Dharma: An open protocol for generic tokenized debt agreements - Built on 0x

Motivation In 2011, Marc Andreesen famously wrote that software is eating the world. In 2017, we propose an addendum: Blockchains are eating the financial system. One after another, the asset classes that store the financial system’s value are being subsumed, swallowed, or augmented by tokenized analogues.Equity markets provide the most lucid example of this phenomenon. Token sales have created an attractive, egalitarian alternative to the time-intensive process of raising capital in an equity fundraise — and we’ve barely begun to scratch the surface.ICOs have created an attractive and lucrative alternative to raising money via equity fundraising mechanisms But why stop with equity? In the legacy financial system, equity is a much smaller asset class than debt — the total value of global equity hovers at around $73T, a relatively modest sum in comparison to the $213T in global debt assets. The mania around token sales has demonstrated that tokens are useful for representing assets with both utility value and equity-like properties; the natural next step is to port the world’s loans, bonds, and debt instruments into openly tradeable, permissionless tokens.The total value of global debt assets vastly exceeds that of global equities.A future in which debt agreements are a tokenized primitive would be a step-function improvement over the status quo, massively lowering the activation energy required to raise debt capital, trade debt instruments, and build credit derivatives. Moreover, the debt industry is notoriously rife with systemic opaqueness and governance crises, and arguably stands to gain the most from transparent blockchain-native infrastructure.The end-state ideal is clear — the world’s debt infrastructure should and will get ported over to blockchains like Ethereum.But how do we get there? The First Step Many projects and protocols — including Dharma protocol’s previous incarnation — have attempted to tackle this problem by building one-off systems optimized for specific classes of lending, be they peer-to-peer consumer micro-loan networks or decentralized margin lending protocols.These solutions share a common drawback — they are narrowly tailored towards a particular class of debt. This is problematic because debt is a massively varied asset class, with incarnations ranging from receivables factoring to sovereign bonds — building a secure, bespoke protocol mechanism for each use case is extremely inefficient and redundant.Moreover, we lack a common interface with which buyers, sellers, wallets, and exchanges can programmatically interact with tokenized debts. A future where tokenized debts are liquidly tradeable requires us to standardize a universal mechanism for representing debts as tokens.All in all, if we want to build a general purpose, tokenized credit market, a necessary first step is to establish a common standard for how debts are issued, underwritten, and administered as tokens. This is our aim in building Dharma protocol. Introducing Dharma Protocol: Dharma protocol is a highly generic construction that allows debt agreements of virtually any type to be issued, crowdfunded, and traded as tokens. We seek to build a common, secure infrastructural layer on top of which lending applications of any type can be easily built and monetized.We optimize for the following design goals: Generic — the protocol must enable the representation of virtually any type of debt agreement as a digital asset.Private — the protocol must not leak private, sensitive data from debtors and creditors alike on-chain.Extensible — the protocol must be useful as a primitive on top of which more complex credit applications can be built — be those on-chain collateralized margin lending schemes, smart contract-based credit derivatives, or zero knowledge credit scoring systems.Transparent — the protocol must enable traders to thoroughly reason about the current value, credit risk, and repayment status of any debt token without having to consult a central authority or administrator.Un-ambiguous — the protocol must codify a debt agreement’s repayment terms in a manner that is incontrovertible, unambiguous, and easily interpretable by smart contracts and similar automata.Un-opinionated — the protocol must be agnostic to the means by which constituent applications choose to deter defaults and delinquencies, be those legally binding off-chain loan documents, on-chain collateralization schemes, or mechanisms that are yet to be developed. Dharma protocol is built on top of the 0x Protocol, leveraging the 0x order schema as a fundamental primitive on top of which we construct a debt issuance scheme. To dig into the technical specifics of the protocol, we encourage you to study the Dharma white paper and provide your feedback, thoughts, and criticisms in our Chat Channel. What applications can be built on Dharma? Dharma is not an end-user lending application, but, rather, a suite of smart contracts, standards, and protocols that make it easy for anyone in the world to build and monetize diverse lending applications that leverage tokenized debt agreements.We highlight just a few interesting applications— Tokenized Municipal Bonds— municipalities frequently finance public infrastructure projects by issuing municipal bonds. With an open debt standard, municipalities big and small can sell tokenized bonds directly to their constituents in a process similar to an ICO.Decentralized Margin Lending — healthy financial systems require both speculators and skeptics, which is why margin buys and sells are fundamental components of any liquid financial market. With an open debt standard, peer-to-peer margin lending schemes can be constructed using smart contracts and price feed oracles.Tokenized SAFTs — projects often raise staggering amounts of capital in order to finance their eventual token sales in vehicles known as SAFTs. With an open debt standard, SAFT agreements can be tokenized as generic debt tokens, where the expected repayment is defined in units of the soon-to-be deployed protocol token. For those interested in building applications that leverage Dharma protocol, we encourage you to sign up for the Dharma Developer Mailing List — we’ll be releasing weekly tutorials and technical content to get you up to speed on the inner workings of the protocol and easy ways you can build lending applications that leverage it.More importantly, join the discussion on our chat channel — we’re excited to see what sorts of novel applications and innovations will come out of the community.Finally, Dharma Labs is hiring — if you’re interested in building out foundational infrastructure for tomorrow’s credit markets, drop us a line and we’d love to meet you.Note: Dharma is not currently doing a token sale and will not do so unless a compelling need for a protocol token emerges in the ecosystem’s development, be that 2 months from now, 2 years from now, or never.