Introduction
============

In a capitalist economic system, it is allowed for an entity to lend money out 
to another entity, as long as both agree upon the conditions of the loan: how 
long, how much interest, any collateral, etc.
This is a simple extension of basic capitalist economic thinking: that the 
owner of funds or other capital, is the one who should decide how to utilize 
(or not utilize) that capital, including the decision to lend (or not lend).

It has been observed as well that groups of people may have relatively small 
savings that they can afford to put into investment (i.e. loaning out for an 
interest rate), but as the technological capabilities of our shared 
civilization have expanded, the required capital to create new businesses or 
expand existing ones have grown much larger than most single individuals can 
invest in.

Thus, coordinators that aggregate the savings of multiple individuals, and then 
lend them out for interest to new or expanding businesses, have also arisen, in 
order to take advantage of the larger return-on-investment of more 
capital-intensive but high-technology businesses, capturing the long tail of 
small investors.
Traditionally, we call these coordinators "banks".

However, this typically involves delegating the work of judging whether a 
business proposal is likely to give a return on investment, or not, to the 
coordinator itself.
Further, the coordinator typically acts as a custodian of the funds, thus 
adding the risk of custodial default to the small-time investors in addition to 
loan default.
(In this view-point, central banks that provide fiscal insurance in case of 
loan default by printing new money, are no different from custodial default, as 
they degrade the monetary base in doing so.)

This writeup proposes the use of features that we expect to deploy at some 
point in the future, to allow for a non-custodial coordinator of multiple small 
investors.

This is not a decentralized system, as there is a coordinator; however, as the 
coordinator is non-custodial, and takes on the risk of default as well, the 
risk is reduced relative to a centralized custodial solution.

Note that custodiality is probably a much bigger risk than centralization, and 
a centralized non-custodial probably has fewer risks than a decentralized 
custodial setup.
In particular, a decentralized custodial setup can be emulated by a centralized 
custodial setup using sockpuppets, and without any decent sybil protection 
(which can be too expensive and price out investments by the long tail of small 
investors, thus leading to centralization amongst a few large investors 
anyway), is likely no better than a centralized custodial setup.
Focusing on non-custodiality rather than decentralization may be a better 
option in general.

A group of small investors may very well elect a coordinator, and since each 
investor remains in control of its funds until it is transferred to the lendee, 
the coordinator has no special power beyond what it has as one of the small 
investors anyway, thus keeping decentralization in spirit if not in form.

Non-custodial Investment Aggregation
====================================

In principle, if a small investor finds a potentially-lucrative business that 
needs capital to start or expand its operation, and promises to return the 
loaned capital with interest later, then that small investor need not store its 
money with anyone else: it could just deal with the business itself directly.

However, the small investor still needs to determine, for itself, whether the 
business is expected to be lucrative, and that the expected return on 
investment is positive (i.e. the probability of non-default times (1 plus 
interest rate) is greater than 1, and the absolute probability of non-default 
fits its risk profile).
We will not attempt to fix this problem here, only the requirement (as with the 
current banking system) to trust some bank **in addition to** trusting the 
businesses that are taking on loans to start/expand their business.

(again: not your keys not your coins applies, as always; investors are taking 
on risk of default.)

The coordinator need only do something as simple as find a sufficiently large 
set of entities that are willing to indicate their Bitcoin UTXOs as being 
earmarked for investment in a particular business.

The coordinator, upon finding such a set, can then create a transaction 
spending those UTXOs and paying unilaterally to the business taking the loan.
The business provides proof that the destination address is under its 
unilateral control (so that investors know that they only need to trust that 
the business itself will do everything in its power to succeed and pay back the 
loan, without having additional trust in the coordinator to hold their funds in 
custody).
Then the individual investors sign the transaction, releasing their funds to 
the business.

However, the issue now arises: suppose the business succeeds and is able to pay 
back its loan.
How does the business pay back the loan?

Thus, prior to the investors ever signing the loan-out transaction, they first 
prepare a loan-payback transaction.
This loan-payback transaction spends from a multisignature of all the 
investors, equal in value to the loan amount plus agreed-upon interest, and 
distributes the money to each of the involved investors.
Crucially, this loan-payback transaction is signed with a `SIGHASH_ANYPREVOUT` 
signature.

Now, in order for the business to pay back its loan, it only needs to gather 
enough Bitcoins to pay back the loan, and pay back the exact amount to the 
multisignature address of the investors.
Then, any of the investors can reclaim their funds, plus interest, by 
re-anchoring the loan-payback transaction to this transaction output and 
broadcasting it.

The coordinator, for its services, may extract a fee from the loan-payback 
transaction that all the investors can agree to; thus, it takes on as well the 
risk of default by the business (the coordinator exerts effort to locate 
investors and encourage them to invest, and would lose the fee paid for its 
efforts if the business it is proposing as a good investment does not pay 
back), which seems appropriate if it also serves as a basic filter against bad 
business investments.
Finally, by working in Bitcoin, it cannot have a lender of last resort, and 
thus must evaluate possible business investments as accurately as possible (as 
default risks its fee earnings).

(investors also need to consider the possibility that the purported "business" 
is really a sockpuppet of the coordinator; the investors should also evaluate 
this when considering whether to invest in the business or not, as part of risk 
of default.)

(the above risk is mitigated somewhat if the investors identify the business 
first, then elect a coordinator to handle all the "paperwork" (txes, 
transporting signatures/PSBTs, etc.) by drawing lots.)

Thus, ***if*** the business is actually able to pay back its loan, the 
coordinator is never in custodial possession of funds.

Cross-business Aggregation
==========================

Nothing in the above setup really changes if the investors would prefer to 
spread their risk by investing sub-sections of their savings into multiple 
different businesses.
This gives somewhat lower expected returns, but gives some protection against 
complete loss, allowing individual investors to adjust their risk exposure and 
their desired expected returns.

The batch transaction that aggregates the allocated UTXOs of the investors can 
pay out to multiple borrowing businesses.
And each business can be given a loan-payback address, which is controlled by 
the investors that extended their loans.
Investors generate an aggregate loan-payback transaction and signature for each 
business they invest in.

Collateralized Loans
====================

As observed in 
https://lists.linuxfoundation.org/pipermail/bitcoin-dev/2020-July/018053.html, 
a Cryptographic Relay would allow collateralized loans.

Nothing prevents the "loan shark" in the collateralized loan example from being 
a MuSig of multiple small investors.
Practically, a coordinator would help facilitate construction of the necessary 
transactions and interaction with the loanee, but as long as ownership remains 
controlled by the individual investors, there should not be any custodial 
issues.

Of course, if the loan defaults, then the collateral needs to be sold in order 
to recoup the loss incurred in loan default case.
Coordinating this sale amongst the multiple small investors is now potentially 
harder.

An additional service may be willing to pre-allocate Bitcoin funds into a 
timelocked contract, where the amount can be claimed conditional on transfer of 
the ownership of the collateral to the service in the future, or if the fund is 
not so claimed, to be returned to the service with the collateral not claimed 
(as it might have been reclaimed by the loaner after successfully paying back 
its loan).
This additional service earns by arbitraging the time preference: in case of 
default, the investors would prefer to recoup their financial losses quickly, 
while the service is now in possession of the collateral that it can resell 
later at a higher rate.

Note that these are all operations that traditional banks perform; again, this 
idea simply removes the necessity for custodial holding of funds, in the way 
traditional banks do.
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