Each participant could play any role in Karma’s ecosystem - they could be either a lawyer, portfolio manager, borrower, investor, insurer, collector, guarantor, or any other roles that may appear on the platform in the future.
To build trust between users, Karma implements a rating system and every user has a “Karma” rating. Therefore, those with higher ratings would be sought out by other users. Since Karma is in its developmental stages, it would first independently serve a number of roles and one of the key players on the platform. However, Karma provides users with the freedom to choose and create roles.
That in mind, let’s look at some of the key roles in the project.
The key roles include: investors, lenders, guarantors, scoring agents, analysts, sellers, collectors and insurers.
Investors are able to select loan applications of interest, or they could submit their own portfolios or prospectus for individuals and firms looking for potential investments. Investors could also pool their capital to co-finance projects. The motivation for investors in the platform would be to generate capital by financing interesting projects, as well as providing resources to companies and people on preferential terms.
Here’s how it works in the Karma ecosystem:
An investor could submit an application targeted at potential loan applicants and would define several parameters, such as the interest rate on the loan, the desired level of collateral, the type and amount of provided resource, the loan due date and more.
Lenders could apply for a resource request and accept applications to provide investment opportunities. This is great for developing businesses or projects which they may not have had access to before.
Guarantors also play a key role in the Karma ecosystem. Guarantors would increase the probability of successful loan repayments and as well as connect to transactions and potentially vouch for lenders with their properties. Someone may want to become a guarantor to receive a reward for a surety, social missions and improve their reputation and bonus if there is a successful loan repayment.
Scoring agents are also an integral part of the Karma ecosystem. Scoring agents provide tools to rate borrower applications. They could also provide their scoring criteria based on any parameters they see fit, such as a mathematical model or expert opinion. The motivation behind becoming a scoring agent include: small fixed payment for calculating the data, percentage of the transaction in the event of a successful loan repayment, percentage of the transaction in case of default or loan transfer to collectors.
First, the borrower could choose one or more scoring interests and ask the scoring agents to score their application. In turn, this would increase the application’s attractiveness to investors. Now, investors could also ask for additional scoring. Karma would independently develop its own scoring methodology and connect independent appraiser partners. The scoring agent could act as a person, as well as the program connecting to Karma’ API.
Moving on, Karma is looking to include analysts into the ecosystem. This would be an institute of local offline experts, or analysts, which would be created for the analysis of the borrower’s creditworthiness. This would be useful because experts could make sure the borrower is actually a living person with good intentions coupled with sufficient experience. Consequently, this helps combat loan fraud.
Analysts could also conduct market research, competitive analysis and may come across other economic indicators for their inspection and primary analysis. Since Karma has a rating system, the higher the analyst’s rating, the more confident users would have in their calculations and qualitative analysis.
Sellers attract new users to the ecosystem using their referral link. For loans by the lender, there are both pros and cons of tokens which we will discuss later in this guide. Payments to sellers for attracting borrowers is one of the reasons why one would consider being a seller. However, the remuneration to sellers is only paid when borrowers fulfill their obligations. If a seller attracts an investor, the seller would receive a percentage of each loan issued by the investor over the year into a deposit and Karma.
Since Karma’s platforms deal with loans, there needs to be collectors on the platform. Collectors ensure debts are collected, which is highly important in cross-border transactions. Collectors would do this by any legal means necessary in the lender’s territory. Collectors would engage in activities ranging from negotiation to litigation, which includes the sale of collateral.
Every collector has the right to appoint any percentage for the recovery of a debt which is dependent on the situation’s complexity. Here’s how it works in Karma’s ecosystem: In contracts, threshold values of delinquencies are fixed ahead of time. Thereafter, the investor has the right to apply first to the guarantors. However, in the case of failure of the guarantors, investors would apply to the collector.
Now, when a debt collector is contacted, deductions from deposits and from the Karma of all participants in the transaction is declared. Finally, the collector signs an electronic contract with the investor and once the contract is signed, the collector has the right to act on the investor’s behalf.
