The road to on-chain mortgages lies in bringing offline loan originators, on-chain
The Bacon Protocol is changing the mortgage landscape as we know it by bringing the benefits of Web3 infrastructure to the traditional mortgage market. We are democratizing mortgages in two major ways.
First, Bacon helps its users get the same safety and benefits from mortgages on US homes that traditionally have been reserved for banks and governments. Until now.
Second, Bacon is creating a new, more capital efficient system for setting interest rates and term lengths on mortgages. We do this by acquiring mortgages from a network of loan originators and adding them to the Pan. This allows the protocol to accrue interest from the mortgage payments, most of which gets passed on to users who hold bHOME tokens.
Using innovative crypto native tools like Automated Market Makers (AMMs) to help decide which interest rates borrowers will pay, we can provide competitive rates, faster and more efficiently along with the ability to refinance at the click of a button. All of this is a process that has traditionally required real world settlement and approval from outside third parties. We are currently building out a system to properly incentivize and protect the loan origination process so that once the assets are on-chain they can be used safely and efficiently.
Let's dive into Loan Originators and how they fit into the Bacon protocol. 👇
Loan originators are regulated and licensed organizations and individuals that provide the service of looking at investor specifications and seeing if those specifications are a fit for a loan to a particular customer. Originators are licensed and regulated by the states they operate in and are able to create mortgage contracts and record liens in the state the home is located in. In the Bacon Protocol, Originators are voted in by governance to service and originate loans within the Bacon ecosystem.
When a homeowner decides to use Bacon Protocol to take out a mortgage, Bacon Protocol activates an in-network originator. This originator goes through a checklist (more on that below) in order to mint an Egg on the Ethereum blockchain. The Bacon Protocol does not take part in the origination process, only stepping in at the end of the cycle to coordinate these originator-approved mortgages on the blockchain.
Eggs are ERC-721 NFTs that represent a lien on a specific house for a specific dollar amount. The originator then sends the homeowner this Egg. Once homeowners receive their Egg from the originator, they are able to stake it in the Bacon Protocol. Currently this is handled in one transaction so the borrow only sees cash come into their fiat account and the originator is the intermediary that gives the borrower fiat USD while taking on $USDC from the pan.
Prior to minting an Egg, an Originator must:
Over the life of the Egg, Originators are also responsible for ensuring that the owner maintains the quality of the home. The Deed of Trust requires that the owner maintain the house such that in the case of foreclosure and it needs to be sold to pay off the lien, that it is in proper condition to be valuable enough to do so.**
This linking of real-world assets and digital ownership represents one of the most challenging and thought-provoking opportunities of Web3. While the blockchain marches forward, the protocol places trust in the Originators to create, maintain and (if necessary) enforce the lien. We’re proud to have created a system that minimizes risk by keeping real-world integrations such as Eggs gated in scope.
We’ve also employed game theory incentives to minimize assumption of trust with real world actors. Originators are already highly incentivized in the real world to maintain trust in the origination process. If state or federal agencies discovered that an Originator had broken this trust in the process they would have their licenses revoked, receive hefty fines and lose their ability to conduct business in that state. Those same protections are still extended to loans originated by Bacon Protocol.
Originators are also incentivized by fees they earn for the two functions they provide in the Bacon Protocol: minting Eggs and servicing loans.
Traditionally, originators earn a majority of their revenue up front at origination of the loan, just a fraction of what investors earn by purchasing the loan and receiving payments from the borrower over time. Conversely, in Bacon Protocol, most of the revenue accumulates over time from interest payments (and a small amount up front). This creates an incentive for the originator to make sure the Egg is valuable long-term and not pass off bad Eggs to the Pan, aligning interests.
When an Egg is used to take out a loan from a pan, the Originator is given bHOME worth 0.5% of the amount of the loan. When the Originator services a loan and sends a payment to the Pan, they are again given 0.5% percentage points of the interest. These fees are sent directly to the originator. The Bacon Protocol also receives 0.5% of bHOME for the total amount of the loan and 0.5% of the interest payments, which are sent directly to the Bacon Protocol treasury.
This chart breaks down the rates and fees of the origination process for a $100,000 loan:
Originators are thus incentivized in the real world to maintain the trust of the origination process by 1) the risk of state or federal agencies revoking their licenses and losing the ability to conduct business in that state and 2) earning fees for minting Eggs and servicing loans.
As we build a decentralized platform for purchasing mortgages, we’re staying cognizant of the great responsibility we hold to properly incentivize good actors in the best interest of the protocol. We hope this deep dive into our process and loan origination structure helped you understand the protocol and maybe even helped you decide to join the community.