GammaX Exchange held its second episode of the StarkDeFined podcast on Tuesday, September 13th 13:00 UTC. Hashstack founder Vinay Kumar and team members Aris Zarimpas and Venkat Kunisetty joined our Head of Community, Lucie Colomb, to discuss Hashstack’s journey in the StarkNet ecosystem as they strive to solve the issue of undercollateralized lending. The recording can be found here. A big “thank you” to all who attended the event live via the GammaX Twitter Space, and for those unable to join, below is a quick recap of what was discussed (note: edits have been made for brevity and clarity).
Q: Tell us about your background and how you got into crypto?
Vinay: Hello everyone… Through Hashstack we facilitate secure, undercollateralized loans for retail crypto users. We have been operating for about 34 months now with an active testnet on BNB chains with plans to release our active testnet on StarkNet in the next couple of weeks.
A brief background about me: I come from about nine years of experience building consumer technology products. For the last seven years I’ve been focusing in the blockchain and syntax spaces – prior to Hashstack I worked as the product head at a new banking startup based out of Bangalore. While there I had the opportunity to work with the savings and credit products, and while working with the savings and credit products at this company I came across the overcollateralization problem in DeFi. So I left my job and wanted to solve this problem – spending about 10 months attempting to solve the issue.
Truth be told there are many products out there that are trying to facilitate undercollateralized or uncollateralized loans. However, they want to implement some sort of credit score on the blockchain which, in my opinion, is not practical because less than 3.9% of the global population is involved in crypto and within that percentage, only 5% of crypto wallets have adequate on-chain data.
Aris: Good day, Lucie. I have been working at Hashstack for over one year now as a growth and community associate. My affiliation with crypto goes back to 2017. I’ve been constantly following the space the last couple of years, doing deep dives in regard to fundamentals and going over all the technologies that are going to disrupt each sector.
That’s the reason I came across Hashstack and saw great potential in what Vinay was building. It’s been a great journey (at Hashstack) with many challenges, but we have gained very good traction, and we’re very optimistic about our project. It’s been built very robust with safety as a number one priority. Joining the StarkNet ecosystem is very thrilling because we strongly believe the ecosystem is going to be a massive success and become the next big thing in crypto.
Q: So during the process of building Hashstack, as you were doing research on the collateralized lending program, what are the unique problems that you saw that other projects weren’t addressing?
Vinay: Any product that is consumer-facing must answer the “why” for all its system participants in order to be sustainable long-term. If we look at the DeFi lending product in general, there are three critical system participants: the lender, borrower, and the protocol itself. All of our direct competitors today assumed the need to compromise the borrower’s experience to achieve protocol security. Therefore, they ended up with the overcollateralization approach of seeking access collateral against the loan.
An average crypto retail user wouldn’t use Compound or MakerDAO in general because it just does not make sense from a fundamental utility point of view. This, in effect, created adoption friction for the existing players. The problem we’re trying to solve, as I’ve established, is the overcollateralization problem in the DeFi lending and in the process we have actually put ourselves in the shoes of our competitors as to what was their thesis for using the old collateralization approach. We wanted to figure out if there’s something we can do to facilitate more loans against the collapsible dollar so again this was the basic brainstorming that went behind the process that led to the product we have today.
Q: Can you explain to our listeners what exactly are undercollateralized loans in simple terms?
Vinay: In regard to undercollateralized loans, the borrower provides less security against the loan they acquire. Let’s say I want to borrow $100 and the lender asks me for $150 as security in the event of default. I’m providing $150 as collateral to acquire a $100 loan – this particular transaction is overcollateralization as the collateral amount exceeds that of the loan. On the other hand, under collateralization involves the scenario wherein I have a good credit score and a stable income so I go to a bank for a loan. The bank gives me a personal loan for (as an example) $10,000 and it may or may not ask for any collateral. In this case the collateral is less than the loan I’m trying to acquire. So, simply put, undercollateralized lending is a scenario in which a borrower can borrow more loan with less collateral.
Q: How do you assess and assign creditworthiness of borrowers and protect yourself from default?
Vinay: Crypto is just beginning to see mainstream adoption and we have already entered a new bear cycle. I believe we are two to four good years away from a significant mainstream adoption. This gives a precedent that the on-chain activity is restricted, so to determine a user’s creditworthiness we have to take various data points that are fragmented on-chain as well as off-chain resources such as a user’s activity with the centralized financial products – centralized exchanges, et cetera – to determine the creditworthiness from a financial activity standpoint. On a holistic level, KYC and social graphs of the user will also come into picture down the line.
