This project aims to support personal and social economic resilience. One aspect of resilience is cash flow flexibility through mutual financial support. Specifically, a social sharing economy for cyclical borrowing & repayments.
Co-here proposes a decentralised trusted peer lending network, at a low cost to a borrower, with options for loan extensions and partial debt forgiveness. A mutual finance network for Buy Now Pay Later (BNPL) at reputable participating Local Token merchants.
People in need of loans are vulnerable to predatory lending, market determined high interest rates, extractive business practices which have become the norm.
Seeking a better solution
It’s not all bad out there… member owned credit unions, welfare grants, micro-credit, mutual credit clubs, subsidised and interest free loans and direct family / friends financial support have helped people, rather than profit.
An early example of setting standards for peer lending are “Rotating Saving and Loan associations (ROSCA), in which “a group of individuals who agree to meet for a defined period in order to save and borrow together”.
Together these networks have served social economic support needs but they have not grown to a scale to serve everyone who needs economic support. Extractive banks, credit cards and short term loan markets are the norm.
Why are member owned mutual credit not enough?
When a credit union or mutual credit society aggregates deposits and lends out to borrowers as a loan service, they remove most of the social capital value from the perception of lenders. The real lenders are the depositors which are out of touch with the borrowers. Depositors can’t easily perceive the value of mutual social economic resilience they offer each other, as a worthwhile outcome, something valuable to contribute to beyond the opportunity to borrow when needed.
Why are small lending circles not enough?
In the case of small lending circles, they are often ad hoc, initiated by the need of a common member. They are limited in financial scale, are not easily re-initiated for other members or expanded to a wider network, lacking clear, robust agreements, procedures and accounting.
Why are peer lending platforms not enough?
Formal online peer to peer lending platforms have developed and grown rapidly over the last decade. Early peer-to-peer lending was also characterized by disintermediation and reliance on social networks but these features have started to disappear.
Learning from the best solutions
Co-here aims to learn from mutual credit, small lending circles and peer lending platforms. To dis-intermediate for profit platforms, by decentralising the platform, by connecting social value and trust among participants providing mutual credit and by standardising procedures for members of trusted circles and facilitating over lapping networks.
Decentralised Peer to Peer Network for Lending
We need a broader societal financial solution, one which can operate from trust, direct communication and the social values found at a small scale yet have the procedural and efficiency standards required to operate at larger scales.
Through the combination of a peer lending protocol and leveraging social peer network effects, lender of a lender connections, we can improve on awkwardness of private loans and utilise the procedures of mutual credit (savings and loans) and potentially scale the network globally.
Additional loan funds required
Co-here recognises the need for additional funding to serve the needs of mutual lending. Usually, interest based lending is motivated to provide additional funds for the opportunity of collecting profit. In the Co-here lending model, lender deposits do not earn interest, and so lenders will not be motivated to deposit significant amount of surplus funds or savings.
Co-here Local Token issuance model considers this and includes the issuance of additional tokens, budgeted for the Lending incentive fund to provide Local Tokens to a Common Loan pool. The Common Loan Pool will contribute approximately 30% to every loan and collect a relatively low interest for all outstanding loan amounts (say 6% APR), for the ongoing funding benefit of the entire lending network.
A peer lending protocol
How might cooperative consumers combine personalised non extractive (not for profit) financial support with standardised scalable standards for financial services?
By switching from aggregated deposits and loans to smaller personal targeted loans with much shorter repayment schedules, with more direct relations between the borrowers and those providing the loans.
By supporting lenders to formalise clear terms, standards and procedures, to help lenders manage their ability to lend, extend and forgive loans (optional), while borrowers understand the terms for repayment.
By recording and presenting borrower and lender activity to allow participants to assess risk and benefits in continuing, changing or terminating terms of agreements.
By leveraging the network reach of lender of a lender (2nd and 3rd degree) to extend direct trust and agreement connections, with graduated allowances and terms, to bring additional financial scale, inter connecting tight clustered networks.
