In the past, people lent credit by attending meetings and contributing a specific amount of money weekly or as agreed upon by the members and leaders.
Lending credit was determined by their credit scores and having a “shortee,” as they call it, to stand in for you or a collateral. When you default, they bear the consequences or no return of collateral.
Traditional Banks also rely on collateral requirements and credit scores to assess borrowers' reliability. These systems, while familiar, are far from perfect.
They often exclude those without formal financial histories, impose high barriers to entry, and operate with limited transparency.
Have you heard of Union Finance, a decentralized finance(DeFi) solution, and how it redefines trust through decentralized autonomous organization(DAO) governed credit?
In this article, we’ll explore how Union Finance redefines trust in DeFi by leveraging the innovation of DAO-driven governance.
Today, the rise of DeFi solutions like Union Finance is making a paradigm shift by bringing traditional lending on-chain. What makes it stand out is no collateral is required, unlike traditional systems that necessitate collateral.
Let's say you have a group of friends. Some are good at saving, and others have amazing ideas they want to build. But are held back because traditional banks constrain them to certain requirements for lending.
Union Finance is a platform that helps resolve this issue without considering any requirement or financial abilities of the individual.
Its mission is to make credit accessible and fair for everyone, especially for those with limited opportunity to borrow credit due to the collateralized nature of traditional financial systems.
Union Finance also incorporates a DAO that transforms trust from a vague promise into a tangible reality. With DAO governance at its core, Union Finance creates a system where transparency is non-negotiable, decisions are community-driven, and access to credit is fair and inclusive.
The system allows people to lend their cryptocurrency and earn interest, helping their savings grow and allowing others to access the funds they need to achieve their goals. It is an inclusive system that is fair and accessible to everyone, especially those usually left out of traditional financial systems.
Borrowers and lenders can participate in the system where risks and rewards are distributed among the community, fostering collective responsibility and trust.
The transparent nature of blockchain technology ensures that all lending and borrowing activities are verifiable, enhancing trust among participants. Smart contracts enforce agreed-upon conditions, eliminating the need for trust like centralized lending systems.
In addition, the system is permissionless in that it allows any Ethereum address or ENS to build credit on-chain, fostering financial inclusion and empowering individuals. Its decentralized credit model is built and operates on the following:
1. Trust-Based Creditworthiness: Union Finance emphasizes community trust as a foundation for lending credit. In traditional finance, when you borrow money, you provide a collateral or a person to stand in for you. But in Union Finance, users can borrow crypto without providing collateral (like a house or car).
The application allows users to vouch for others, i.e., trust or back friends with credit within the network based on personal relationships. This differs from traditional credit scoring models, which rely heavily on financial history.
2. Peer-to-Peer Lending: Registered members can borrow and lend directly to each other, potentially bypassing intermediaries like banks and bringing credit lending onchain.
3. Decentralized Governance: It is not controlled by any central entity, rather by the people who use it through a DAO. It gives decision-making power to the people who have the UNION token. Holders of the token vote on proposals and influence changes in the protocol.
4. Open and Accessible Credit: Credit is accessible to anyone, making it more inclusive. It leverages blockchain technology, where anyone with an Ethereum address can participate.
5. Programmable Credit: Developers can build applications and integrations leveraging Union's credit system. This programmability enables innovative use cases and extends the reach of credit services.
Just as we have boards of directors in traditional organizations who come together to make decisions based on hierarchy, Union Finance takes a different approach, which is community-driven.
In traditional organizations, decisions are usually made by a small board of directors or a group of executives at the top. Think of it like a small group of people deciding for the whole group — they may have good intentions but don’t always know what’s best for everyone. These decisions often flow top-down with little input from those directly affected.
In contrast, Union Finance relies on DAO governance, where community members actively participate in decision-making. Think of it like a town hall where all the friends (community members) involved with Union Finance – both those lending and those borrowing get to have a say.
They vote on how the system works, propose changes, and ensure everyone is treated fairly. This community-driven approach ensures that Union Finance goals align with the collective goals and needs of the people who use it, unlike traditional systems where major decisions are made behind closed doors.
Proposals for changes are openly discussed, debated, and voted on by the community. This ensures transparency and fairness in credit management and distribution.
Users who hold Union Finance governance token($UNION) propose and vote on changes. This includes adjusting borrowing rates, managing risk pools, and approving new features.
Once a proposal is approved, smart contracts automatically implement the decision. This eliminates the need for intermediaries and ensures consistent rule enforcement.
The Union token is an ERC20 utility token at the heart of Union governance structure with an initial supply of 1,000,000,000 (1 billion). The token is non-transferable, facilitates decentralized governance, and incentivizes responsible participation within the Union protocol. The token serves several key purposes:
Voting Rights: $UNION token holders can vote on protection claims, conflict resolution, risk parameter adjustments, incentive programs, and future expansions.
Decision-Making Power: Token holders influence all protocol parameters and upgradeable logic.
Encourage Active and Responsible Use: The Comptroller(V1) program, a core element of UNION's design, incentivizes users to stake, vouch for trustworthy borrowers, and maintain a healthy credit environment. Higher rewards are granted to members who actively participate and support non-defaulting borrowers. This promotes a system where responsible behavior is directly beneficial.
Mitigating Early Participant Dominance: Union recognizes the potential for early adopters to exert disproportionate influence. To address this, it incorporates mechanisms to distribute control more broadly over time. These include a set inflation rate and a reward system that prioritizes active borrowers with good repayment histories.
Anyone can contribute to the Union DAO, regardless of their background or skill level. You can get involved by:
Participating in discussions on the Union Discord server
Drafting or providing feedback on Union Improvement Proposals (UIPs)
Developing code for the protocol
Voting on proposals
The UIP is a formal proposal for changing the Union Protocol. This could include anything from adding new features to changing protocol parameters. A UIP goes through two main phases:
Phase I: Temperature Check & Proposal
Temperature Check: This is an informal discussion on the Union Discord server to gauge community interest in a potential change. It is usually handled off-chain.
Drafting a Proposal: The proposal is formally drafted in the Union Github repository. This includes writing the plain English version and developing the necessary code.
Phase II: Active Proposal
Active Proposal — Governance Portal: The proposal is submitted to the governance portal for voting onchain. To submit a proposal, you must have at least 10 million UNION tokens delegated to your address. Voting lasts three days, and a proposal needs a 4% quorum and a minimum vote of 50% in favor.
You can vote on active proposals through the Union dapp or the Tally governance UI. Once a proposal passes, there is a 24-hour timelock before the proposed code is executed. This delay provides a final safeguard against any unforeseen issues.
Learn more about the governance process here
Union Finance’s DAO-governed credit model offers several advantages:
Transparency: All governance activities, including proposals, voting records, and smart contract executions, are publicly accessible on the blockchain.
Inclusivity: Anyone can participate in the DAO, regardless of their background, making the system more democratic.
Resilience: A decentralized governance structure reduces the risk of corruption or single points of failure, ensuring the platform remains fair and secure.
Community Trust: It involves users in decision-making, thereby building a sense of ownership and trust among its community members.
Union Finance DAO-governed credit protocol represents a significant leap forward in the DeFi space.
By redefining trust through decentralization, transparency, and community governance, Union Finance is not just creating a new credit system but paving the way for a more inclusive and equitable financial future.
Judith Etugbo
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