We started Home with the vision to make a totally new, decentralized way for people to help each other buy a home. Throughout history, communities have helped each other with housing — from neighbor’s raising a barn together to a simple housewarming gift to today’s overly complex mortgage financing system.
We have learned by founding many projects to always start with a simple version of an idea, ship it, and quickly iterate while always keeping the end goal in mind. Over the last year of watching Home grow, and with a ton of input and feedback from the community, we’ve learned a lot about what’s working and what can be improved.
Today we’re excited to share some about the next iteration of Home.
Since its launch, the Home contracts have minted HOME from USDC deposits. When someone deposits USDC, the contracts mint an equal amount of HOME and hold the USDC for use in lending. While this model has worked to get the protocol to where it is today, it has some downsides that make it less suited to growing for the future:
Liquidity for HOME can get sparse in down markets. Adding Boosts recently helped, but didn’t solve it completely.
HOME is highly reliant on USDC and limited because it’s not independently created from home loans.
It’s not capital efficient. The AMM tries to hold 10-15% of the TVL in USDC that provides no returns to HOME holders or revenue to the protocol.
Now, it’s time for HOME to continue to move towards true decentralization and independence with improved incentives so it can grow and help millions more people in the world and scale to Trillions in TVL.
Through the last few decades, the Federal Reserve (the Fed) has minted trillions of dollars backed by home loans. As of October 2022, $2.7 trillion dollars are backed by home loans. The number of dollars backed by home loans is second only to the amount backed by US Treasuries ($5.6 trillion). The Fed’s balance sheet is publicly available at https://www.federalreserve.gov/releases/h41/current/h41.htm.
The Fed mints dollars from home loans through the financial system. A person buys a home using borrowed dollars. This creates a new mortgage that can be bought and sold. After passing through many hands, each of which takes a fee, that mortgage is bought by the Fed using newly minted dollars. Effectively, the Fed has minted dollars by lending to the homeowner. In fact, all dollars are minted by lending, mostly to home owners or to the government through US Treasuries.
The new model is the same as used by the Fed and also similar to the way that DAI is created by borrowing against ETH.
The simple change to make HOME truly independent is to stop minting HOME from USDC and to start minting HOME when a home loan is created. HOME will be created by borrowing against the value of a house.
This solves many of the problems described above and creates some cool new abilities for HOME.
For example, an interesting option is for borrowers to borrow HOME and immediately turn around and boost it. If their borrow rate is lower than their boost rate, they will be able to benefit from the extra value of their home that’s usually locked up.
What are the next steps to reach this vision?
Complete selling the loans from the recent Snapshot vote and return the liquidity to the protocol through the Curve pool. This is in process through capital markets and agreements with loan buyers.
Finish on-chain LP rewards to increase the incentive to participate in HOME DEX pairs. The contracts are in place and the final website changes are being completed and tested.
Continue to work with centralized exchanges to support HOME. Home is in process to be listed at many and will continue to build partnerships with the largest and most trusted exchanges.
Discuss, take feedback, and vote on the proposed changes. This blog post will kick off more official discussions to continue the early conversations over the last few months.
Implement the change to start minting HOME independently from USDC. The changes to the contract are fairly simple and as with all changes, will get thorough testing and review.
Adjust the AMM to be market-driven instead of liquidity driven. To start the AMM will move to a simple off-chain mechanism.
We’ll be publishing and sharing in discord more thorough details on how these pieces work together and solve some of the important issues.
An example may be the most useful to show the new benefits and how all the pieces work together.
A borrower comes to the originator and asks for a $100,000 loan. The originator sees that they qualify and the home is worth enough.
They go to look at the DEX pool for USDC/HOME to see what's available. There's a few possibilities:
The pool doesn't contain $100k in stablecoins that can be converted to fiat (USDC/USDT/DAI). In this case the loan just can't be done at all if the borrower needs USD out. They'll have to wait until more liquidity comes into the pools. (If they just want HOME to hold or boost, though, no problem since no exchange to USD will need to be made).
The pool has over $100k in USDC and HOME is trading at a discount. The loan can be done, but the borrower will have to pay an up front fee. If HOME is trading at $0.99, then the borrower effectively will pay a 1% fee. They trade 100k HOME to only get 99k USD out. (if you're familiar with "points" on a tradfi mortgage, this is almost identical).
When this is the case, less borrowers will want to borrow, so the price won't be pushed further down. But, investors get a bonus when they buy HOME, so the price will tend to come back up.
The pool has over $100k in USDC and HOME is trading at a premium -- $1.01. Great! The borrower gets a bonus (similar to a "rebate" in tradfi). They take their 100k HOME and get $101k USD out.
When this is the case, lots of borrowers will want to borrow and it will drive the price of HOME back towards $1. Investors will be less interested above $1 and generally wait to buy HOME.
Let's say we're in case #2 and HOME is trading at a slight discount of $0.99.
First, the loan is completed, the lien is applied, and an NFT representing the lien is minted.
The NFT is used to borrow 100,000 HOME from the contracts. When the NFT is deposited as collateral, 100,000 HOME is minted (created) right then and sent to the borrower. It doesn't come from the boosted HOME. It's minted. The amount of HOME increases to keep the balance between loans, collateral, and amount of HOME.
This borrower wants USD, so they take it to the pool and get 99,000 USDC. The price of HOME falls a bit so the next borrower may decide to wait until investors buy HOME and the price moves back up.
Now, an investor comes and sees the low price of HOME and buys it at a discount. They might spend 98,500 to get 100k HOME. They take that 100k HOME and boost it to earn from the interest that will be paid from the loan that was just created. When a borrower makes a payment of HOME to the contract, some HOME is burned, for the amount of principal they repaid, and the HOME for the interest they paid is sent to the HOME boosters/holders.
So the path for borrowers is this
Loan -> minted HOME -> Curve/Uni/Sushi -> USDC -> USD -> Borrower
Another interesting path is an investor buying HOME to boost. In the new world, the only way to get HOME to boost is to buy it from an exchange (well, aside from borrowing minted HOME yourself through an originator).
Loan -> minted HOME -> Curve/Uni/Sushi -> Investor -> Boost
The third new feedback loop is the borrower repayment path.
USD -> USDC -> HOME (through DEX) -> Repay HOME Contract
When HOME is trading low, there will be a new incentive for borrowers to repay their loans early because they get a slight discount on their payments from fiat. There are definitely borrowers willing to come in and make early repayments to get a 5-10% bonus on their mortgage payment.
That incentive would have brought the pool back up to around $1 so we could fund new loans again.
It's all these new feedback loops that I'm most excited about for the upgrade. We don't have them today and they are the flywheel for growth that will break us out of our current chicken and egg situation.
We hope to quickly get feedback on the proposals and get them implemented so we can all benefit from a more lively, growing protocol soon.
Beyond this proposal, there’s much to be excited for in the future as we all work together to build a new, stable, transparent, yield-bearing future.