At this point, how we are balancing the risk is via our system that is designed in a way in which it is agnostic of the user’s creditworthiness. Just to give you a simple example, Open (Protocol) a user can borrow up to $300 with a collateral as little as $100. Now with the $300 loan they acquired they can spend it using it as a trading capital, or they can split it into trading capital as well as a personal cash requirement. So for the portion of the loan that is up to $70 they can withdraw that amount into their wallet, while the other portion, $230, stays within the protocol. So in effect, the protocol always secures itself by ensuring that it has a significant control over the loan that is given to the borrower.
The relationship between the protocol, the borrower, and the loan is such that the protocol owns the loan in the sense that the protocol owns the loan that is given to the user in their wallet. However, the borrower has the right to spend the loan and they can spend it across applications that we integrate. If the borrower ends up making money through staking or whatnot, it’s for the borrower to keep, and if they end up making a loss, then the loan becomes distressed and the process of liquidation kicks in.
On a process level we do use computational feeds – we’re partnered with Empiric – to determine the underlying volatility of an asset that allows us to determine the permissible LTV that needs to be given to a borrower at the time of the new loan request, etc.
Q: So, the number of applications that borrowers can use to spend their funds are actually limited, correct?
Vinay: Initially, yes.
Q: What are the projects that you are thinking of partnering with?
Vinay: So we have integrated one of the renowned, automated market makers – think of it as Uniswap on the StarkNet – that allows you to swap the loan you acquire into other coins. We are currently integrating a decentralized exchange that allows you to trade assets. That’s product #2. We are also working with a couple other DeFi applications to help us enable staking opportunities for users. These are the preliminary products we are integrating as of now.
Q: How are you evaluating risk with these partner projects? I’m guessing there is a lot of it.
Vinay: Certainly, so what we do is we identify and integrate dApps that fit about seven criteria. These dApps must have: real utility, traction, accessible developers, accessible code, solid development practices, been audited (bonus), and a bounty program (bonus). Oftentimes what happens, considering the free and open source nature of most DeFi projects, we don’t really need to enter into formal agreement. In most instances the contract code is easily accessible so we do our own technical proof of concept. Once we have certainty that we can integrate the systems, the developers are accessible, and the other factors are present, we then assess the long-term goals of both projects and explore entering into a formal partnership.
Q: How has the journey of building Hashstack been and what challenges have you experienced?
Vinay: I have been working on this project for about 34 months, full time for the last two plus years. For the first 10-12 months I focused purely on problem discovery and market study. Right now we have 12+ people full time. Our engineering team is on-site based out of Bangalore. The two biggest problems we have right now are: (one) finding the best talent for the team and (two) navigating the product development in correlation with the changing market dynamics.
Q: Why is ZK important to you and did you have any engineering challenges that you’re hoping to solve with ZK Proofs?
Venkat (senior developer at Hashstack): We think that L2 is going to be the main reason as to why a wide range of people are going to use crypto in the coming future and we want to be the leaders in this space. If you see loans in traditional finance, it’s never really overcollateralized loans, it’s a lot more personal loans where the collateral is very low. So, we think that for the majority of people to start using blockchain-based lending undercollateralized has to be the way and L2s are going to be the answer for low gas transactions. I think that StarkNet is the right kind of mixture to place ourselves in the ecosystem and build on top of it.
Q: Do you have any advice for building on StarkWare?
Venkat: To build on StarkWare it’s an entirely different technology (or language) known as Cairo. The learning might be a little steeper compared to someone with a Solidity background. But Cairo does what it does for the purpose of ZK Rollups – essentially ties to anything that happens on the blockchain. It ensures that there is proof of computation and that once there is proof, the computation is sent to L1.
Q: What are some things you’ve learned on your path to where you are now and what’s one thing you would do differently if you had the chance to?
Vinay: The learning has been tremendous because when you build a product you don’t just build a product, there’s also a number of things you must factor in. You make mistakes, you learn along in the process.
In terms of things I would do differently I wish we weren’t in the bear market so we could reap some rewards. But, bear markets are for building so no complaints in that regard.
Q: So lastly, what’s up next for Hashstack? Are there any updates you want to share with our listeners?
Vinay: We’ll be building the StarkNet version of the testnet in the next couple of weeks, but beyond that we have some updates with regard to the next two major milestones of the project that we’ll be able to announce in the next two to four weeks.
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And that’s the end of our conversation with the Hashstack team!
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