Under-Collateralized Credit - Banking but worse - Andreas Fletcher

hello everyone my name is Andreas I am the head of product at Wildcat protocol and I'm going to talk about under collateralized credit and why it is important and how we're addressing the overall solution or problem what we have so just to quickly remind ourselves what does it mean credit we have traditional credit we have over collateralized credit we have under collateralized Credit in the traditional world you go to a bank you basically show them everything that you have um income statements uh anything that you own and then they type it in the computer and determined on specific factors they either say yeah we're going to give you some money or we're not going to give you some money um it's mostly determined on how much money can they get from you in future or um are you buying something I need the money for and if you not able to pay it back can they liquidate it easily um and you have to pay high interest on it now if you over collatz credit and that's what we typically have in crypto is you don't really have too much default risk because anybody that wants to borrow money um needs to basically also include more money into what is actually born so the the value behind that is is a question mark yeah typically what happens is uh people that have for example a huge amount of e but don't want to sell it but they want to have U more liquid U or more stable tokens they exchange it for D and to get like 100's die they have to put in $150 worth of eth and then pay interest on it at some point of time they can exchange the die again for uh the ease that they have ensuring that whoever gives them the die they will never have the risk of basically losing what they give you because it is over collateralized in such a dimenstion that the price would need to drop 30 40 50% to result in a default here and the under ceriz aspect is something it's not really new um we had a lot of problems in the past with under cized credit that resulted in a lot of you know collapses over all the whole drama around FTX was also very related to under collateralized credit and it basically means that I borrow money but I don't give you any collateral the only thing that I provide to you is either a legal contract or trust that I will return the money and you know trust on blockchain is something that is a little bit tricky but to bring you into the scope of why we need under cized credit I'm going to take the most easiest example and compare it with money and the value that we have in the traditional world and if we want to you know crypto being a competitor showing you why we need under catat Credit Now what is money um there are a lot of definitions typically Regulators regulate what the definition of money is up to the concept that you know the term cryptocurrency is not a legal term and if you talk to Regulators they say it's not cryptocurrency but it's crypto asset uh even though we Define the term cryptocurrency long before they actually know what it is uh but this is a picture of the um first thing that you see if you walk into the Central Bank Museum in Frankfurt and I like the definition because it basically just defines in money is something that people trust in and it needs to have specific characteristics but overall if I read that that's one of the things that I say yes crypto could be this and crypto is this in some scenarios so we could compare crypto to money and why shouldn't crypto be money the way money is created nowadays is there are different types of money categories m zero M1 M2 and3 I'm not going to go into detail with that but the critical point that I'm making here is m0 is the only like true money it is hard cash in your pocket it is anything that is a paper Bill and that is a coin and this is money that is basically being issued by central banks and all other value is derived by Central Bank money with specific multiplicators or just using that as collateral and the overall Factor then results in you know M3 plus large deposits being $1 150 trillion us overall and if we compare this to what crypto's you know value is it's a small fraction so if we say that crypto is going to be something that is supposed to be an alternative traditional Finance or is at least supposed to play at the same level there is in terms of value a pretty big gap and even though I'm optimistic that crypto will increase in value I don't think that we're going to fill the Gap with just eth going up Bitcoin going up I do think we need more Tools in our toolbox and then if you see what the overall credit Market is within the world um are screenshots from Ava stable coins Etc you need about three times the amount of collateral to get a credit of the value that you want to have and this naturally then results in the problem that you know in crypto where in the financial world the graph goes up in crypto the graph goes down which results in us not being able to compete with traditional P because we don't have any multiplication Factor we cannot generate more value out of what we have based on credit this this can be good this can be bad depends on who you talk to um understanding credit risk in defi in a traditional World already told talked about it a little bit in the beginning but what I want to basically say here is that we can use specific tools to guarantee transparency to ensure that even if we do issue under collateral credit we can ensure that whoever we issue that credit to has the means to pay us back without necessary you know showing into what exactly we has and we can do this by using um ZK Tech and TLS notaries where we basically create systems where we ask specific questions on Shain and we get the ZK proof for it that guarantees that there is still liquidity in the borrower side and they will not go into default within the next five or six minutes the overall challenges there are Credit Systems already on chain um cedora for example they do credit uh ratings on chain um I think they do it once a week like one time a week rating somebody based on his assets is is good but we all know how fast crypto can move up and down therefore we actually need to have like adj in time worry or some way to you know have life monitoring and for this we need to increase you know the role of ZK Tech allowing to ask specific questions for example does this bar still have ownership over at least 80% of the assets that he has borrowed from and we can you know create a system that then thinks back yes he has it but we're not telling you where we're also not telling you what you using it for and this gives me as a lender just The Confident okay in theory he has enough money to be pay back and I'm not scared that he you know lost all the money and um at some point of time I can withdraw my money back out of it and he has the