zMorgan is an on-chain platform for Securities-Backed crypto Lending.
Transitioning into the new truly decentralized economy requires replicating trillions of capital into the blockchain. Today, over $95 trillion are in the global stock market. zMorgan aims to be the agent that allows stock investors to seamlessly transition into blockchain and replicate their capital.
Equity holders of public companies can extend their real-world portfolio to crypto markets utilizing and monetizing stocks that are otherwise lying idle, without selling them.
One of the current emerging trends in finance and blockchain, crypto lending is a form of Decentralized Finance (DeFi) when investors lend crypto or fiat currencies (within Zamzam platform USDT, BUSD or USDC are available) to borrowers and receive a reward as interest (crypto dividends in stablecoins $USDZ). It is quite similar to P2P lending as it includes three parties – the lender, the borrower, and the lending platform.
A securities-backed loan is a loan backed by publicly traded securities such as stocks or bonds as collateral. A borrower deposits securities into an escrow account on which the lender has a lien, and the lender will usually make available loan funds in the amount from 50% to 95% of the securities’ market value. An available credit limit depends on the specific securities in the portfolio and the level of diversification. For example, if a lender might approve more funding against a portfolio of U.S. Treasury notes than a portfolio that holds a single, concentrated stock position.
Usually there are three general purposes for taking a securities-based loan:
1. Return enhancement: clients take a loan backed by a securities portfolio and re-invest the loan to increase the portfolio’s expected returns (and risk).
2. Diversification: clients take a loan backed by a concentrated portfolio (e.g. small number of securities) and use the loan to invest in a diversified portfolio, thereby increasing the overall diversification of the investment portfolio.
3. Liquidity: clients take a loan backed by a securities portfolio and use the loan externally.
A securities-based line of credit helps borrowers to meet their liquidity cash needs by unlocking the value of their investments without selling them.
Some of the advantages of securities-based lending include:
Access to cash when a borrower needs it, potentially avoiding capital gains taxes from selling securities
Typically lower rates than other forms of credit. The first ingredient in the cost of a securities-based loan is a central bank policy rate within a certain country. With central banks keeping rates lower for longer, this looks set to remain low for the foreseeable future in most developed economies. Meanwhile, since securities-based loans are backed by portfolios, the spread over policy rates can be relatively low. As the first consideration in making a loan is the difference between the estimated interest rate on the loan versus the expected return of the investment, securities-based lending has become increasingly attractive.
For example, UBS Group AG’s case study shows how an investor with a portfolio valued at EUR 10 million, who wants to buy an apartment worth EUR 3 million, would forgo a EUR 1.1 million return over 10 years by selling parts of their portfolio instead of using a securities-based loan.
Flexibility in borrowing: there are no restrictions on what the loan can be used for
Not included on monthly credit reporting and not affect a Borrower's credit score
Less paperwork compared to traditional loans
The benefits of marketable securities backed finance include:
Liquidity to pursue your existing investment strategy and investment opportunities
Additional capital without selling securities
No interruption to your asset allocation and long-term investment strategy
Freedom to alter the strategy or focus of your portfolio being used as collateral
Credit lines/loans structured according to your individual needs with regards to type, amount, tenor, repayment and currency (including cryptocurrency)
Portfolio yield enhancement
The risks inherent in securities-based lending are not always readily apparent, but must be recognized as an important consideration when operating a securities-based loan.
If a securities-based loan is taken out for investment purposes (crypto investment or other), the investment risk will increase since there is no guarantee of how much return the investment will actually yield. Depending on the market situation, it is possible that the interest on a securities-based loan will be higher than the returns. In this case, a borrower would generate a negative leverage effect.