Loan account & trusted lenders
Each peer lending participant requires an initial loan account with a minimum deposit, a “stake”, made available for loans, to be borrowed by their peers. An example initial stake could be $100 worth of local tokens. More funds can be added later, as trust develops among peers and they wish to provide each other greater funds and credit limits.
Each participant also requires a minimum of unique lending peers in their trusted lending circle (1st degree lender). Unique means a trusted peer is not also a trusted peer to another peer in your circle, they are not over lapping. It’s not unusual for your friends to be friends with each other and the same applies in trusted circles, but a minimum of unique peers are required.
Establishing a loan & repayment schedule
A borrower wishing to purchase from a participating reputable merchant (with sufficient trade history), which accepts full payment in local tokens, could request to borrow from their trusted lending circle. If all the preferences are aligned with the loan and the funds are available, the loan is established and the merchant is paid.
A loan establishment fee of 2% is paid from the borrower’s personal account, 1% for the Transaction Pool for the life of the loan (10x 0.1%) and 1% for the Contingency Pool (covers up to 50% of debt remaining from a loan default).
Loans have a schedule for repayment, for example 10 repayments over 10 weeks. A lower than market interest rate, for example 6% Annual Percentage Rate (APR), for the outstanding loan amount is added to the loan on a weekly basis, .
A borrower could establish more than one loan at a time, as long as they maintain scheduled payments, remain with in their credit limit and their is an availability of funds.
Initial stake & raising credit limits
A new lending participant initially makes a loan account deposit (stake) of say $100 worth of local tokens and connects with a few unique trusted peers which have also deposited their required stakes. Since they have yet to show a history of reliability to repay loans “on time and in full”, their initial credit limit will be restricted, a limit equal to their stake, a 1:1 loan ratio.
As participants demonstrate a history of making all payments “on time and in full” their confidence increases, their credit limit could be raised, up to twice (2:1) or three times (3:1) the amount in their loan account. Loans are also dependent on the availability of funds in the loan pool network. As participants gain confidence in the repayment and circulation of their funds, they could consider raising their stakes in their loan account to provide more funds to each other and the lending network.
Interest is waived for growing loan accounts
When a borrower is up to date on their scheduled loan repayments and has deposited to their loan account, so as to have at least 6% (as an example) more in their deposit balance compared to 60 days prior, and where 60 days prior their loan account deposit balance was above the minimum required, an interest of 6% APR (example) on outstanding loan amounts can be waived.
The loan account deposit balance is not effected by loans taken from their loan account, just like your deposit balance at a credit union. Peer lending is about sharing access to funds of loan accounts and as a collateral of last resort, in case an account owner defaults on payment. The 60 day deposit balance comparison looks at total deposited balance.
An alternative to a single threshold is a tiered incentive approach. For every 1% increment added to their loan account deposit balance compared to 60 days prior, there is a corresponding 1% reduction in the applied APR interest rate for outstanding loan amounts. For example with an interest rate of 6% APR, when the current deposit balance is 3% more than 60 days prior, this increase would reduce the applied interest rate by 3% to an effective 3% APR.
When users add to their loan account balance with additional deposits, they increase the shared loan pool for their immediate trust circle and also for their trust lines (see explanation below).
No positive earning would be available beyond zero interest. Usually there would be an increase in the borrower’s credit limit, based on a ratio to deposit balance, their repayment reputation and available loan funds.
Interest adds to the Common Loan Pool
In the Co-here peer lending model interest has a singular purpose: to gradually add funds to the lending facility, scaled through a common loan pool available to the entire lending network. Interest (with an example rate of 6% APR) on outstanding amounts is paid from the borrower’s personal spending account to the common loan pool (previously called lending incentive pool), rather than to the lenders loan accounts. Principal loan repayments are sourced from personal spending accounts to lenders loan accounts and the common loan pool.
