Lending Circle

Lending circles have been around a long time as a means of financing for individuals. A group of people contribute X amount to a pool. Then every month, the entire pool is given to a random participant until everyone receives a payout. It's great because there's little to no interest. This project puts this on-chain.

Lending circles are still very popular in Brazil today for people to prepare a down payment for a house or to pay for a vehicle. They were an informal way of financing between people that know each other. This has evolved into a financial product often administered directly by banks.

That's where the problem comes in. Some banks have hidden ridiculous fees and terms into their contracts. People often complain about not receiving the payout their payout.

Putting it on-chain as immutable code solves those issues by having full transparency on fees and terms.

But it's certainly imperfect. Malicious participants that received their payout early could stop paying the required contributions and run away, which would lead to insufficient funds for the next payout and the need to rely on some reserve.

This project mimics what banks do: It has an administrator who approves participants joining a lending circle, as opposed to the participants deciding who gets to join. Therefore the administrator has a big role in vetting individuals before approving them.

Vetting has to be done using any and all info available on participants. This is where an on-chain public identity becomes crucial.

A lending circle would also contribute to a stronger future DeFi ecosystem that enables non-collateralized loans. People that follow through with their contributions all the way are building good credit on-chain. In the beginning it may not mean much but in the long-run, it can be just as strong as your TradFi credit score.

For now the contract uses pre-determined admins to manage requests to join lending circles. But this could later expand to a DAO that gets to vote on admins. And to balance risk/liquidity, token holders should receive rewards from the reserve.

The backend is simply using a Solidity contract to implement the logic of the lending circle. I use Hardhat as my dev environment. The smart contract is easily deployed across EVM compatible chains: Scroll, Mantle, Ethereum, etc.

Front end built on Next.js

This requires creating lending circles, approving join requests, executing distributions etc. There are several touchpoints that require a signed transaction so it doesn't make sense to be on Ethereum mainnet. Gas costs would be too high.

That's why L2s are a perfect fit. This runs on Scroll, Mantle