LoanCoin by investing funds into the network – funds which will ultimately be used to make loans to borrowers. Lenders may also purchase LoanCoin via the secondary market. Whichever the method, these investors have become coinholders – and can extend “trust lines” to loan officers, whose responsibility it is to originate, fund and manage loan assets. A loan officer could be a bank, financial institution, peer-to-peer lending platform, or even an individual.
Coinholders may extend either high or low trust lines to loan officers – depending on the performance of that officer. If an officer’s rating is low, that officer may be required to post a “surety bond” using LoanCoin when making a loan. This feature is designed to align the incentives of both the loan officer and the network. The credit line of each loan officer will also depend upon the aggregate trust line assigned to them by the network.
Loan officers may charge origination or performance fees. The latter amount is determined by working out the difference between the risk-adjusted performance of a particular officer’s lending portfolio and the average risk-adjusted performance of all loans within the network. Lending DApp anticipates a driving down of borrowing costs due to the intra-network competition between loan officers that performance fees will engender.
Borrowers repay their loans with interest either directly to the network or via the loan officer. These officers reclaim a proportional amount of their surety bond with each individual repayment. Any losses due to defaults or missed payments will cause the loan officer to forfeit its surety bond – which will go some way towards ensuring that the network’s lenders get repaid. Broadly speaking, coinholders are faced with two choices when loan repayments (both of principal and interest) are returned to them. They can reinvest into the network in order to acquire – or “mine” – new LoanCoin. Or alternatively, they may opt to receive payment directly – via bitcoin or other supported currencies. If lenders take the latter option, a proportional amount of their LoanCoin will be destroyed.
The Lending DApp model effectively represents an intriguing new method of harnessing the wisdom of the crowd. It does not facilitate direct lending – instead it allows investors to back other direct lenders, and to rate the performance of those lenders in a meaningful way. MacLane Wilkison and Mikhail Egorov – Co-Founders at LoanCoin – offered a consummate explanation of the structure of their new platform in a recently published white paper:
“We can think of Lending DApp as the super node and each loan officer as a child node. Child nodes can lend directly to borrowers or behave in a similar manner as the super node, establishing their own network of trusted loan officers and even issuing their own child coin. In this case, the network can be thought of as a fund of funds. Investors can purchase LoanCoin for exposure to the entire network or, if they prefer more specific asset exposures, they can purchase child coins from a child node that specialized in certain kinds of investments (emerging market debt, T-bills, corporate debentures, etc.)”