Customs Standardization Group Outside the Box Technology

Providing credit to the Bitcoin economy through Credit Coin

I’m a Bitcoin investor and believer.  I truly believe in Bitcoin (BTC) and the underlying technology of the blockchain.  Not only does BTC itself allow for economic freedom but with technologies like the lightning network small payments are made even easier.  I truly believe that someday national currencies and CBDS will go the way of the Dodo and the world will adopt BTC as a universal currency.

But there’s a problem, what if you want to buy a car with your BTC but you don’t have enough in your wallet?  Normally you’d just go to the bank, get a car loan to buy the car, and then pay back the loan with interest.  But the whole point of BTC is to get away from banks so changing the bank loan from a national currency to BTC kind of defeats the point of moving to BTC.  What BTC needs is a credit system built specifically for BTC.

Credit Coin

CRED would be based on the Ethereum (ETH) code but would not be built on the Ethereum blockchain.  Why not build on the ETH blockchain?  ETH is at its heart centralized and unstable.  By creating a completely separate Proof-of-Work ETH-based blockchain, all the centralization the ETH has can be avoided and users can trust that their money is secured in a truly decentralized network that can not be locked by a few users as is the case now with ETH.

This new Ethereum-based coin would be called Credit, and be one plus 8 decimal places, the same amount as BTC.  So one Credit would be 1.00000000.  Anything below on would be CRED, so anything 0.99999999 or below would be CRED.  For simplicity’s sake, I will refer to Credit Coin and CRED simply as Credit from this point on, unless needed for clarification.

Decentralized Finance

Decentralized Finance (DeFi) will be the heat of this system, DeFi apps will act as the bankers and loan officers that manage the smart contracts that Credit will be issued on.  First, what is DeFi?  From Wikipedia’s article on DeFi:

Decentralized finance (often stylized as DeFi) offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. DeFi uses a layered architecture and highly composable building blocks. Some applications promote high-interest rates but are subject to high risk.

DeFi apps will be the way lenders and borrowers will interact with smart contracts.  Lenders will be able to create new contacts or join already established contracts through the DeFi app, and borrowers will be able to apply for loans through the DeFi app.  The DeFi app will hold BTC in escrow for the life of the contract, handle interest payment allocation, and return staked BTC once the contract expires.  The DeFi app will also manage the oracles that provide the outside data needed for contract creation.

So once a DeFi app is set up, users can join a smart contract by staking their BTC for a set amount of time.  Once the DeFi app has BTC staked it will create Credit, this Credit will be tied to the price of BTC at the time of creation via the oracle, so 2 Credit would equal 1 BTC.  The reason 2 Credit is equal to 1 BTC is the 50% rule.  The 50% rule will state that only 50% of the value of the staked BTC can be turned into Credit.  This will allow for price fluctuations and early exits from staking if the need should arise.  If an investor needs to pull their staked BTC from the smart contract they will be allowed to do so provided it would not drop the total staked BTC below the 50% threshold.  When leaving a staking contract early the investor will lose all future interest payments and pay a 10% penalty for early withdrawal.

Interest rates and repayments would all be laid out in the smart contract so that potential borrowers could browse and pick the one loan contract that suits them best.  Leanders can set rules like borrowers must give identifiable information about themselves, or income, and anything else they wish to add.  Then borrowers fill in the information and the lenders will be notified by the DeFi app that there is a potential borrower and the lenders can approve or deny the loan.

Oracles

Oracles are the source of truth for off-chain information.  When a lender stakes their BTC into a smart contract the oracle will provide the current BTC price for the contract.  Also if the smart contract creator(s) wish to tie their interest rate to something like a nation’s current nail interest rate, the oracle would provide that data for the contract.