Using a well-diversified portfolio as collateral and investing the loan proceeds into a well-diversified solution reduces financial market risk. Investors should typically not make use of the maximum lending value available. Dynamic asset allocation strategies with risk-mitigating features can further reduce portfolio volatility and alleviate the risk of financial losses due to a collateral shortfall event. Choosing a loan tenor that is in line with the investor’s interest rate expectations and risk profile helps to keep funding cost risks under control. Borrowing against a securities portfolio with little or positive correlation to interest rate increases also lowers risk.
So, leverage provides the opportunity of realizing higher portfolio returns, but also entails higher risks. While risks can never be eliminated, they can be mitigated. The likelihood of return enhancement is higher with longer investment horizons and better-diversified portfolios.
If the value of your securities falls below a certain limit, you may be asked by Zamzam to furnish additional collateral (margin call) or to repay the loan in part or in full. If you are unable to meet this obligation to make an additional capital contribution or repay the loan, Zamzam may liquidate some or all of the investments used to secure the loan.
However, within zMorgan we offer to borrow about 50% of the value of securities that allows us to maintain a conservative cushion to reduce the threat of liquidation.
Insufficient funds to cover interest installments due or redemption of the loan may result in the sale of the pledged securities at an inopportune point in time.
Zamzam as a lender must be able to accurately determine which benefits he is due, and a borrower must be able to remit them on the due date. Zamzam must also ensure that if a loan was returned prior to the payable date, the benefit due is secured.
An additional benefit in certain jurisdictions is the tax deductibility of loan interest payments. The ability to deduct the tax on loan interest payments lowers the “effective” funding cost for the loan.
For example, private individuals who have unlimited tax liability in Switzerland usually are able to exclude the debt and the cost of interest from their taxable assets or income. However, if loans were issued for finance security transactions purposes the Swiss Tax Authorities determine a taxpayer as a professional securities dealer. In this case, capital gains would be taxed as income.
All terms of loans on zMorgan are controlled by smart contracts. A smart contract is a coded contract or transaction protocol that automatically executes, controls, and enforces the terms and conditions and provides a transparent, fair arbitration process.
Oracles allow our blockchain and smart contracts to interact with external data. They search, verify, and authenticate external data and then transmit it to smart contracts. They act as an API to external data sources providing accurate data from external sources.
Securities portfolio is put into the care of a third party (escrow agent) and such portfolio is held in an escrow account for delivery only when certain specified conditions are met - the loan is fully paid by the borrower.
Our goal is to allow the lenders to transfer investment coins to the borrower, and the borrower distribute repayments to all lenders, while achieving unlinkability. Without a loss of generality, we assume there are a certain number of lenders and one borrower. We separate the protocol into negotiation phase, lending phase and returning phase. The detailed lending and borrowing process is summarized in the Figure below.
First, within Zamzam platform a borrower verifies his identity and then submits his loan application attaching necessary documents in respect of a securities portfolio information. The borrower and Zamzam agree on the following loan information: total amount of a loan, numbers of repayment (loan term), interest rate.
Second, the borrower deposits the securities portfolio to Zamzam platform and this securities portfolio is transferred to a broker’s escrow account.
The borrower pays zMorgan Protocol fees that cover the broker’s commission for the escrow account and transaction fees. Zamzam tokenizes the securities portfolio and the information about the tokenized securities portfolio is posted to the dashboard.
Third, Zamzam creates a 2-of-2 multisig escrow account with the borrower. Based on the interest rate and loan terms, a repayment plan must be set upfront. After the lending platform gets a repayment from the borrower, the platform distributes the repayment to the lenders based on their lending amount. We introduce a variable repayment list agreed upon by both the borrower and Zamzam, then committed and posted to the dashboard. All loan information is posted to the dashboard for a lender’s review.
Each repayment varies in a certain range (number of repayments), but the total repayment amount is still equal to the desired repayment. Since Zamzam can not predict the total number of lenders, we can not construct the repayment plan in advance based just on the agreement between the borrower and Zamzam. Each individual borrowed amount must be divided by the number of lenders.
