How do you obtain a loan in a decentralized and permissionless financial system? The predominant structure for on-chain credit requires over-collateralization. A borrower must lock up their ETH (for example) to borrow a stablecoin like USDC. Is this the most capital-efficient way of borrowing? In traditional finance, there are credit scores. What about decentralized finance?

What is Union Protocol?

Union protocol allows any address on the Ethereum network to accumulate a credit line on-chain in a permission-less crypto-native way. The protocol does not underwrite risk. It remains a neutral party, solely providing a transparent mechanism for one or more addresses to “vouch” for another address. A “network of trust” can form around a specific address, which provides a signal for the user’s creditworthiness to a potential lending party.

Will you “vouch” for me?

Vouching is a key part of the Union protocol ecosystem. One party demonstrates their “trust'' in another party by “vouching” for them. How does this work in practice? A wallet vouches for another by pledging its stablecoin (DAI). The more DAI a wallet stakes in the protocol, the more they can vouch.

UNION Token

Union is paid as interest to users who stake their DAI or “vouch” (extend credit) on the platform. Union token holders maintain governance rights over the protocol, but one needs 1% of the total supply to even propose a change.

Early days

Small loan amounts and demanding user interface. An address can borrow a minimum of 100 DAI and a maximum of 5,000 DAI on the platform. Currently less than 2 ETH, this credit limit will hardly satiate the leverage-hungry borrower. Also, there’s no autopay, so borrowers must continually remember to pay back their on-chain loan. Set those calendar reminders - payback loan on Union. We checked Union protocol’s “developer FAQ” page, still under construction. It’s early days…

Opportunities with composability

Union is not a specific product, but a primitive. This means it’s designed for products to be built on top of Union. Traditional credit products like credit unions, credit lines, installment loans, and venture debt could be provided upon the Union platform. Of course, this depends on user adoption of the model, but it’s an intriguing proposition. A peer-to-peer underwriting system for a permissionless and anonymous financial system. With a system that caters to developers and builders, products built on top of unions could be the engine for user acquisition. It’s compelling.

The Jewelry store NFT

A jewelry store called NFT? To reward early participants, Union gave “ring of trust” non-fungible tokens (NFTs). Interesting user acquisition strategy!

Risks

What happens when someone cannot pay me back? With Union protocol, it’s “tough luck.” This is an uncollateralized and unsecured credit network. There is no asset backing the loan, only trust. Union suggests it's “advisable to only vouch for and lend to addresses you feel you can trust.”

Opportunities

Imagine a world where a prominent venture capital firm could “vouch” for their portfolio companies via Union Protocol. An early-stage project, with credit needs, could be supported by a network of reputable addresses to “vouch” for them.

Cryptofunds, market makers, and trading desks can engage in DeFi and Web3 with MetaMask Institutional

MetaMask Institutional offers unrivaled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance requirements. We enable funds to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.

Learn more about MetaMask Institutional

Found this research useful? Connect with the Consensys Cryptoeconomic Research team at [email protected]

Return to the Cryptoeconomic Research Library

Disclaimer: Consensys Software Inc. is not a registered or licensed advisor or broker.  This report is for general informational purposes only.  It does not constitute or contain any individual investment advice and is made without any regard to the recipient’s objectives, financial situation, or means.  It is not an offer to buy or sell, or a solicitation of any offer to buy, any token or other investment, nor is it intended to be used for marketing purposes to anyone in any jurisdiction.  Consensys does not intend for any person or entity to rely on any facts, opinions, or ideas, and any financial or economic commentary expressed in this report may not be relied upon.  Consensys makes no representations as to the accuracy, completeness, or timeliness of the information or opinions in this report and, along with its employees, does not assume any responsibility for any loss to any person or entity that may result from any act or omission based upon this report.  This report is subject to correction, completion, and amendment without notice; however, Consensys has no obligation to do so.