Common Loan Pool serves the network loan facility
A common loan pool is initially funded and receives additional local tokens whenever local tokens are issued, which occurs when ever wallet holders convert crypto collateral in to local tokens. The purpose of the common loan pool is to boost the funds in the lending network, say by an additional 30%. The tokens in the pool are held separately from lender loan accounts, they remain always available for further loans and the pool earns all the interest.
Lender of a lender of a lender network
A second and third level of lenders of lenders will extend the scale of the Trusted circle loan facility. Lender of a lender links are called Trust lines.
Peer loan sources – extending trust
Loans may be sourced:
- 40% from 1st level lenders
- 20% from 2nd level
- 10% from 3rd level
- 30% from the common loan pool
The ratio between sources aims to extend trust from 1st level lenders by requiring the largest portion of the loan to be sourced from lenders who know and mutually trust each other. The next most significant amount is the common loan pool, as it is able to continuously re-loan out its funds without requiring borrowing from the network. The 2nd and 3rd degree lenders help spread the loan source requirements over a wider network.
The 2nd level lenders won’t have direct access to a borrower profile to determine trust. Their trust in the borrower comes from the trust of the borrower’s 1st level lenders, who know both the borrower and them directly. The 3rd level lender depends on the 1st level lender trust and the intermediate discretion of the 2nd level lender to choose trusted lenders.
Late repayment consequences
When a borrower is late on a payment of a scheduled loan, they are prevented from any further borrowing until all loans are fully repaid. If the payment is late more than 7 days, the loan amount they can borrow is reduced by a factor. For example if they developed a loan to loan account ratio of 3:1, it is reduced to 2:1. They will need to complete all payments of loans on time to begin to build up trust again, to restore a higher loan ratio. If after 7 days a late payment has not yet been paid, it’s payment is sourced from the borrower’s loan account. If the loan account is thereby reduced to an amount below the minimum required, the lender will need to add to their loan account to the required amount, before they can begin borrowing again.
In case of loan default
If after 7 days following the end of a loan schedule, a borrower has failed to repay the loan, their account is put in to “hold to exit” state, their loan account will pay out as much as it can to cover loan repayments. The Contingency Pool then pays up to 50% of what remains of any loans and the account is closed, the profile records the default.
The lending account can be reopened through repayment of the Contingency Pool payout, a deposit of the minimum amount required for the loan account and re-establishing connections with a minimum number of Trusted Circle lenders. These lenders will be aware of the default, because they were probably the lenders which lost some of the defaulted amount or if they are new potential trusted lenders, they will see the request of the lender profile has a default on record.
When a borrower is late to make a scheduled repayment, and a lender has agreed in their preferences to extend a scheduled repayment for their trusted borrower, a loan extension is automatically setup. This saves a borrower from incurring a late payment.
An extended loan starts it’s own schedule for repayment, for example 33% per week over 3 weeks and would incur a higher interest than the initial loan, for example 12% APR interest. Lender profile preferences indicate the availability of loan extension permissions as an agreement and are adjustable in real time for future loan and loan extension permissions.
Only one loan extension is permitted per loan and only two loan extensions permitted across all of a borrowers loans.
Lenders providing loan extensions are required to have a higher loan account minimum of say $150, 50% higher than the minimum of lenders with a loan only preference. Since the loan extension payment is automated it will be sourced from the lenders loan account first and the lender may need to top up their loan account, to the higher minimum, to continue to provide loan extensions.
When a borrower fails to repay a loan extension payment, a lender may preference to automatically forgive the amount owed to their own loan account by repaying that amount on behalf of their borrower. The forgiveness payment is not in any way a loan but the profile of the lender and borrower will be updated to reflect these actions. The borrower will still be required to pay loan extension payment to those lenders not providing forgiveness.
Profiles allow for informed loan preference adjustments between trusted lenders. A lender may at any time close a trusted lender agreement / connection to prevent further loans, or withdraw loan extensions permission or forgiveness option to a specific borrower.
Lenders providing loan extension forgiveness payments are required to have an even higher loan account minimum of say $200, higher than lenders with a loan only or loan and extension preferences. Since the forgiveness payment is automated it will be sourced from the lenders loan account and the lender may need to top up their loan account, to the higher minimum, to continue to provide loan extension forgiveness.
