Decentralizing Credit 102
joining the guild, sketching the yield curve
Last time, we ran through the lifecycle of a loan and how gauge voting works in the Ethereum Credit Guild. Summarizing briefly:
GUILDholders vote on a global debt ceilinglending terms are proposed optimistically, subject to veto
optimistic governance in DeFi was introduced by Gyroscope here
the concept was further developed in the Tribe DAO, listen to this talk by Tom Waite
GUILDholders vote for lending terms in gauges, allocating the global debt ceilingborrowers post collateral to a lending term of their choice and mint
CREDIT
The issuance and redemption of the GUILD token will occur through a similar mechanism where users post collateral to mint and borrow GUILD. Both minting and repayment will be rate-limited to prevent governance attacks and ensure stability in the amount of first loss capital. Since the token is nontransferable, a user borrowing GUILD can only use it to vote in the gauges, and is unable to take on a leveraged exposure to collateral by this means.
Besides CREDIT itself, liquidity pairs with stablecoins on decentralized exchanges would be preferred collateral for minting GUILD, and may receive negative interest rates to incentivize participation.
In this way it is simple and permissionless for anyone to get involved with the Ethereum Credit Guild by providing capital, and also to leave again if they wish to, but they have skin in the game for their decision-making while they are there.
One thing we didn't discuss yet is duration. How can CREDIT holders express the maximum price of liquidity they are willing to pay, or the maximum lockup they’d accept, such that
GUILD holders can safely lend at longer durations?
The answer is a special type of lending term called a bonding term. A bonding term allows users to lock up their CREDIT subject to a certain call fee, interest rate, call period, and so on, similar to a regular lending term, but not associated with a specific collateral asset. The amount of credits locked in the bonding terms can be used to set debt ceilings on longer term loans.
I don’t expect anyone to want to lend long term through a brand new and unproven smart contract system, so we’re not focused on including bonding terms in the launch MVP. These and other variant lending terms can be added later, such as:
the swaps term, which is intended for rebalancing the surplus buffer among backing assets rather than minting against overcollateralized debt positions
a variable rate lending term, where the interest rate is adjustable according to a preset rule (ie, increment by at most 50 bips once per month)
a fixed maturity term, which starts out already called
Next time will focus on scaling, including delegation for GUILD holders, multi-voting with signed messages, borrower vaults, L2 liquidity plans, and more.