From the Blockchain Oracle Wikipedia page:

A blockchain oracle is a third-party service that connects smart contracts with the outside world, primarily to feed information in from the world, but also the reverse. Information from the world encapsulates multiple sources, so that decentralised knowledge is obtained.  Oracles provide a way for the decentralized Web3 ecosystem to access existing data sources, legacy systems, and advanced computations. Decentralized oracle networks (DONs) enable the creation of hybrid smart contracts, where on-chain code and off-chain infrastructure are combined to support advanced decentralized applications (dApps) that react to real-world events and interoperate with traditional systems.

For a more in-depth description of what an oracle is and how it works please refer to the article by Cointelegraph entitled What is a blockchain oracle, and how does it work?

What is Staking?

Staking is where you agree to lock up your assets for a set period of time in return for interest.  It’s like investing in a Bond or Certificate of Deposit (CD).  The goal of staking is to leave your assets in the smart contract for a set amount of time just like with bonds and CDs.

How does the seller get paid?

So you’ve been approved for the loan, received your Credit and given it to the seller, and walked away with your purchase.  Now how does the seller get paid?  The DeFi app will create an ERC-20 token for each smart contract, this token will be tied to the individual contract.  The seller will go to the DeFi app and submit the Credit they were just given and their BTC address and the DeFi app will then deposit the amount of BTC that the submitted Credit was worth at the time of the contact creation.

The seller will be responsible for returning the Credit to the oracle for the equivalent BTC, if the seller fails to return the Credit prior to the smart contract’s end date then the seller forgoes the BTC that the Credit represented.

Software

Anyone an individual or organization that wishes to take part in the Credit system will need to run the Credit wallet.  To interact with the smart contract and the DeFi app users will need to run a full Credit wallet.  To transfer Credit, such as the borrower receiving the Credit prior to transferring it to the seller, a lightweight mobile wallet will be all that will be needed.

The Credit wallet will be where investors will load their BTC to be staked, interact with the DeFi app and smart contact, and receive their staking rewards and eventual repayment of BTC by having it unlocked.

The Credit wallet will also be where sellers will receive their Credit and cash out the Credit for BTC to the BTC address they provide to the Credit wallet.

Borrowers would be able to run a full Credit wallet but would only need the lightweight mobile wallet to transfer Credit to the seller.

Example

Let’s take a look at how this would work.

Jake and Jane both make 30 BTC per year, they each only need 15 BTC to cover their expenses.  So Jake and Jane decide to put 10 BTC into an oracle to earn a return on their money.  Once both Jack and Jane have staked their BTC the DeFi app creates 10 Credits staked to the current price of BTC and announces to the network that there is an open contract.

Bob needs 0.00000100 BTC to buy a car and sees the open contract.  Bob fills out all the information Jack and Jane have requested and applies for the loan.  Jack and Jane review the information provided by Bob and each approves the loan.  The DeFi app then transfers 0.00000200 CRED to Bob’s Credit mobile wallet.  Now Bob goes to the car dealership and buys his car with the Credit transferring all 0.00000200 to the dealership.

Now the dealership, having received the Credit to their full Credit wallet submits a request for payment to the DeFi app and the DeFi app transfers the BTC to the dealership’s provided BTC wallet address.

Now Bob makes his agreed-upon monthly payment to the DeFi app in BTC and the DeFi app redistributes the payment to Jack and Jane’s BTC wallets.

After the agreed-upon amount of time, Bob has repaid his loan, and the contract’s end-of-life date and been reached.  The DeFi app unlocks Jack and Jane’s BTC and returns it to their Credit wallet where they can take it and move it somewhere else or reinvest it in another contract.

Conclusion

If Bitcoin is going to succeed there needs to be a way to issue credit.  If we rely on traditional lenders then the move to Bitcoin will be for nothing as corporations and governments could still control monetary policy and engage in economic warfare.  If on the other hand, there is a decentralized network of lenders employing oracles and smart contracts then true economic freedom can be achieved.

This proposal may not be the final answer to how we provide credit in a Bitcoin economy, but it is my hope that it will at least get the ball rolling on the development of how we solve the credit problem within the Bitcoin economy.

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