What’s the Union Protocol?

A Simple Introduction

5 min readAug 28, 2023

Today’s centralized system of credit is not so inclusive to the public. All the lending relies on the bank as a trusted third party to initiate any loan. It keeps all the records and safeguards all the assets in return for money incentives. In today’s era, the depositor doesn’t get much benefit besides minimal interest.

Bank (source: https://www.investopedia.com/terms/b/bank.asp)

With the decentralization revolution, we see the potential to fill the negatives.

What is Web3 Lending/Loan?

The depositors now have options; instead of trusting the bank or any other unregulated platform, they use a non-custodial wallet to hold their funds and earn similar interests. All the ownership, transaction, and trades resides with the blockchain. The smart contract does all the work of escrowing the funds when predetermined conditions are met. It decides the LTV ratio (Loan-to-Value), interest paid, and liquidation thresholds, making it transparent to everyone. By taking loans on the blockchain, the borrower enjoys the creation of liquidity of digital collateral without incurring a taxable event. The borrower still pays the interest only to some of the management or shareholders of a bank but all to the depositor. Sometimes, a smart contract divides the interest between the depositor and DAO(if it governs the Web3 platform), which in every case is minimal.

All the services are available all day and all night in a very cost-effective way, which is the best thing about this. And even in a market turmoil, Web3 lending or loan doesn’t stop.

There are two aspects to this,

Web3 Lending: Here, the individuals deposit their cryptocurrency to a lending pool, giving out loans to the borrower for a profitable interest payment.
Web3 Loans: The borrower uses their crypto assets as collateral to secure loans. Once the repayment with interest is completed, the borrower gets their collateral back.

So, What’s the problem?

Everything cannot be perfect, but it can aspire to be.

The big problem is the amount you get in return for the value of the collateral you submit. The volatile situation in today’s many cryptocurrencies makes it harder to get a good LTV ratio (only sometimes as high as 0.75, which is pretty bad).

Image from nexo.com (A leading centralized lending platform) giving only 50% LTV

Image from compound.finance (A leading decentralized lending platform, $898M borrowing backed by $2.3B collateral.

This is great if you need to borrow some and have collateral lying in your wallet. But what about the people who don’t have such assets but know use cases where they can earn using a monetary opportunity?

The idea of unsecured lending.

It has two benefits. First, idle money is put to work. Second, it lets a borrower effectively time shift when they benefit from some resource.

The simple logic is this new decentralized economy should work for everyone, with or without assets.

This is where the Union comes into the picture.

Union is a credit mutual that enables pseudonymous, unsecured credit lines.

What is the Union Protocol?

The Union Protocol is a credit network that enables any address to accumulate a credit line on-chain in a permission-less, crypto-native way.

Basically, you have a friend, and you both trust each other. So, Union helps you to convert that trust into available credit for both of you.

Trust is relative (Source: Union Protocol’s Medium)

Union helps you to vouch for your trusted address so you can accumulate credit backed by their decentralized web of trust. Giving all the people, DAO, and smart contract to use the trustworthiness as well as uniqueness.

What are the uses?

Using Union, people can build different products utilizing different aspects like Credit Unions, Credit Lines, Installment loans, and Venture debt.

Credit fluidity (Source: Union Protocol’s Medium)

Here is a small explanation of all the listed products,

Credit unions are financial institutions that their members own. Credit lines are a type of revolving credit, having a variable interest. Installment loans are non-revolving credit (repaying in equal installments for a period). Venture debt is a type of financing typically used by early-stage startups.

This results in different types of credit relationships.

1 → 1: Your usual case of lending small amounts to your friends.
1 → n: When a person (can be a smart contract) vouches for a DAO.
n → 1: When multiple friends vouch for a person.
n → n: When DAOs lend to each other.

What are the benefits?

As discussed previously, it allows trust to come on-chain, retaining pseudonymity.
Increases efficiency of every DAI.
Gives a wide range of LTVs.
Smart Contracts/DAOs get credit lines.
Invest by extending credit.
Vouch for Charity (instead of donating) or invest by vouching for DAO (instead of depositing)

The version 2 launch of the Union protocol recently has many more improvements. You can check the latest Medium article here. To learn more about Union token and DAO, click here.

The best thing about Web3 is transparency; here is the link to the smart contracts, which will help you understand how this works under the hood.

Here is a tutorial on how to use the new v2 Dashboard of Union.