reserve to pay back now we're not building this we're building Wildcat protocol and uh we're building it because currently under catered credit basically sucks on chain there is no good solution for for it it is heavily driven on the lender side and not for the borrower side and the overall transparency is generally very very bad and if you want to do under cized credit the alternatives are very limited you can of course go to AA compound or somewhere else and you know generate your 5 to 6% yield on lending die in an over cized manner but in an under cized manner the borrower is able to use more money and generate a higher percent yield where I'm not saying like 20 25 30% yield because that's dangerous again but it could be like 8 9 10 11% yield so the overall philosophy that we have is that if defi wants to be a counterpart to traditional F world we need to use similar tools that we have in the traditional Financial World which for example spal Reserve Banking and this really depends on what type of person you are and what you see where crypto is leading but if you're saying that crypto is supposed to be an alternative traditional Financial world we need these kinds of tools if you say crypto is a niche product and we never use it for real-time payments on a global scale then maybe we shouldn't use fractional res but if we really want to compete with the traditional Financial world we need to use traditional financial instruments in some way or methods to generate the value that we currently don't have and therefore our goal is to create a protocol that is an alternative to banks that issue credit or companies that do peer-to-peer Credit in some way um just being able to capture any credit agreement on chain and this could be over cized credit this could be under catered credit this could be um non-collateralized credit um currently we are focusing on non-collateralized credit and under collateralized credit for explaining the overall difference and why we are building something that we think other people are not building the overall Market is dictated and determined by lender focused people that heavily focus on retail so anything that you can see out there that is related to credit onchain is typically a product where the protocol says hey if you have too much money give it to us we'll give you an apy on it and we'll find the right person to give it to and we produce the overall collat um the overall default this and we're switching it we're saying we're not targeting lenders we are targeting the borrow some and we're allowing the borrower basically to dictate their own terms of how they want to lend money so any bar that joins our platform can create the markets and they Define what type of APR am I giving what type of token do I want what um time of repayment cycle do I want to have and this basically gives the bar the option to create their own offerings and then to attract lenders the product that we have is not a ril product so we're not looking for the typical retail person to invest or to give like their 10 100 1,000 um usdc in the platform we're more looking for bigger projects Market maker family offices to on board and go to our platform and the current scope is that we're live we've been live for about eight months we have 30 million in GBL um and we're launching B2 soon and B2 will concentrate on ntion markets or minimum deposits that the bar basically can freely change or determine what exactly the parameters are going to be um kyc important the potential here is again talking about like for example the bond market which is like 130 trillion overall um very interesting in our opinion and it is a use case that even though it has a big potential to elevate crypto to the next level it is something that is not being addressed enough and that's why we're trying to do this small team very few people and if you have any questions or want to reach out that's my email address or if you have questions now go ahead it's also on stream okay uh hi so what's the main guarantee for like the land the borrower not to default on obligation is ZK or of chain contracts what's the main source the main source of why the bar would not go into default is that a good question it's it's um the lender can decide if they want to give the borrow the money and the borrower basically gives the terms now one of the terms could be I want to sign an MLA with you so a master loan agreement that basically gives the lender the legal entity name and any anything that is related to the credit that the lender gives to the borrower and that is the risk that you still take you basically give money to somebody that you screen yourself and you know so like one of our users is Vin mute for example so like anybody in the in the ecosystem that would want to lend money to Vinter mute would research mute say okay they're a big market player and they are able to you know give back my money when I need my money or if they default then I can still sue them because they're a big company that have a legal entity and and that is the potential that you have so we're we're not mitigating it through the collateralization ratio but we're mitigating it through the overall transparency that you have on chain and then in future we want to of course partner with other projects that allows for a Better Credit scoring or borrower scoring and one of the examples here is like doing credit risk analysis through ZK Tech but we're not doing that we were looking for partners that would be able to do this so accountable for example is one player in the ecosystem that uses this kind of technology to determine credit risk for somebody that borrows money okay but it's more like using the traditional Finance model there using traditional Financial models also using traditional financi contracts or contracts not smart contracts but actual paper yeah uh to guarantee that if somebody runs away with my money I can sue them but again I have the choice to give them the money and this is then dependent on what my credit risk and my APS okay one more question when what's the main benefit of your protocol when just fight in the indust street so Discovery or some other um Discovery is definitely one point like not a lot of people know that you know if they are a company they could lend to these players that targeting but um it's also the transparency so you can see the markets that the borrowers create you can see how much money is going in you can see how much money is going out you can see if they're actually paying back the apy so all of this gives higher transparency to what the borrower is actually doing with the money um now in combination with then onchain kxc Integrations for example A lender could choose to give a borrower money without disclosing his information to the borrower um but just providing you know the