BYOB: The Case for Smart Contracts

How to Be Your Own Bank?

The way to be your own bank consists of participating in certain smart contracts of a financial nature. These contracts, like any other, must include the necessary elements for their legal validity and specify the terms and conditions under which the transactions will be executed.

For example, consider the collateralized loan. A user owns a bitcoin, which can be deposited in a smart contract with specific lending terms. The purpose would be to obtain a collateralized loan. For this to work, there must be a counterparty, who acts as their own bank, willing to lend money in exchange for interest, using the bitcoin as collateral. The details of this contract can vary. Imagine it is an overcollateralized loan, with a loan-to-value of 75%. If the lender wants to minimize exchange rate risk in case of default, they could acquire a derivative contract, such as a future, to mitigate this risk by selling a bitcoin at a fixed price.

Thus, if the set of contracts acquired by the lender satisfies their need or appetite for risk and their investment objectives, they can do so without additional intermediaries. The question arises of who drafts these contracts, what they look like, where they are executed, whether they include conciliation or termination clauses, and how the execution of the transaction is ensured.

If the contract is executed on Ethereum, one can be drafted that activates when certain conditions are met, exchanging tokens for dollars and the bitcoin for a wrapped bitcoin. A zero-knowledge approach for the bitcoin deposit could also be explored, evaluating the need for an additional counterparty, although it might be unnecessary with Ethereum.

Therefore, this method enables transactions of this nature, where the contracts must be open source to ensure code verifiability and have security and protection mechanisms. This allows for correcting possible errors in subsequent investments and creating an ecosystem where users can manage their financial will based on their assets.

The functionality of these blockchains falls within the domain of computation, but it is a viable option worthy of consideration.

This essay is related to the broader research on interest rates in DeFi and the challenges of structuring a decentralized exchange. See also: Optimizer Finance for practical DeFi applications.