In most emerging markets, only a minority of households and businesses borrow from banks. Most potential borrowers are too small and/or operate in the "informal industry". They often have no formal credit history or traditional financial documents. Even if financial institutions wanted to serve these borrowers, it was often not feasible. The cost of collecting and verifying information about them (originating cost) is too high.
Informal and small business borrowers expect trillions of dollars in loans from institutional lenders but cannot. This "credit gap" is sometimes filled at exorbitant costs by friends, family and local moneylenders. The amounts they provide can be insufficient, they impose heavy social costs on borrowing, and they often charge high interest and guarantees. More commonly, potential borrowers ignore informal borrowing at all, depleting life savings or forgoing their planned expenses.
Banks and other regulated institutions can unlock this trillion-dollar global market and are sure to outperform informal lenders, but first they need a cheap and reliable way to evaluate borrowers.
A solution is on the horizon: informal borrowers seeking microloans are now using services that capture and store their financial data. For example, in India, Kenya and China, borrowers seeking microloans are increasingly accepting electronic payments. Sales information is recorded when a customer pays with a debit or credit card or mobile wallet. Likewise, when small businesses pay suppliers electronically, records of inventory expenses are stored.
Hundreds of electronic payment networks, including giants such as Paytm, bKash, Alipay and WeChat Pay, are collecting vast amounts of sales and expense data for informal customers and small businesses. Supplier networks and e-commerce sites are doing the same. If shared, this data could help lenders assess the creditworthiness of informal borrowers. However, most lenders do not have access to this data, and it is not shared with credit agencies.
Currently, lenders in some markets are gradually establishing bilateral partnerships with data providers. But this slow and uncompetitive process limits the size of such loans and excludes smaller data sources and specialist lenders.
LendLedger connects lenders with untapped data to bridge the trillion-dollar gap between financial institutions and informal borrowers. It brings together borrowers, data providers and lenders in an open and secure global ecosystem based on distributed ledger technology.
Through the LendLedger protocol, anyone can join the lending market. API1 of the protocol allows parties that do not know each other to exchange data and value. It uses Stellar's blockchain technology to obtain loan origination and repayment records in real time. This gradually builds a transparent and irrefutable reputation for all participants. By looking at the blockchain, lenders can properly see the behavior and price risk of borrowers.
LendLedger will help small businesses and informal borrowers access affordable credit from financial institutions. Its open standards and trusted shared ledger will increase data sharing, market interactions and lending volumes. LendLedger can create a more efficient, economical and inclusive lending market.
LendLedger Protocol
1. What is it
The LendLedger Protocol is a set of open APIs that connect lending market participants. It is an open alternative to central intermediaries and lending platforms. Borrowers, lenders, data providers, and other service providers use APIs to share data and transfer value. The protocol records each such interaction on the Stellar decentralized ledger. This means that even if parties do not trust each other, a permanent, transparent record can be trusted.
When gatekeepers or market makers exit, lending costs are lower, transaction friction is reduced, and market participants interact in more creative ways.
The open architecture of the LendLedger Protocol lays the foundation for lenders and borrowers to build virtually any loan type, and is suitable for virtually any type of data or service provider to participate.
2. Design requirements
The LendLedger Protocol is designed to ensure maximum transparency and openness, while giving every market participant full control over their data and
reputation. The key requirements are:
1. All financial transactions between the parties are permanently recorded.
2. Each party has full control over who can view their data and profile.
3. All credit data (home or business transaction data) about the borrower will be kept confidential.
4. Anyone can be a data provider or lender, subject to national regulations.
3. Building Blocks
The LendLedger Protocol has four components that work together to create an open, transparent and trustworthy platform.
1. Data API
These APIs define how data is passed between parties. They define how data is stored in the blockchain, how it is requested, and how it is sent. The Data API specifies the format of business data (for credit decisions), KYC data, and credit assessments. Over time, the community may add data APIs to handle more types of data.
2. Transaction API
These APIs control how value is transferred. They are the building blocks of smart contracts for lending and service provider agreements.
3. Loan Smart Contract Template
These are template smart contracts for common small business loan products. Over time, the community can use the transaction API to build smart contracts for less common loan types.
4. Loan digital assets
LOANtokens are LendLedger's digital assets. When held by credit nodes (described below), they issue LedgerCredits. LedgerCredit is the protocol's internal unit of account. It is denominated in (fiat) currency issued by the government and acts as an IOU for the issuer.
4. LendLedger users
Here's how LendLedger will be used by various lending market participants.
Lender: Originate a loan using the credit data provided by the data provider. Sign loan contracts with borrowers and issue loans to them.