proof that he is fitting into the parameters that the Bor is looking for for this for example we're using um key ring and we're using key ring uh as a partner here where they basically allow the BS to create specific um kyc parameters and then the lenders provide all of the criterias to a kyc um proof check and then the borrow only gets the yes he fulfills your criterias but they don't get the information of who the lender actually is the is it important for Zora to understand who the land vure is for the good point because the bar basically has the money he doesn't actually care about who the lender is yeah but um if for example you're dealing with somebody that gives you money from the United States then you may not want to have that money so there there are specific reasons why you would say I don't really care about where the money comes from but I want to be sure that it's for example not coming from the United States because I don't want to deal with the SEC or whatever and we have cases just three or four weeks where the SEC actually went um and uh took people in front of court that were um collecting money to um from lenders to borrows and they were basically said yeah you're issuing a security which you're not allowed to do and so that that gives also the security hi uh first of all I really love your cup uh thank you I they don't do them they don't produce them anymore I'm like really holding on to it yeah I was about to come to you after and ask like we're together anyway um question more more philosophical um so like you mentioned things like uh fraction Reserve Banking and other things like that and um under colonized and and everything like uh philosophically like it's kind of maybe against the vision of like a crypto ecosystem like this is exactly what we what we want not to have um we don't want to create again worthless paper money um we don't want to create economy of dep um and so on and so forth like um yeah so like more philosophically do you think that project like projects like that like what are your arguments that these kind of projects will actually benefit the ecosystem not like decrease the trust or decrease these uh these values that like drive this entire thing the the philosophy of what what crypto is and and what it's supposed to do and what we're supposed to do if it has changed over the the years but if you like look back on like 2009 2010 you know the the original times yes I I do agree with you in some sense the difference I think now is that we can use the tools that we've created and we can build something better in comparison to traditional Financial world without necessarily saying no to all of the components that the traditional Financial Works has to offer for us because we can build it in a way that it increases overall transparency and transparency is the key um in in this scenario where where you basically still allow for you know the concept of you know fractional Reserve banking but you actually can see on chain what the movement of the money is you can actually see who the players behind it is and you can actually see when problems arise and not read it in your newspaper in the next day when the next bank collaps because you know they didn't let anybody look in their Banks Bank books or bank statements huh it's the same question about um you know self- custody non-self custody Etc yeah in in theory nobody should use a custody service because that's you know not your keys not your money yeah but the truth is Mass adoption without it won't happen yeah people don't want to deal with private keys on a large scale so we have to find a balance in my opinion and as long as we're increasing the the overall use case of the old traditional Financial world and making it better and I believe that this is making it better I think it's a step in the right direction um I'm going to do one and one as the last one so the approach is hybrid between traditional finance and blockchain and I was wondering if in your opinion this also open up the possibility for new malicious attacks or Malian action that would not be possible in trat five yeah I mean the the like we have a very hands off um um philosophy of the deployment like we deploy we cannot touch it afterwards we cannot change it we have we don't have control we don't have any back doors so yes in theory if you know our code is wrong and it opens up the risk of you know somebody exploiting what we've developed then that would be bad but that's why we're doing Audits and making sure that um um people are educated on how to use what we what we are deploying um in terms of like the pure concept of you know money in out and if that creates new attack vectors that are not within the current traditional world I would say probably not the only additional risk that you might have but that's like the ecosystem problem like you have the overall problem of um as soon as we for example introduce um markets that are connected with oracles you have Oracle risk now so that's ecosystem problem problem that's not specific to us then um but but other than that no I can think about it a little more Sy after I'm done with the questions oh one okay uh I have a afraid that these type qualified as Securities um good question and as I mentioned that uh in the past last um two or three weeks we had the incidents that similar stuff has been classified as potential security um we as Wildcat were not participating in the deal flow we're just basically providing the UI and the front end for the bar and the lender to come to an agreement and we also don't Target the lender we only Target Target the borrower and we make it easier for the lender to contact the borrower but also to like find markets that the borrower has to join the B so in our case for me personally I don't think that Wildcat has a high threat of you know being Su for something like that now on the borrow side that could be different and the Bor will definitely have their own legal team that looks into it and you know thinks about what this has for implicit reasons of of um being a security or not having security we actually did um a change in V2 which allows for the borer to determine if if a lender puts money into the market that the Bor creates they get Market tokens and this could be in some scenarios some people would say since there is a new asset being created this could be not good for us so we have the option to like turn that on and turn it off so that the bar can Define the market tokens can be created but they're not transferable again they're just there for bookkeeping purposes so maybe but I can't give you a clear answer yes or no to that question it depends on the market depends on which country you're in yeah thank you yeah definitely yeah yeah let's end with wish you good luck it's a good and okay thank you Andreas for