Trust agreement, dynamic resilience
Trust Circle lending agreements (1st level) are an ongoing adjustment, including preferences for loans, extensions and forgiveness based on your knowledge of the borrower / lender and their lender profile.
You can group your trusted circle (1st level) lenders in 3 ways:
- lenders with a loan only preference
- lenders with loan extensions
- lenders with loan + extensions + forgiveness
For example you may have a total of 100 trusted circle lenders (1st degree lenders). As an example of the 100: 60 are loan only, 30 with loan extension permission and 10 with extensions and forgiveness option.
2nd and 3rd level lending options
2nd level lender options:
- only provide a loan
- or + loan extensions if level 1 extends
- or + extension forgiveness if level 1 forgives
3rd level lender options:
- only provide a loan
- or + loan extensions if level 1 and 2 extend
- or + extension forgiveness if level 1 & 2 forgive
Common Loan Pool as a 4th level lender
- will always loan as a 4th level lender
- will + loan extensions if level 1, 2 & 3 extend
- will + extension forgiveness if level 1, 2 & 3 forgive
Why extend trust based on the trust of another?
The incentive for lenders to provide or repay loan extensions for borrowers is not only to support the borrower in need but also to support the trusted network loan pool facility. Repayments restore the lending pool, while payment delays and defaults diminished the lending pool for all connected members.
Contributions to social resilience can be understood through actions and feedback. The facility for loan extensions and forgiveness add some additional layers for mutual peer to peer financial resilience.
Measure feedback for resilience
Trusted circles are based on real world examples, in which lenders and borrowers actually know each other well enough to make a loan agreement and in such situations the consideration of a loan extension and partial forgiveness are also common.
Significant social connections with trusted lenders allows for direct communication and support. A clear set of common rules and parameters facilitates an ongoing dynamic among participants.
Preference and agreement adjustments allow individuals and groups to adjust to their social economic value priorities, decisions to take action, to open and stregthen pathways and provide a measurement for feedback in personal, community and societal resilience.
Preference and Profiles
Loans, borrowings, payments, extensions and forgiveness are all recorded in lender and borrower profiles, as well as preferences as to acceptable agreements. Only your Trusted circle peers will see your profile. Those making a request to join your Trusted circle will allow you to see their profile for your consideration and then you will choose if to offer your profile to them, before either of you make an agreement.
When peers consider agreeing to be in each others Trusted circle, they view profiles and preferences. They will be acceptable or unacceptable accordingly. The 2nd and 3rd degree lender connections will be matched automatically according to preferences and profiles without viewing.
As profiles change they may affect agreements. Membership in a Trusted circle (1st degree mutual lending agreements) and Trust lines (2nd and 3rd degree lenders through your trusted circle and your lenders trusted circles) are re-adjusted according to each persons preferences and member profiles. For example a “no extension” preference will automatically disconnect further lending for a borrower with a late payment. The repayment is still owed but no new loans will be allowed. A trusted lender connection may be renewed after a late payment, if the lender agrees to reopen the connection.
Peers choosing peers choosing peers
It’s hard to tell how people will preference having others in their trust circles (1st, 2nd and 3rd levels) with profile records showing paid and unpaid loans, loan extensions and forgiveness paid for them, and those lenders who have paid back some of the loans for their borrowers.
People will be attracted to members with a decent loan pool facility but also profiles whose records show willingness to make loan extensions and have made repayments to help others pay down their debts.
Wanted: Borrowers needing support
On the other hand, including people in your trust circles (and lines) who do require more debt repayment support, allows lenders to demonstrate their willingness to ‘extend and forgive’, which is recorded in their profile. A lender’s willingness to ‘extend and forgive’ may become a profile and trusted circle expectation.
Obviously this all needs modeling and real world experiment.
