zMorgan Protocol (soon)

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.

What is Crypto Lending?

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 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.

What Is a Securities-Backed Loan?

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, and then, the borrower is able to receive a loan usually in the amount from 50% to 95% of the pledged securities’ market value. An available credit limit depends on the specific securities in the portfolio and the level of diversification.

What are the purposes for taking a securities-based loan?

A securities-based line of credit helps borrowers to meet their liquidity cash needs by unlocking the value of their investments without selling them.

Usually there are three general purposes for taking a securities-based loan:

1. Increasing return on investments: clients receive a loan backed by a securities portfolio without selling it, and reinvest the loan to increase the portfolio’s expected returns (and in the same time risk will increase).

2. Diversification of investment portfolio: clients receive a loan backed by a concentrated portfolio (i.e. small number of different securities) and use the loan to reinvest in a diversified portfolio (including reinvesting in crypto), thereby increasing the overall diversification of the investment portfolio.

3. Liquidity: clients receive a loan backed by a securities portfolio and use the loan externally.

Key Advantages of Securities-Based Lending in Crypto

Thus, key advantages of a securities-based loan in crypto include:

• Access to funds when a borrower needs it, potentially avoiding capital gains taxes from selling a securities portfolio.

• Portfolio yield enhancement as a borrower receives an opportunity of reinvestment of his securities portfolio (including reinvesting in crypto) and getting higher yields.

• Usually lower interest rates than other forms of credit. The cost of a securities-based loan depends on a central bank policy rate within a certain country. As securities-based loans are backed by securities portfolios, the spread over policy rates can be relatively low in most developed economies.

• Usually the crypto market is more volatile than the securities market. Therefore, using securities as a collateral is more stable and helps borrowers to avoid liquidation compared to the crypto collateral.

• Flexibility in borrowing: loans are structured according to a borrower's individual needs with regards to amount, repayment plan, loan tenor and currency (including cryptocurrency). And there are no restrictions on what the loan can be used for.

• Crypto loans are much faster to receive compared to loans in traditional banks.

• Crypto loans are not included on monthly credit reporting and do not affect a borrower's credit score.

• Less paperwork compared to traditional loans.

Risks in Securities-Based Lending

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.

Leverage Effect

If a securities-based loan is received for investment purposes (crypto investment or other), the investment risk will increase as 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.

Investors should typically not make use of the maximum lending value (LTV) available to mitigate risks.

Investing in a well-diversified portfolio can also further reduce portfolio volatility and alleviate the risk of financial losses due to a collateral shortage.

So, leverage provides the opportunity of realizing higher portfolio returns, but also entails higher risks. As risks can never be eliminated, they can be mitigated. The likelihood of return enhancement is higher with longer-term investment and better-diversified portfolios.

Minimum Cover Requirements (Liquidation)

If the value of your securities falls below a certain limit, a borrower would be asked by Zamzam to deposit an additional collateral or to partly repay the loan. If the borrower is unable to meet these obligations, Zamzam will 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.

Insufficiency of a Borrower’s Funds

If a borrower has an insufficiency of funds to cover loan interest or repayment of the loan on time, this may cause the sale (liquidation) of the pledged securities at an inappropriate moment.

Accrued Benefits

Zamzam as a lender must be able to accurately determine which benefits Zamzam is capable of receiving, and a borrower must be able to pay them on the due date. Zamzam must also ensure that if a loan was returned prior to the payable date, the suitable benefits are received in the full amount.

Tax Implications

An additional benefit in certain countries 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.

Mechanisms

Smart contract

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

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.

Escrow Account

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.

How It Works (in development)

We separate the zMorgan Protocol into the lending phase, borrowing phase and returning phase. The detailed lending and borrowing process is performed in Figure below.

Lending

After an identity verification, a lender chooses available terms, currency and lending amount through the zMorgan platform. Then, the zMorgan platform offers the lender certain lending APY. The APY depends on the number of lenders at the moment and the amount that has been already lent within zMorgan Protocol.

If the lender agrees with the lending conditions, the lender deposits funds in stablecoins BUSD or USDC to the zMorgan Protocol. Then, the zMorgan Protocol locks these funds on the escrow for an agreed period of time.

The zMorgan Protocol would regulate the sufficiency of the Liquidity Pool for issued stablecoin $USDZ within the zMorgan Protocol so that the value of issued $USDZ on the free market would not exceed the Liquidity Pool value. The information about the value of the Liquidity Pool would be available on the Dashboard in real time.

Borrowing

First, within the Zamzam platform a borrower verifies his identity and then submits his loan application, including desirable loan information: total loan amount and loan term. The zMorgan platform offers to a borrower a certain interest rate (APR) based on the loan information.

‌Second, if the borrower is comfortable with APR and is ready to borrow, he deposits a securities portfolio in the amount at least 2X the loan amount to a Zamzam 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, based on APR and loan terms, a repayment plan must be set upfront. After the zMorgan Protocol gets a repayment from the borrower, it 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 would be available on the Dashboard in real time.

Then, the zMorgan Protocol transfers to the borrower the desirable loan amount in $USDZ.

Repayment

According to the final repayment plan the borrower pays the interest and loan principal in $USDZ to the zMorgan Protocol. Then, the zMorgan Protocol creates a transaction to each eligible lender to pay them according to their lending amount and the repayment amount. The zMorgan Protocol also implements the conversion of the repaid loan amount from $USDZ (from the borrower) to BUSD or USDC (to the lenders).

After the zMorgan Protocol 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 and paid fees and interest would be available on the Dashboard in real time.

Collateral

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.

Example:

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.

Liquidation

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.

Credit limit

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.

Interest Rates

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.

Reporting

Data on total value locked in the pool, value of escrowed stocks, value of issued stablecoins as loans, and transactions with their wallet addresses are reported and accessible via zMetaBoard.