3.2 Underwriting and risk assumption

The role of risk assumption within the Resource protocol falls on network participants that assume the role of Underwriters. In principle, any network participant may occupy the Underwriter role. However, within the context of the ReSource Network, Underwriters are whitelisted entities with proven underwriting proficiencies.

Underwriters analyze new member’s credit line requests and approve them by staking MU, the network’s governance token. This staked MU serves as the Underwriter’s “skin-in-the-game” and will be confiscated in case of a respective member’s default. In return, Underwriters receive a portion of network proceeds; which primarily comprise transaction fees paid by members.

This process is assisted by the ReSource Underwriting Algorithm, developed in partnership with Teller Finance - an algorithmic credit risk protocol for decentralized lending. The algorithm aggregates economic data of new members by connecting to their bank account and other verified data sources and oracles. On the basis of this economic data, a protocol-native credit score is generated, which determines the size and life-span of credit lines offered to potential new members and the respective MU Staking Requirements. MU Staking Requirements define the amount of MU underwriters are required to stake in order to approve a credit line.

On the basis of these data points: MU Staking Requirements, the algorithm’s credit score, and their own independent due diligence, Underwriters submit credit term offerings in a competitive auction scenario. These offerings detail the height of transaction fees the new member will have to pay for their activity within the network. Following an efficient market hypothesis, the higher the risk an Underwriter identifies, the higher the transaction fees they are expected to demand from new members.

From these offerings the lowest is automatically selected and offered to the new member who can then accept or decline it. This way a market emerges on which the most efficient cost of Resource credit lines is being constantly discovered and adjusted.

To further diversify risk, delegated staking is introduced, through which the general public can participate in MU staking pools and enjoy staking rewards in return for sharing some of the network’s risk.

These staking pools may feature diverse investment instruments, composed by Underwriters, which re-package debt according to the varying risk appetites of the market. These debt packages are then offered on a platform that makes it easy for the public to compare risk scores, default rates, and rates of return, and review the individual identity of underwritten debtors. This secondary market allows Underwriters to extract a portion of their staked MU and reuse it to underwrite additional credit lines.

This way underwriters are subjected to two-fold competitive pressures. On the one hand Underwriters compete against each other to extract the lowest possible network fees from members, while on the other hand, underwriters compete to offer delegating stakers the best structured staking products in order to attract leverageable capital in the form of MU.