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3.4 Underwriting and risk assumption
The role of risk assumption within the ReSource Protocol falls on network participants who 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 members’ credit line requests and approve them by staking SOURCE, the network’s governance token. This staked SOURCE 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. The algorithm aggregates economic data of new members by connecting to their bank accounts and other traditional data sources, but also takes socially generated data into account, such as activity on social media networks, customer reviews and web2 storefront activity.
Based on 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 level 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 the new member.
To exploit the collective intelligence of the Underwriter network to its fullest, the system calculates a consensus fee on the basis of the offerings of all individual Underwriters. This consensus fee is an adjusted average of all Underwriter fee proposals, while extreme deviations from mean are being discarded.
From the proposals closest to the consensus fee, the lowest is automatically selected and offered to the new member, who can then accept or decline it. This way a market emerges in 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 SOURCE Staking Pools and enjoy staking rewards in return for sharing some of the network’s risk.
These Staking Pools may feature diverse instruments, composed by Underwriters, which repackage 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 SOURCE and reuse it to underwrite additional credit lines.