We are creating a protocol that allows fast, accessible and cost-effective P2P escrow and collateral management. Sure value exchange is our goal. We are SureVX.
We believe in leveraging the power of blockchain technology to render transactions between counterparties secure regardless of which geography they reside. Using smart contracts, we help people and organisations to protect themselves against default and fraud and to build strong trading relationships that allow positive economic growth in circumstances where such protections may not have been possible before.
Agreements for escrow and collateral management are made, in a basic form, between an agent who stakes the collateral, the Paying Counterparty (PC), and an agent which is protected by the collateral, the Receiving Counterparty (RC).
Escrow is basic. You agree on an amount of an asset with a counterparty which secures a transaction. Then you transfer that into a smart contract, and it remains locked up until the counterparty signals the deal is over. Then the collateral either goes to the counterparty if it is the principal, or it goes back to you if it was just for securing a deal.
The paying counterparty places payment for goods or services in the contract. Then, when the contract is over, the Paying Counterparty signifies the status of the contract: valid or broken. In valid, the contract releases the funds to the Receiving Counterparty. In broken, the contract releases them to the Paying Counterparty.
The Paying Counterparty is required to overfund the escrow as an incentive to signify. This overpayment is returned to the paying counterparty when they signify. If they don’t signify, after a defined time, the overpayment goes to the SureVX protocol.
The Paying Counterparty places payment in escrow, though this is alongside another transaction representing an agreement which is outside in the SureVX protocol. Both parties must indicate the start of the escrow in a primary signification. Once set up, both counterparties signify status. If both are valid, the funds are released back to the paying counterparty. Alternately, if both statuses signify at broken, the funds go to the Receiving Counterparty. If the statuses differ, the contract is in dispute and on-chain services like Kleros, or real-world courts, resolve the disagreement.
Both parties are required to overpay the escrow as an incentive to signify. If one party doesn’t signify, after a defined time, the overpay goes to the other party regardless of the state of the contract. If neither party signifies in a set time, the overpayment goes to the SureVX protocol.
Collateral Pools are a more sophisticated collateral agreement. They allow changes to the amount in collateral based on market movements in price, liquidity and quality for the collateralised assets. Margin Calls satisfy requirements to add or remove collateral. In SureVX, each side of the collateral deal funds a pool, which then automates these margin calls, allowing the agreement to keep up with market changes without requiring consistent human intervention.
These agreements are for underlying contracts which settle in the future and which carry default risk, like financial derivatives. During the lifetime of these contracts, the position may report a profit to a counterparty – i.e. it’s a successful bet – in which case they are ‘in the money’. Conversely, if a position is against a counterparty, they are ‘out of the money’.
Counterparties in SureVX can either contribute their cryptoassets or source them from the crowd via a Collateral DAO (and other lending sources).
Unilateral Collateral Pool
Two counterparties create an escrow agreement with floating collateral requirements: amount under collateral moves to reflect changes in price, quality and liquidity. Changes in these last three create margin calls which are served by automatic calls from and transfers to the paying counterparty’s collateral pool.
This Collateral Pool offers no protection to the Paying Counterparty against default if the contract moves into the money for them as there is no requirement for the Receiving Counterparty to collateralise.
Bilateral Collateral Pools
Same thing as a Unilateral Collateral Pool except there is also a collateral pool on the Receiving Counterparty side which may come into use if the underlying moves into the money for the Paying Counterparty.
- ETH currently costs 50 DAI.
- Paying Counterparty (PC) agrees to pay the Receiving Counterparty (RC) 100 DAI for 1 ETH in three months.
- The terms of the collateral agreement mean the difference between the current ETH price and 100 DAI is the necessary collateral.
- PC puts 50 DAI in collateral to cover the difference between the actual price and the underlying contract price.
Paying Counterparty In the Money Example
- One month later, ETH is 75 DAI. PC’s collateralisation is now only 25 DAI.
- PC gets 25 DAI back into their Collateral Pool.
- One month later, ETH is 105 DAI. PC is now ‘in the money’.
- The collateral in the contract is now in PC’s favour. All their DAI are now back in their Collateral Pool. The RC’s Collateral Pool funds the contract with 5 DAI.
- If the RC defaults, PC gets the 5 DAI.
- The period finishes and RC sells PC their 1 ETH at 100 DAI. The contract unwinds and puts 5 DAI back in the RC’s Collateral Pool.
Paying Counterparty Out of the Money Example
- One month later, ETH is 25 DAI. PC’s margin is now 75 DAI.
- The contract takes 25 DAI from PC’s Collateral Pool.
- One month later, ETH is 10 DAI.
- The contract takes 15 DAI more from PC’s Collateral Pool (the RC is now collateralising 90 of the 100 DAI that they are paying at the end of the contract).
- One month later, the underlying contract finishes. The price of ETH is still 10 DAI. PC pays RC the 100 DAI and receives 1 ETH.
- The contract finishes, and the contract unwinds and puts 90 DAI back in PCs Collateral Pool.
In either of these scenarios, if a Collateral Pool doesn’t have sufficient funds to meet any margin call, then that counterparty is in default and SureVX closes out the collateral position in favour of the other counterparty.
So, that’s a high-level overview of the escrow and collateral management that SureVX does. Check out our other blogs to find out more about how SureVX can deliver value to trading counterparties via escrow and collateral management.