Ha, you're right, sorry. We think we'll be able to sell value added services to our ecosystem (for example, consulting services, insurance, data feeds, etc.).
We will also investigate token models to see if there is a way to make the underwriting process less trustful, and this token model may be a revenue generator as well.
Even if you 100% collateralize, you can get 2x leverage. That leverage can be applied to all sorts of use-cases, but we think one of the main ones that will be common today is speculative margin trading (e.g., short selling)
Censorship resistance is a big factor - since no one entity controls the Ethereum blockchain or smart contracts that have been deployed to Ethereum, there is no way to shut down the service. This paves the way to a single global capital market that is much more inclusive and efficient than the haphazard and heavily intermediated capital markets we have today.
Dharma Protocol doesn't require that the value of collateral be greater than the principal of the loan, but we do expect the market will demand full- or over-collateralization.
Similar to the question about SALT and EthLend, these are both applications. See our answer there fore more details.
Re. MakerDao, they offer one type of loan, the Collateralized Debt Position, in which a borrower collateralizes ETH and the principal is denominated in DAI. And they have built in many automated mechanisms to keep DAI stable against the value of a US Dollar.
Dharma can support a similar use-case (getting liquidity on crypto-assets without selling them) -- you would collateralize any currency and borrow in DAI. That way you can get fiat liquidity today, but if you pay back your loan on time you can still benefit from appreciation of the asset you collateralized.
In addition, Dharma is capable of supporting other lending use cases: short selling, speculative leverage, venture debt, corporate bonds, muni bonds, etc. etc. We are a platform for any kind of debt agreement and for companies that want to issue these debts.
Right now we expect most loans will be fully collateralized by other crypto-assets. So the default deterrence would be that if you don't pay back your loan, you lose your collateral.
We also support unsecured loans (i.e., loans that are not fully collateralized). We consider these pretty experimental and lenders should do a lot of diligence before investing.
For unsecured loans, counterparties can agree to any kind of default deterrence that they want. Could be off-chain legal agreement, could be a reputation scheme, etc.
EthLend and SALT are both lending applications. While we have created a lightweight lending app in Dharma Plex, our core offering is Dharma Protocol.
Dharma Protocol is a suite of developer tools that enables entrepreneurs to create apps like Ethlend or SALT easily and securely. It's open source and entirely free to use.
One way or another, the borrower has to come up with the principal + interest or they will forfeit their collateral. So they will want to use the loan in some sort of income generating capacity: financing a project, speculative trading, etc. If they are able to use the loan to earn more than the interest rate they've committed to, they'll make money overall. If not, they'll lose money.
Bottom line: we don't think the monetary policy of crypto-assets will have much of an impact on default rates in the short term.
Yeah that's essentially right. The only modification I'd make is in your last step, what'd you need to do is buy back the magic bean coins (because you owe them to someone else). So you you wouldn't "sell 0.5 eth for 20 bean stalks", you'd buy 20 bean satlks for 0.5 ETH. You'd then pay back the loan, at which time your 1 ETH of collateral would be released back to you. Now you'd have 0.5 ETH in profit from selling magic bean coins high and buying low, as well as your original 1 ETH.
Regarding your parenthetical questions:
1) yes, you'd pay interest on this. you'd negotiate this interest rate with the person lending you the magic bean coins
2) yes, there are a couple scenarios where you'd forfeit your collateral: a) if you were wrong, and the price of magic bean coins appreciated beyond the value of your collateral; b) if even if you were right and the price depreciates you forget to pay back the loan
3) that's correct, Dharma is just the protocol for the creation of the loans, so the terms of the loan would be determined by the constituent parties (the borrower, lender, and underwriter)
I work at Dharma with Nadav and am happy to shed some light here.
Your point is well-taken and definitely a risk. What lenders plan to do, for loans collateralized by crypto, is overcollateralize substantially.
So, for instance, in order to take out a 50k USD loan, you may need to put up 2.5-3x of the value in ETH, say 150K USD worth of ETH. This protects against some of the volatility (though definitely not completely).
I'm on the Dharma team with Nadav, and happy to shed some insight here.
So we think a really interesting use case in the short term is margin lending of crypto assets. Say you have 10 ETH and want to short-sell a different ERC20 token. You could lock up your ETH as collateral in a loan denominated in the other token, and then sell those tokens. If those tokens depreciate in value vs. ETH, when you buy back the tokens you'll have made a profit.
Your first point is well taken - without some sort of identity layer on the blockchain to create either social or reputational accountability, unsecured loans probably will not flourish.
Regarding you second comment, what's cool is that we can collateralize not just collectibles, but any ERC20 token as well, which makes the protocol substantially more attractive.
We will also investigate token models to see if there is a way to make the underwriting process less trustful, and this token model may be a revenue generator as well.