This document describes the process by which the Open Token Lending Protocol will be decentralized and transitioned over to community governance via the GOTL token.
It is divided into 2 parts:
- What is the OTL all about
- Decentralization and community governance handover
The OTL (Open Token Lending) is a protocol devised to support the lending and borrowing of any ERC20 token against any other ERC20 token as collateral in a permissionless and trust minimized manner.
Its primary use case is to support lending against real world assets that are tokenized and represented in an ERC20 format.
Why Real World Assets
Most DeFi platforms to date have focused on pure onchain assets.
However blockchain will not make a meaningful difference unless it is actually used to solve real world problems and have use cases that go beyond speculation on the price of crypto.
Cost of capital is often high in many different real world sectors due to the lack of liquidity and access issues.
There are several examples of this: personal credit, business finance, trade finance, receivables and invoice factoring, car loans, and real estate project finance are just a few of these examples.
All of these offer potentially strong rates of return, and by connecting them to the new wave of DeFi investors, both parties can benefit. Cost of capital is reduced for borrowers due to greater access and liquidity, and DeFi investors can get access to a stable and competitive return.
Challenges with Real World Asset Tokenization
There are significant difficulties when attempting to bridge the DeFi space to the real world.
A couple of the key ones are:
- Securities regulation
- How to enforce defaults
One of the key challenges with real world asset tokenization is securities regulation. Most approaches to date have been around fractionalization of an asset and representing them as tokens and selling these fractions.
However this puts them squarely in securities territory.
The approach the OTL is taking is to not focus on distributing the fractions of an asset but rather to borrow against the asset.
An analogy where a Company sells its shares to raise capital (which is the fractionalization or IPO/STO approach) vs the Company borrowing from a bank instead.
In the second case there is no transfer of ownership, and the money is lent against the collateral value which means it is not reliant on the active management efforts of key participants (one of the key criteria around digital securities guidance by the SEC).
The company is not soliciting capital publicly, not selling shares or even debt and is hence not making a securities offering. It is simply approaching a bank which makes a decision on whether or not the company is worth lending to, and based on that, distributes the capital.
The bank in our case is replaced by a decentralized money market which we call the OTL.
The OTL, if operated at an arm’s length, independently and in a sufficiently decentralized manner would also not run into securities issues.
The biggest problem in real world asset tokenization is off chain enforcement. How do you liquidate the offchain asset in the event of a default?
The solution to this problem is a staged approach where you start with highly liquid listed assets and then work your way to illiquid assets.
Listed shares can be traded using pre-programmed scripts. Algorithmic trading constitutes the bulk of the stock market activity today. Which means the buy and sell orders can be conducted via programs. These programs can be plugged into the dAPP, so that the dAPP can issue automated instructions to liquidate the collateral in the form of listed tokenized stock and commodities.
The next step is to identify assets whose issuance/existence can be controlled programmatically. School and college diplomas/degree credentials are one such potential candidate to be tokenized as NFTs. Student debt, school fee receivables can be tokenized in such a manner that if the payments are not made then a precondition to the issuance of the credential which is recorded as a NFT is not met. The student still has to meet the requirements in the form of grades, but if the fees are not paid then the credential cannot be issued.
Eventually with time more transactions will start happening on-chain which will create the necessary infrastructure to make tokenization of illiquid assets possible.
There are however other mechanisms by which off-chain enforcements can be handled in a progressively trust minimized manner.
The simplest is simply relying on a reputation system where a trusted 3rd party takes on the responsibility of enforcing the defaults off-chain.
As a demonstrator the team at Konkrete.io has tokenized a commercial property in Melbourne, Australia.
And deployed it as collateral on the OTL.
The next step is requiring an equivalent amount of collateral to be put on chain as a stand-in by the party responsible for enforcement. However this is capital inefficient.
An alternate solution is to have a put option against the price of the offchain asset and the option writers are rewarded via the fees paid to them, a quasi insurance system.
A step beyond that would be to tokenize the ownership of the OTL and use that as collateral. This as described later is one of the intentions of the token distribution.
COMMUNITY GOVERNANCE HANDOVER
The OTL is at present a fork of the Compound protocol. Once the community handover is completed, the community may choose a new development/leadership team that can evolve its technical progress. The GOTL tokens are a fork of the COMP tokens and the process of governance proposals and the voting on them is expected to mirror Compound’s process closely.
The OTL, whilst being a fork of Compound, however has a few key differences.
On Compound all ERC20 tokens behave similarly. On the OTL, we have cash equivalent tokens in the form of stable coins such as USDC, USDT, DAI etc. And separate to that we have asset tokens which represent the tokenized real world asset.
Cash tokens can be only used to lend and asset tokens can only be used to borrow.
There is a price oracle interface which can be tuned
A few key points to consider:
- THIS IS NOT A TOKEN SALE
- NO FUNDS ARE BEING RAISED VIA THIS PROCESS
- THE PLATFORM TECHNOLOGY BUILD IS LARGELY COMPLETE
- THE TOKENS ARE A FORM OF A LOYALTY REWARD TO THE USERS OF THE PLATFORM.
The term largely is used in the second point as in case of technology, development, improvements, and maintenance is a perpetual process. However the system as of today is being used in a functionally complete manner)The tokens are being given away for free to the users of the OTL.
The key intention here is to achieve decentralization by handing over day to day control of the governance of the platform to the community that is actually using it.
The community can then choose to add more assets, determine new enforcement rules and valuation mechanisms as well as future enhancements to the platform.
Every day X number of tokens will be distributed to the wallets that have deployed assets to lend on the OTL proportionate to the interest they are earning. The absolute amount of tokens distributed daily will reduce by Y% daily till it reaches zero after which it will stop. This is meant to reward early adopters.
We have not yet decided upon X and Y numbers, but will update this soon.