Parameters to be considered
Setting system wide minimum loan account balances and Trusted circle minimum unique lender number. These two parameters will automatically determine the minimum lending network and loan pool for 1st, 2nd and 3rd degrees. Buffer unique lender numbers to warn and prevent breaking minimum requirements. Parameter ranges would need to be researched to ensure a sustainable lending networks.
Loans are not for extraction, yes for resilience!
Why does the interest on loans go in to the common loan pool rather than to lenders loan account or to personal accounts? The purpose of this peer lending network is non extractive mutual lending. Over time it’s hoped to grow and improve and become an alternative to market based profit extractive lending.
Loans are restricted to payments at reputable Merchants, including prepaid subscriptions. Personal cash loans are not permitted. This is to avoid the possibility of an exploit where by fake or bad actor accounts are set up to extract Local Tokens out of the ecosystem through borrowing, converting and withdrawing. Merchants wishing to accept payment through peer lending will need to qualify through a trade history as a merchant.
Co-here will provide an alternative lending model to service merchants – Peer to Merchant loans, through customer prepaid subscriptions, which benefit the merchant with a cash advance and the customer with loyalty discounts.
Halting loans and Exiting the peer lending network
If a participant decides to halt new loans, they set their lending account to “hold”. No new loans will be drawn from their loan account, while any existing loans drawn from their loan account are gradually repaid according repayments schedules.
If a participant decides to exit the peer lending network, they set their lending account to “hold to exit” which notifies their trust circle of their withdrawal from lending and intention to depart their trust circle. No new loans will be drawn from their loan account, while any existing loans drawn from their loan account are gradually repaid according repayments schedules. Once they have fully repaid any loans and interest they owe to others, funds in their loan account will be returned to their personal account and any further repayments owed to them from others will be returned when completed. Their peer lending profile which shows previous lending activity will remain intact, in case they choose to reconnect with others in a new trust circle.
An experiment in Trust
Trusted peer lending networks, with trusted 1st degree circles and 2nd and 3rd degree trust lines proposes an interesting experiment in trust, communication and feedback. Through measurement and feedback the mutual personal lending and preferences, interacts with their own closest peers, extends to a wider trust network through peers of peers, demonstrating value priority like ripples.
Examples with a ripple effect
Actions may ripple through a network (see “going critical“). An example of a ripple effect could be the spread of the specific preferences which clusters of participants make, setting an example, potentially encourage others to follow or trial. The ripple mechanism occurs through the influence of participants in overlapping circles and the effects of lending preferences with 2nd and 3rd degree trust lines.
For example a participant may add funds to their loan account which encourages peers to add funds as well. The addition of funds may spread to wider and wider circles. The same may occur with agreeing to loan extensions or debt forgiveness. The negative actions, retracting extensions and forgiveness may also ripple.
Merchant promotional opportunity
Another ripple (network) effect may be through peer to peer recommendations. Peers may spread news or a recommendation about a worth while prepaid subscription offer they enjoy or simply recommending their most recent favourite merchant which happily accepts local tokens. Merchants may offer a bonus loyalty reward to customers for successful recommendations.
For an example a local gym offers a prepaid subscription for 52 weeks with an overall price discount of 19.5%. Let’s say the offer is $858 for 52 weeks for access to classes and the gym, which equates to $33 a fortnight. The post paid amount would be $1,066 for 52 weeks. The prepaid discount saves the customer $208 over 52 weeks, 19.5%.
The first person takes up the offer borrowing local tokens from their peer network, to pay the merchant. That person’s trusted peers hear about the loan for the merchant offer as they are in open social communication, and the peers consider taking up the offer as well. Then peers of peers hear about the offer and consider it. Some take up the prepaid offer and choose to borrow from peers, while others lend.
The repayments are scheduled over 10 weeks (+6% APR ~ $10), while the benefit of the discounted prepaid subscription lasts for 1 year. The merchant made the offer with the hope of increasing membership, receiving payment in advance of delivering services and the benefit of social networking as a means to spread and market the offer, saving on marketing costs.
Learn more about Peer to merchant lending networks