Study Guide for Distributed Ledger Loan Systems
Glossary
Term DefinitionsVIRL (Virtual Representation of a Thing)A digital manifestation of a good, service, or experience, such as a gift card, digital music file, digital video file, software, digital photo, physical good, digital service (such as a video streaming subscription), physical service (such as a driver service, domestic service, dry cleaning service), and/or purchased experience (such as a hotel package, concert ticket, airline ticket, etc.), or any combination thereof.TokenDefinitionA digital mark of ownership of a specific item. A token can be fungible or non-fungible.Fungible TokensA token that is interchangeable with other tokens of the same type, for example, one bitcoin is interchangeable with another bitcoin.Non-fungible TokensA token with a unique identifier that is not interchangeable with other tokens, for example, a token representing a specific piece of art.Smart ContractsA computer program stored on a blockchain and executed automatically when predefined conditions are met, for example, to manage loans, token ownership, and other loan-related transactions.Distributed LedgerA decentralized database shared and synchronized by a network of computers, for example, a blockchain.BlockchainA chronologically linked and encrypted block of transaction records. Sidechain A shard of a blockchain that extends from the main blockchain, for example, a sidechain used to store virtual representations of a specific type of item and associated data. Consensus Mechanism A mechanism used to validate and add new transactions to a distributed ledger, for example, Proof of Work (PoW) and Proof of Stake (PoS). Private/Public Key Pair A pair of keys used to encrypt and decrypt data, for example, to digitally sign transactions and verify ownership. A digital signature uses a private key to encrypt data to verify the authenticity and integrity of the data. Hashing Algorithm An algorithm that converts data of arbitrary length into a fixed-length hash value, for example, SHA-256. Guild A group of participants that performs specific tasks in the decentralized loan process, for example, a validator guild, an appraiser guild, and a custodian guild. Governance A collection of rules and regulations that govern different aspects of the decentralized loan process, for example, system-level governance, stage-level governance, and guild-level governance. Custody Holding of assets by a trusted third party, for example, holding collateral items by a custodian for the duration of the loan. Liquidation The sale of collateral assets in the event that a borrower violates the terms of the loan, for example, through an auction or over-the-counter (OTC) transaction. Short Answer Questions
Instructions: Please answer each of the following questions in 2-3 sentences.
What is a Virtual Representation of a Item (VIRL)? How does a VIRL relate to a physical item?
What is the difference between a non-fungible token (NFT) and a fungible token (FT)?
What role do smart contracts play in a distributed ledger lending system?
Describe how a distributed ledger can be used to maintain a transparent record of token ownership and transaction history.
Explain the purpose of sidechains in a distributed ledger system and provide an example use case.
What are guilds in a decentralized lending system? How do they promote decentralization?
Distinguish between system-level governance, stage-level governance, and guild-level governance.
Why is it important to escrow collateral in a decentralized lending system?
What is liquidation in the context of a decentralized lending system? When does liquidation occur?
Give a brief overview of how a decentralized lending system works, from tokenizing collateral to loan repayment.
Short Answer Questions
A Virtual Representation of a Item (VIRL) is a digital representation of a good, service, or experience. It contains details related to the item but does not necessarily represent the item itself. VIRL can be tokenized, creating tokens to represent ownership of items that can then be traded on a distributed ledger.
Non-fungible tokens (NFTs) have unique identifiers and are not interchangeable, while fungible tokens (FTs) are interchangeable with other tokens of the same type. NFTs are suitable for representing unique items, such as collectibles or digital artworks, while FTs are suitable for representing fungible items, such as currency or commodities.
Smart contracts automate the execution of agreements in decentralized lending systems. They define the terms of the loan, manage collateral, and ensure that actions are performed when predefined conditions are met, such as releasing funds at the end of the loan term or liquidating collateral when loan terms are violated.
The distributed ledger maintains an immutable and transparent record of transactions. Every time the ownership of a token is transferred, a new transaction is added to the ledger, creating a public history that can be audited by anyone. This transparency promotes trust and reduces the possibility of fraud.
Sidechains are independent blockchains that extend from the main blockchain. They handle specific tasks or store specific types of data to improve scalability and efficiency. For example, a sidechain can be specifically designed to manage transactions related to a specific type of collateral, such as real estate or art.
Guilds are groups of participants that perform specific tasks in a decentralized lending system, such as verification, evaluation, or safekeeping. Guild operations follow predefined governance rules to ensure decentralized decision-making and reduce the risk of manipulation.
System-level governance defines the rules and regulations for the entire decentralized lending system. Stage-level governance sets rules for specific process stages (such as verification or evaluation), while guild-level governance sets rules for the operation of a specific guild.
Custodial collateral ensures that the collateral is properly kept during the loan period. This provides assurance to the lender and reduces the risk that the borrower will sell or otherwise dispose of the collateral.
In a decentralized lending system, liquidation occurs when a borrower violates the terms of the loan, such as failing to repay the loan. In this process, the collateral is sold to repay the lender. Liquidations can be automatically executed by smart contracts to ensure fairness and transparency.
Decentralized lending systems first tokenize the collateral, creating a digital token that represents its value. Borrowers can then use this token as collateral to obtain a loan. Smart contracts manage the loan terms and automatically enforce repayments. If the borrower fails to repay the loan, the collateral may be liquidated to cover the lender's losses.