Data Providers: Provide lenders and borrowers with credit data they have accumulated on households and businesses.
Borrowers: Obtain their personal or business credit data from data providers. Identify lenders willing to offer loans, apply for and receive loans.
Credit Evaluation Agency: Provides loan decision advice based on loan applications shared by lenders.
Identity Verification Agency: Contracts with lenders to provide verification of borrower KYC data.
Loan Servicer: Receives loan repayments from borrowers on behalf of lenders.
More roles may emerge as the ecosystem grows. Loan originators can help identify potential borrowers, and marketers may craft messages specifically for potential borrowers.
Some entities will have multiple roles. A point-of-sale provider (PoS) can not only be a data provider, but can also act as an identity verification vehicle (IDV) to provide know-your-customer (KYC) information, or act as a loan servicer to collect repayments.
exchange data
LendLedger expands lending to unserved industries by unlocking new sources of digital credit data. Borrowers obtain their own credit data from data providers and share them with lenders so that lenders can assess their creditworthiness.
The LendLedger Protocol's data API defines how credit and other data critical to the lending process is shared among participants. They also ensure that data is safe and trusted.
1. Data format
The Data API covers how to exchange the following information:
• Business or other credit data used for credit decisions
• Loan terms and conditions
• Credit advice from a credit assessment agency
• KYC data for identity verification
• Identity certification provided by an identity verification agency
Within these categories, data types will expand over time. For example, the Data API parameters will initially cover transaction data from point-of-sale devices and mobile wallets. This data is already used by lenders to make lending decisions. But the data-driven approach to lending is steadily maturing. The community will be able to define more formats as lenders seek new sources of data (such as farm yields, satellite imaging) to evaluate loan applications.
2. Data exchange
In the LendLedger protocol, data is exchanged using transactions on the Stellar decentralized ledger. These transactions act as a messaging system. Each transaction has a memo field where LendLedger participants embed data requests and responses.
But the data itself, such as credit data shared between borrowers and lenders, is too large to be stored on the blockchain. So it is stored on IPFS (Interplanetary File System) and referenced by Stellar transactions. Using encrypted data on IPFS also ensures that only parties authorized to view the data can access the data.
Here is an example of how a small merchant can use LendLedger to access their credit data:
1. The merchant creates a Stellar transaction using the web or mobile app.
2. In the transaction's remarks field, she inserts a request for sales data.
3. She sends this transaction to her data provider (a PoS network).
4. The data provider validates her request and obtains her historical sales data from its system.
5. The data provider encrypts and stores her sales data on IPFS using her public key. 4 (doing this so only she has access).
6. IPFS generates a hash of the encrypted data file and sends it to the data provider.
7. The data provider creates another Stellar transaction and inserts this IPFS hash in the memo field.
8. The data provider sends the transaction back to the merchant.
9. The merchant's app uses the IPFS hash to get the file from IPFS and decrypt it.
All LendLedger data exchanges take place this way, such as when borrowers send data to lenders, or when lenders share data with credit assessment agencies. The data format used for credit decisions and identification may differ from the format used for credit data, but all data exchanges take place through the same mechanism.
loan process
Loans are created and recorded using the transaction API. Loans can be constructed using the loan smart contract templates provided for common loan types, or by combining transaction APIs into new smart contracts to accommodate less common loan structures.
While details may vary, loans generally follow a common process, divided into four stages:
1. Application
2. Credit Decision and Loan Agreement
3. Loan financing and origination
4. Repayment
1. Application
Borrowers can apply for loans in various ways. Some people look for loans and use a mobile app or web interface to find lenders and loan offers. Others have advertisements or loan offers made to them by lenders who pre-determine them as potential borrowers.
1. The borrower applies for a loan offer.
The borrower selects the loan to apply for and informs the lender. In response, the lender creates an "escrow account" on the Stellar ledger.
This is an account that must be signed by multiple parties ("multi-party") who execute all transactions related to the loan. It designates escrow account signatories for itself (the lender), the borrower and any related service providers. It then informs the borrower of the account's location.
2. The borrower provides credit data to the lender.
The borrower provides the lender with the required information. The first requirement is usually credit data. The borrower requests data from a data provider with their relevant business or credit data (such as a PoS company that processes credit card transactions for the borrower's store). The borrower receives this data from the data provider and sends it to the lender. (For more information on these exchanges, see "Exchange Data.")
3. If necessary, the borrower will provide further identity verification.
If the lender requires identity verification in addition to the data provided by the data provider, the borrower should work with an identity verification agency. The borrower sends the KYC data to the identity verification agency and withdraws their proof of identity. This proof is then shared with the lender.