After a lender compares the borrower's project information and interest rate on the dashboard, we assume the lender wants to lend a certain amount of coins to the borrower through Zamzam platform. The lender asks Zamzam to set up a payment channel. Then the lender deposits USDT, BUSD or USDC in the desired investing amount on the blockchain via 2-of-2 escrow transaction with Zamzam. Upon the funded coins exceeding the proposed in a certain ratio Zamzam collects funded coins. In case some lenders change their mind before the deadline of fundraising and drop off this loan opportunity Zamzam is capable of collecting over-fundraising in a certain ratio.
After the borrower’s loan request is successfully funded, Zamzam generates the final repayment plan that is posted on the dashboard and transfers certain amount of $ZAMs to the lenders as incentives.
Then Zamzam sets up a mutually signed escrow and transfers to the borrower the desirable loan amount in $USDZ.
According to the final repayment plan the borrower pays the interests and loan principal in $USDZ through Zamzam platform. Zamzam creates a transaction to each eligible lender to pay them according to their lending amount and the repayment amount. Zamzam also implements the conversion of the repaid loan amount from $USDZ (from the borrower) to USDT, BUSD or USDC (to the lenders).
After Zamzam confirms the loan is fully paid by the borrower, the borrower receives back his secured portfolio used as collateral.
The information about the paid loan is posted on the dashboard.
Both processes of lending and borrowing require risk management. Therefore, a liquidation and risk management protocol can make sure that all loans are properly backed.
Collateral is based on LTV ratio. LTV stands for Loan to Value and represents the ratio between loan amount and deposited collateral:
ZMorgan enforces a minimum 50% LTV ratio, meaning you'll need to deposit no less than 2X the amount you're borrowing as collateral (a maximum collateral coverage ratio is 200%).
The collateral coverage ratio is counted as collateral value divided by the total loan amount.
If a borrower owns a securities portfolio worth at the moment of loan issuance $10,000 and the borrower is ready to use the whole amount of the portfolio as collateral, the borrower is able to borrow a maximum of $5,000 in stablecoins $USDZ.
LTV after the loan is issued can not go higher than 90.9%.
In case the value of escrowed stocks drops below 65% of their initial value (LTV is above 76.9% and collateral coverage ratio is below 130%), the borrower will be notified to return at least 10% of stablecoins + interest to keep a minimum collateral coverage ratio above 110%.
If the value of escrowed stocks drops by 55% (LTV is 90.9% and collateral coverage ratio is 110%), they are automatically liquidated by the smart contract.
The borrower must return the stablecoins + interest on the day of maturity of the loan. In case the borrower didn't pay back the loan due to the maturity date, the smart contract automatically liquidates the escrowed stocks.
What happens when the securities portfolio value rises or falls? If it grows, then the borrower’s LTV ratio gets more and more favorable since, in effect, the borrower is depositing more collateral. The borrower can take out additional cash against his added value, or get out of his current loan in profit.
If the securities portfolio value falls, the borrower’s LTV ratio goes up, meaning the borrower effectively has less collateral protecting his loan. If it goes higher than a certain point, and the borrower doesn't deposit more collateral to bring the LTV ratio down or partly return the loan, the borrower’s collateral will be liquidated in a margin call to protect the lender's assets.
Credit limits depend on the stock to be escrowed. Highly liquid blue chips allow a credit limit as high as 50% of their market value. The credit limit of other stocks depends on where they are exchanged and how liquid they are.
If the price of escrowed stocks increases, the borrowing limit builds up as well, and hence the protocol offers the borrower to increase his loan.
The credit limit can not be higher than the real-time value of the stocks.
APR without staking
APR with $10,000 or more of staked $ZAM
Borrowers and Lenders that stake $10,000 or more $ZAM enjoy preferable interest rates. Interest rates may change based on market conditions and/or community governance.
Data on total value locked in pool, value of escrowed stocks and transactions with their wallet addresses are reported and accessible via zMetaBoard.