Subject: Re: [bitcoin-dev] Implementing Investment Aggregation

From: ZmnSCPxj <[email-masked]>
Date: Tue, 21 Jul 2020 16:28:03 +0000

Good morning Hilda,

> Good Day ZmnSCPxj,
>
> Thanks for sharing the idea! I read through the doc and have some concerns that might be off the topic or outside the scope. Please bear with me.
>
> The traditional banking system provides more than custodial holding of funds in terms of lending & borrowing. One important function is to match long term investments with short or variable term deposits. Alice might be willing to make investments at time 0, but some emergency occurs and she may need (part of) her bitcoins back at time 1 before the loan due date. 

This may be possible by using a Decker-Russell-Osuntokun ("eltoo") mechanism.

The laon-payback transaction (the one that is signed with `SIGHASH_ANYPREVOUT`) can, instead of paying out directly to the investors, pay out to a Decker-Russell-Osuntokun mechanism that is signed by a MuSig of the investors plus the coordinator.

The initial state of this mechanism is the payouts of each investor, in proportion to the amounts they lent out.
Thus, if none of the investors need to liquidate early, this initial state is what gets posted on the blockchain ***if*** the loaning business successfully pays back / does not default.

If one of the investors needs to liquidate its position in this loan agreement, the coordinator can offer to buy its position (in whole or in part) for a smaller amount (as the coordinator takes on more risk).
Then all the investors plus the coordinator sign a new state of the Decker-Russell-Osuntokun mechanism, with the coordinator getting more funds, and the liquidating investor losing all or part of its allocation.
The investor doing the liquidation can demand a pay-for-signature, so that its signature share of the new state is only acquired by the coordinator if and only if it actually gets paid with Bitcoins now.

The position need not be bought by the coordinator --- one of the other small investors in the business can "double down" and purchase more of the share of the eventual loan-payback by the same mechanism, from peer investors who need to liquidate their position in the loan-payback early, increasing its risk exposure but potentially getting even more profit in case the invested business pays back the loan.

>
> Also, in the banking system, there are usually sophisticated risk analysis systems covering formulas, due diligence, and funds for loan defaults. Banks can reinvest partial of what they namely have and obtain profits to cover possible losses when borrowers cannot pay back 100%. In this way, they are more resilient to defaults & change of collaterals' value, and borrowers might be able to leverage 1 unit worth of collateral to get 3 units fund instead of 1. 

Similar constructions could be done by the coordinator and / or the investors directly; unfortunately I know too little of them to give an idea how this can be done.

Regards,
ZmnSCPxj