2 . Credit Decisions and Loan Agreements
After the application stage is complete, the lender must make a credit decision and develop a loan agreement.
4. Lenders may evaluate information provided by borrowers themselves or use credit evaluation agencies.
Lenders send credit data, KYC and other relevant information to a credit evaluation agency (CE). Credit evaluation agencies evaluate this information and the borrower's
Existing credit profile (if any) on LendLedger to develop credit recommendations. A recommendation can be a rejection or an approval, with an indication of the loan interest rate, term and amount that the lender should offer the borrower. Recommendations will be sent to the lender.
5. The lender funds the escrow account and distributes the loan agreement for signature.
Lenders develop loan agreement smart contracts to manage escrow accounts. This smart contract includes all transactions related to the loan: issuance, repayment, and potentially defaulting transactions. Also embedded in these transactions are appropriate fee payments for the service provider.
The lender signs the loan agreement and sends it to the borrower for signature. The borrower signs the agreement - the pre-authorization of the transaction set. As signatories to escrow accounts, service providers also sign after checking transactions to ensure they are being properly compensated.
3. Loan financing and origination
After all parties have signed the loan agreement, the loan can be funded and disbursed.
6. The next job is only loan disbursement.
The lender provides the appropriate amount of LedgerCredit (loan plus fees) into the escrow account and then submits a pre-signed loan origination transaction. The escrow account issues the LedgerCredit of the loan to the borrower and issues the fee to the service provider.
4. Loan repayment
The repayment schedule is created as part of the loan agreement smart contract. The transaction API allows for a wide variety of repayment structures. When signing the loan agreement, the borrower will pre-authorize the various repayment transactions required to repay the loan. These transactions specify the amount and date of each repayment.
At each repayment date, the borrower contributes the amount of LedgerCredit due to the escrow account, either directly or through the loan servicer. When a repayment transaction is submitted, it releases the LedgerCredit to the lender and any service providers involved in the loan.
5. Default and Default
If the borrower does not fund the escrow account with sufficient funds, subsequent repayment transactions will fail. If this happens, the lender can pursue the arrears or declare default after any grace period.
Default will cancel all subsequent repayment transactions and transfer control of the escrow account to the lender. If lenders and borrowers can agree on the terms of the settlement, lenders can structure new repayment plans.
LedgerCredit, LOANtokens and Credit Nodes
There are several requirements for LendLedger to become a trusted yet decentralized lending network:
1. Trusted reporting - All participants must trust that the transaction happened as reported. Lenders and borrowers cannot disagree on whether a loan has been made or repaid.
2. Stable Value - Transactions within the network must be conducted in a currency that is stable relative to the fiat currency that lenders and borrowers use every day. Fluctuations in transaction value may make the loan unviable for the borrower or lender.
3. Authorized Use - Borrowers and other participants should be protected from the risk of transacting with lenders not authorized by regulations.
4. Decentralized Access - Any authorized lender has the right to access the network anywhere. No central authority may control or restrict this access.
The LendLedger protocol fulfills the first two requirements by using an internal accounting unit called LedgerCredits. It fulfills the latter two requirements by combining an external tradable token, LOAN, with special network participants called credit nodes.
1. Ledger Credit
LedgerCredit is the unit of account for all transactions, including loan origination, repayment and fees. Since all transactions are conducted in LedgerCredit and recorded on the blockchain in real-time, participants can trust transaction records.
There may be doubts if lenders and borrowers conduct off-chain transactions via cash or bank wires and report the results after the fact. What if a borrower reports a delay? Or what if the results reported by both parties are different? Trust is guaranteed with LedgerCredit.
LedgerCredit also ensures stable value. For participants to lend or borrow against an asset, that asset must be relatively stable relative to the fiat currency in which it conducts business. Currencies like Bitcoin or Ethereum are not suitable for lending due to their volatile nature:
If Bitcoin or Ethereum interest rates spike, borrowers may find themselves paying back multiples of the fiat value of the loan.
Instead, LedgerCredit is pegged to the local fiat currency and is non-fungible (has no external value and can only be used in the network). So it is not affected by external influences.
2. Issue LedgerCredit using LOANtokens
Issuance is programmed into the protocol and does not give any entity a special right to issue LedgerCredit. This ensures decentralization and avoids the cost, friction and trust issues associated with centralized actors.
LedgerCredit issuance is programmed into the protocol through LOAN digital assets. LOANtokens are traded on the open market. The price of LOANtoken is floating relative to fiat currency, so it is also floating relative to LedgerCredit.
