New Crypto-Secured Lending System with a Two-Way Collateral Function

Abstract

All existing secured loans, including crypto-secured loans, are provided under the condition that the collateral entrusted by the borrower is kept safe during the loan term. In other words, they use a one-way collateral function. Thus, a frequent drawback of these loans is that the collateral value increases if and only if the collateral price increases. To resolve this problem, this paper proposes a new crypto-secured lending system incorporating a new two-way collateral function. It would allow a borrower to invest proportions of their own collateral by predicting the market in both directions to make profits irrespective of whether the price of the collateral increases or decreases. This benefits the borrower since profit can be made even if the price of the collateral drops, by betting on the price decrease. This new lending system could include a new hedged portion, unlike traditional secured lending systems. As a result, larger loans can be made under this arrangement; further, this portion provides the advantage of reducing the underlying collateral price volatility risk.