On Karma’s platform, there are two possible contract formats for selecting parties: the collector retains an agreed upon percentage as a result of debt collection, or the collector could purchase a debt with a discount and they could pursue the debt collections themselves. If the customer is satisfied with the collector’s services, the collector would receive a plus in Karma. Conversely, if a customer is not satisfied, the collector would receive a minus in Karma.
Investors and borrowers could also sell a loan by putting the offer into public access. Thereafter, collectors could offer terms for the repayment of a problematic loan and investors could choose the “best” conditions suiting their needs.
Moving on, insurers are needed in Karma’s ecosystem as well. There are two types of insurances offered in the platform: credit risk insurance and currency risk insurance.
Credit risk is one of the primary problems with the loan industry. With credit risk insurance, insurers would receive a premium for insurance from investors and insurers would pay out an agreed upon compensation in case of default. Now, investors could insure anywhere between 1 and 100% of the risk. The higher the insurer’s security, the higher the insurance premium. Therefore, with 100% credit risk protection on the loan, the insurance premium is maximized at that point.
If a borrower defaults on a loan and the investor had credit risk insurance, there are two outcomes for the insurer. If the insurer pays the agreed amount of insurance, the insurer would receive a plus in Karma. Thereafter, the insurer inherits the investor’s right to collect obligations and essentially, the insurer becomes the investor with the possibility of credit transfer to the collection.
On the other hand, if the insurer does not pay the agreed upon insurance amount or pays it in part, the insurer receives a minus in Karma. The investor could sell the right of the claim to the insurer or collector or they may file a claim to the court.
Moving on, users also have the option to purchase currency risk or foreign exchange risk insurance. With currency risk insurance, the insurer undertakes the loan to cover the loss from fluctuations in foreign exchange rates. Investors would pay insurers a premium for the transaction. Similar to credit risk insurance, users could insure 1 to 100% of the risk. The mechanism works identical to credit risk insurance, except users would just be insuring different risks.
Payment systems are also a part of the Karma ecosystem. They would ensure transactions are within the country’s legal jurisdiction with fiat currency. Consequently, they would earn a percentage from each transaction.
Lastly, investment funds will be an essential role on Karma’s platform. Now, both individuals and legal entities could participate in Karma’s ecosystem. Investment funds and managers help to raise capital from investors and distribute it to lenders based on their strategy. In turn, investment funds would receive a percentage of profits for effective fund management, just as many hedge funds do in the financial industry.
Investment funds could declare their strategy and commissions, aggregate investors’ capital and distribute the capital to lenders meeting the requirements. With investment funds, there would be a securitization mechanism from loan portfolios in securities. In other words, investment funds and Karma can package loans in security portfolios. Moreover, they could issue tokens for those portfolios and their sale within Karma’s platform. That means the owner of the token automatically receives the interest that lenders pay or could resell a token.
“ Commissions distributed by different social roles:
That in mind, Karma’s ecosystem is robust with all the different users that could take part in the economy. Additionally, once there are an increasing number of users offering services on the platform, there should be a large increase in demand for the services as well.
With the advent of social media and other technologies connecting users across the globe, the world has a large appetite for direct interaction between people. From searching for services from taxi drivers, accountants, money managers, housekeepers, tutors and even doctors, whatever the case may be - each specialist tries to do their job as professionally as possible to satisfy consumers because their reputations depend on it.
Whether it be Amazon, Yelp, Uber, Lyft or eBay, ratings are key for professionals who wish to increase their revenues. For example, a bulk of all sales on Amazon are made by clicking on the product from the first search engine results page (SERP). Now, one of the key criteria for ranking higher an being placed on the first page is the rating of goods and sellers.
On the popular site Yelp, created to search for local services, a one-star increase in ratings adds an average of 5 to 9% to the volume of orders. Conversely, a one-star decrease on average brings a loss of 30 potential customers.