LedgerCredits are issued when LOANtokens are held by certain types of market participants (credit nodes). In order to hold LOANtokens, credit nodes send them to the LedgerCredit smart contract. It includes the public key address of the participant who obtained the LedgerCredit, and the unique loan ID that ties together the LedgerCredit issued to a specific loan.
For example, let's say a lender wishes to issue a loan of $100 and LOANtokens are currently priced at $0.20 per token. To get $100 of LedgerCredit to issue to the borrower, the lender sends $100 of fiat to the credit node, which puts 500 LOANtokens ($100 x $0.20) into the LedgerCredit smart contract. The LedgerCredit smart contract then issues $100 of LedgerCredit to the lender.
3. Credit Node
For all LendLedger loan transactions, the Lender is required to obtain a license or other authorization to carry out the loan business in the Borrower's jurisdiction. There is also a need to protect the network from other potential fraudulent or illegal uses.
To this end, the network restricts the issuance of LedgerCredits to a special type of participants called credit nodes. We want credit nodes to operate in a single lending jurisdiction (usually a country). In that jurisdiction, they are responsible for some activities and we expect them to charge a fee for that. However, the critical role of credit nodes in the LendLedger network also means that organizations with a mission to advance financial inclusion may be attracted to operate credit nodes.
First, credit nodes help protect the network from fraudulent or illegal lending. Any lender who wants to participate in the LendLedger network must first register as a credit node and provide proof of their loan authorization (i.e. a license). Credit nodes certify lenders and share this certification with other credit nodes. They only issue LedgerCredits to accredited lenders.
Note: The issuance and certification of loan licenses varies by country. In some countries, all licensed lenders are publicly registered with the regulator. In other countries, there is a state or province-wide regulatory network. Credit nodes need to obtain and verify licenses according to the current system.
Second, credit nodes convert fiat currency to LedgerCredit. For each loan, the lender sends local fiat currency to the credit node in exchange for an equivalent amount of LedgerCredit. After the lender issues this LedgerCredit (i.e. the loan) to the borrower, the borrower exchanges the LedgerCredit for fiat currency through the credit node.
For example, here's how credit nodes help make loans:
1. The lender sends the fiat currency to the credit node.
2. Credit nodes use the LedgerCredit smart contract to hold an appropriate amount of LOANtokens and designate the lender account that should receive LedgerCredit.
3. After the LedgerCredit is received by the Lender, it is released to the Borrower through an escrow account (please refer to "Loan Process").
4. Borrowers prefer fiat currency to issued LedgerCredit, so they send LedgerCredit to credit nodes to exchange it for fiat currency.
5. The credit node in turn sends the LedgerCredit back to the LedgerCredit smart contract, which will release the LOANtokens it originally held.
4. Addressing counterparty risk associated with credit nodes
During the above process, Credit Nodes may knowingly withhold fiat currency or LedgerCredit for failing to meet their obligations to lenders or borrowers (counterparty risk).
This can happen because the value of the loan has declined relative to fiat. In this case, the credit node has an incentive to keep the fiat currency received from the participant rather than redeem the corresponding LedgerCredit. (The value of the fiat currency is higher than the loan held.) Or this could happen because the credit node accepts fiat currency but has no intention of returning the LedgerCredit, or decides not to exchange the LedgerCredit for fiat currency due to bankruptcy.
To reduce counterparty risk, LendLedger takes a three-pronged approach: a) credit node selection, b) incentives to align credit nodes with network interests, and c) scope limits for fraud.
Credit Node Selection
The process of selecting a credit node will be decentralized, will ensure that the selected node can fulfill its obligations, and will prompt the credit node to have a long-term commitment to LendLedger and be able to withstand short-term fluctuations in LOAN prices.
Key criteria for a credit node include:
1. Sufficient capital. Credit nodes must make a sizable minimum loan investment and have the capital to obtain further loans on the open market as the loan volume grows.
2. Technical capabilities. Credit nodes must run efficient processes to ensure lenders are authorized.
3. Task adjustment. LendLedger is just getting started and will grow rapidly. Credit nodes must be prepared to weigh short-term profit opportunities against the opportunity to help build a large, long-term network.
Adjust incentives
Every time a LedgerCredit is issued, credit nodes must stake LOANtokens into the covered bond smart contract. Covered bonds are an incentive for credit nodes to fulfill their obligations. If it fails to do so, its entire secured bond could be forfeited.
Covered bonds are always held at an amount proportional to the credit node issuance activity (e.g. 10%). So if a lender provides $100 to a credit node, the credit node will put $100 worth of LOANtokens into the LedgerCredit smart contract and $10 worth of LOANtokens into the covered bond.