That said, the value of reputation on Karma’s platform will be so high that any participant would do their best to raise it, and not to lose it under any circumstances to increase demand for their services. Therefore, the greater the number of users with high ratings, the greater the number of potential users who may be attracted to the platform.
Now, let’s delve deeper into Karma’s platform.
In the traditional banking industry, as well as many P2P-platforms, the central counterparty or the site organizer decides what financial products are available, interest rates on loans and deposits (from which loans could be made on) will be scoring parameters and what kind of company will insure risks. Basically, people looking to obtain loans may have a hard time and have many hoops to jump through to obtain a loan. Now, Karma provides a solution to the problem.
Karma provides participants with the freedom to create any financial products. Whether it be short-term pawnshop loans to interest-free unsecured ones with an open return date, users have the ability to create nearly any financial product of their choice. Additionally, any assets could be given as collateral and on credit.
When creating a request for the provision of investment or credit, the user could specify the terms of pledge securing. If a user wants to, they could specify anywhere above 0% and the market would determine whether there is a demand for the application.
Karma’s platform allows for secured lending, and according to the project, any of these may serve as collateral or credit, “Real estate is the most popular and relevant type of collateral in business credits. The key issues are the registration of the pledge and its withdrawal. On the Karma platform, it is planned to automate the procedure of working with a pledge. An investor from one country will be able to issue a loan with a pledge in another country where the cadastral register is connected to the API.
If, suddenly, the borrower cannot fulfill the obligations, then according to the agreement the pledge either passes to the creditor or is sold on the market by other participants of the platform. After that, the lender returns the necessary amount, and the borrower receives the rest of the money...
If crypto-assets are used as collateral: bitcoin, air, other cryptocurrencies or tokens, digitized gold (Digix) or real estate (BankEx), then the mechanism of operation is simple: the token-pledge is placed in an electronic smart contract, which is an escrow (safe box). The creditor and borrower sign a smart contract (agreement). The lender transfers the money to the borrower. If the borrower cannot fulfill his obligations, then the pledge is realized on the exchange. From the received funds, the loan amount is returned to the creditor, and the borrower receives the balance.
If the borrower has one currency, and the credit is needed in a different currency, he can obtain it under the pledge of available currency. To do this, he will need to place a pledge on the escrow account. The lender transfers money on the escrow account too. As soon as the borrower receives the credit, the platform will block the pledge on the escrow account. As soon as the credit is repaid, the pledge will be unlocked and returned to the borrower.
In the future, other types of pledges will be connected to the platform: works of art, collections, cars, goods in a warehouse or on the way. The procedure for working with the pledge is the same: the pledge is placed by the escrow agent, who blocks it until the obligations of the parties are fulfilled.”
Now, there could also be lending without collateral but this has its own specifications. It is highly important to figure out whether the borrower’s credit-worthiness is satisfactory. Any modern scoring or checking mechanism could be used, which will be discussed later.
Since there is no collateral here, there is a higher rate of return for the risk. In other words, since users lend and the loan is not secured with collateral, they would have higher risks and consequently, they would need higher returns to justify taking the risk.
In the event of non-payment of an unsecured loan and failure of renegotiation of terms, the investor of the loan could either: sell the debt to collectors at a discount, seek out services from debt collectors to recover the payments or independently file a lawsuit to collect the debt that may include automated platform mechanisms, which we will analyze later.
Moving on, any participant could provide investments on any terms. Moreover, participants could request a loan on any terms. Investors can provide investments for any terms, even with an open date (borrowers would aim to pay as soon as possible).
The free and open market would determine which loan conditions are more appropriate for particular situations, states or types of relationships. Due to the variety of socio-financial relations, Karma’s ecosystem is robust and flexible, allowing it to adapt to any state of the financial market at any time.
Next, let’s look at how Karma is decentralizing geography and information technology (IT).