The covered bond smart contract holds the covered bond amount for the duration of the loan. This ensures that credit nodes always have proportionally significant value in the system and act as an incentive for credit nodes to fulfill their obligations.
Limit the scope of fraud
We expect that the timeframe for most loan originations and other payments will be relatively short (e.g. seconds). Because of this, credit nodes have access to a limited amount of fiat currency from customers at any one time. Thus, the gains gained by defrauding a small number of customers are trivial compared to the long-term value of acting as a credit node and the amount locked in covered bonds.
identity and reputation
1. Identity
On the LendLedger protocol, each participant has a public key, which is their unique identifier. In each transaction, parties are identified by their public keys. So, in an abstract sense, a participant's "identity on the network" is actually their public key and a record of all transactions associated with that public key.
For some types of participants, this network identity in LendLedger may be enough to give others the confidence to do business with them. A loan proposal record from a credit assessor may speak for itself. But for many lending market participants, a verified "out-of-network identity" is critical to giving others the confidence to transact:
Lender's Out-of-Network Status
Credit nodes authenticate each lender. Other credit nodes review the certification. Certification confirms the identity of the lender and ensures that they are legally authorized to carry out lending business in a specific jurisdiction.
Borrower's Off-Network Identity
Both the data provider and the Identity Verification Authority (IDV) verify the borrower's off-network identity. The borrower identifies itself to the data provider using the account number and password or other means specified by the data provider. When a data provider provides credit data in response, it will prove that the data provided belongs to that borrower. Upon the lender's request, the identity verification agency can provide further verification of the borrower's identity. The borrower submits the required KYC data, which is authenticated by the identity verification agency.
Service Provider Off-Network Identity
Unlike lenders, most service providers are unlicensed. Unlike borrowers, most do not submit identifying information to business associates. As a result, participants have limited "off-net" information for them to evaluate before transacting with service providers. To solve this problem, LendLedger requires service providers to hold LOANtokens.
As blockchain-based identification solutions mature, we anticipate leveraging service providers to improve the identification process on the LendLedger network.
2. Reputation
In LendLedger, participants' transaction history determines their reputation. All transactions are recorded on the blockchain in real time, such as loans issued, loans repaid and defaults incurred. This allows borrowers to build their own credit history. Likewise, data providers will have a track record for loans based on their data. Other players can even calculate the return on investment (ROI) of the loan based on information from the data provider. The same applies to credit assessors, loan servicers, identity verification agencies, and other players.
LendLedger participants can easily view each other's reputation. Using the native Stellar API designed for this purpose, they can extract historical transactions associated with any account (i.e. any public key). Based on these transactions, participants can form opinions on the reputation of the other party using whatever criteria they see fit. Some players, like credit assessment agencies, can apply fairly complex and proprietary algorithms to make these assessments. Others may rely on third-party assessments or "scores." It is likely that a class of credit assessment agencies will emerge, offering a single reputation score similar to those given by credit agencies.
Software for Lenders, Data Providers and Credit Nodes
After launch, we will provide a simplified web-based software so that lenders and data providers can easily use the LendLedger protocol. Over time, we will develop interfaces for other service providers such as identity verification agencies, loan servicers and credit assessors.
We are currently developing two products: L-Lend (for lenders) and L-Data (for data providers). These will be available through a pay-as-you-go, software-as-a-service (SaaS) license and can be used without any technical expertise. Market participants can also build their own front-end applications as an interface to the LendLedger protocol, or contract with third parties for this functionality.
1 Common features of L-Lend and L-Data
Both systems will provide:
1. Connect: Connect via the LendLedger protocol to send and respond to API requests
2. Account Management: Registration, Configuration and Ongoing Management
3. Crypto Management: Send and Claim; Exchange Fiat for LedgerCredit
4. Analysis: Performance Monitoring and Optimization
2 . L-Lend
L-Lend addresses three key functions for lenders: originating loans through LendLedger, loan management, and tracking finances and accounts.
3. L-Data
L-Data addresses three key functions for data providers: data marketplaces, data analytics and technology/integration portals.
Data providers will evaluate software based on demand and revenue potential for their data, ease of technology integration, and whether analytics and insights can help their business.
4. Credit node software
Credit nodes play an important role in the LendLedger network by holding LOANtokens and identifying licensed lenders, as described in clause 5. To encourage more credit nodes to emerge, the LendLedger team will develop open source credit node software that others can also adopt. As part of this credit node software, we will create a marketplace where credit nodes compete for the rate and availability of jobs offered by lenders, borrowers, and other participants.
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