# Official PawnSpace Whitepaper
A Decentralized NFT Collateralized Lending Platform - Turning your NFTs into Financial Opportunities
PawnSpace is a decentralized NFT collateralized lending platform, that allows you to convert your NFTs into financial opportunities. The protocol is currently being built on Polygon with the alpha now LIVE on Mumbai Testnet. \_**"Don't let your NFTs stay idle in your wallet anymore. Collateralize them, and turn your NFTs into financial opportunities! 'Cause, why not? :)"** \_
**Abstract**
The document introduces a decentralized NFT Collateralized Protocol that enables users to borrow and lend assets such as NFTs (ERC721 compliant). It also explores and describes the theory and technical aspects of the protocol / platform and its key features that make it distinct from existing products in the market.
> **`Authors: Robin Roy, Tomohiro Furuta, Julian Cislo`**
> **`Whitepaper Version 1.0 | August 2021`**
>
> **`Last Updated: 20th August, 2021`**
Website:
Twitter:
Discord:
# Introduction
With the future of NFTs and its well-needed utility lingering right around the corner, it is a no-brainer to have a way to use your NFTs in such a way that, it no longer stays idle in your wallet, but rather can be used smartly to generate passive income by bridging the NFT and DeFi world.
PawnSpace is a decentralized NFT-collateral lending platform, which primarily functions in a P2P “bid-and-ask” model. This approach allows PawnSpace to not only allow any NFT to be collateralized but also allows the market to decide the valuation of the NFT, and reach a mutual agreement on its valuation, just like in a traditional NFT marketplace.
The valuation of an NFT however, may not need to be speculative all the time, consider financial-based NFTs, whose intrinsic value is determined by on-chain verifiable data (for example NFT LP tokens, Gaming Items, Virtual Lands & Metaverses, etc.).
PawnSpace allows for the collateralization of any ERC-721 compliant NFT or multiple ERC-721 NFTs of the same collection in order to take out potential loans against them. We are driven by a “let the market decide” approach and intend to keep the platform open for any NFT to be listed on the platform. The “bid-and-ask” approach adopted by the platform conforms to this same notion.
**Lock NFT -> Place an Order -> Get Offers -> Approve Offer & Receive funds -> Pay Back and Retrieve NFT/ Default and Lose NFT.**
It's simple!
# Glossary
The following definitions are used in the rest of the whitepaper/documentation to point out certain features pertaining to the PawnSpace protocol.
## PawnSpace Related
| **Term** | Description |
| ------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| Borrower | Any user/wallet address on the protocol that wants to borrow funds by collateralizing their NFT. |
| Lender | Any user/wallet address on the protocol that is willing to accept the NFT collateral and loan conditions and lends funds to the borrower. |
| Loan Conditions | Parameters used to specify the conditions of the loan. This includes "Loan Amount", "Duration", "Interest Rate". |
| Order | The represenation of an NFT collateraL with the Borrower's preferred loan conditions |
| Create Order | The act of collateralizing an NFT on the protocol by the Borrower. |
| Withdraw Order | The act of withdrawing an NFT from collateral by the Borrower if the loan is not initiated yet. |
| Offer | The representation of Loan Conditions set by the Lender as a counter to the Borrower's Order. The loan is only initiated if the Offer is accepted by the Borrower. |
| Create Offer | The act of counter-offering/proposing Loan Conditions by a Lender for a given Order. |
| Accept Offer | The act of accepting an Offer from a Lender by a Borrower to initiate a Loan. |
| Instant Loan | The approval by a Lender to accept the Borrower's preferred Loan Conditions and instantly start a Loan (without Borrower approval). |
| Credit Token (CT) | The ERC721 (NFT) Token generated upon initiation of a Loan. It is generated when an Offer is approved by the Borrower or when a Lender initiates an Instant Loan. The Credit Token will be assigned to the Lender upon generation. It represents the obligation to receive repayment of the loan (aka ). |
| Debt Token (DT) | The ERC721 (NFT) Token generated upon initiation of a Loan. It is generated when an Offer is approved by the Borrower or when a Lender initiates an Instant Loan. The Debt Token will be assigned to the Borrower upon generation. It represents the obligation to repay the loan (aka Debt). |
| Credit Derivatives (CDs) | Derivative tools & products built on top of the protocol using the Credit Token |
| Debt Derivatives (DDs) | Derivative tools & products built on top of the protocol using the Debt Token |
## Other Concepts
| **Term** | Description |
| ------------ | --------------------------------------------------------------------------------------------------------------------------- |
| NFT (ERC721) | Non-Fungible Token which represents digitial assets on the blockchain. Follows the ERC721 standard in EVM-compatible chains |
| ERC20 | A token standard on EVM-compatible chains for representing fungible tokens. |
{% hint style="info" %}
The definitions of these terms are in draft, and may change as the protocol evolves.
{% endhint %}
# Why PawnSpace?
The current DeFi landscape allows you to put up a liquid asset in order to borrow another liquid asset, both with their associated volatility. This not only adds an added aspect of risk and liquidation for the borrower (when prices get too volatile) but also creates a barrier to what and how much can be borrowed. Collateralization in this manner has its benefits in the DeFi world, but with the tokenization of Real Estate, there becomes a need to collateralize these assets without having to sell them.
Most protocols in the DeFi space focus on Fungible Tokens which conform to the ERC20 standard. For example, if you have Ether, you can use it as collateral to withdraw DAI (a stablecoin). In essence, the user will collateralize one ERC20 token in order to “borrow” a different token. However, most cases require a borrower to possess more value for use as collateral than that will be borrowed. This over-collateralization does help in instant liquidity but limits funding possibilities. In traditional finance, it is similar to borrowing the Japanese Yen using the US Dollar as collateral. Yet, in reality, most debt is collateralized with tangible assets (i.e. real estate, stocks) instead. Non-fungible tokens (NFTs) are an alternative asset class to currencies within the blockchain space. On Ethereum, most NFTs follow either the ERC721 or ERC1155 token standards. NFTs are commonly used to represent unique artwork or as in-game items for use in a game. The potential for NFTs is to enable users to prove ownership of unique assets in a digital form. A mechanism for linking real-world objects such as real-estate and automobiles to NFTs is being actively developed and will come sooner or later to the blockchain. Due to their unique and individualized nature, pricing of NFTs is as challenging as pricing of real estate; there is currently no way to evaluate its true value beyond a “bid-and-ask” approach. The need for a universal and unbiased DeFi NFT trading product is ever in demand.
**Current forms of NFT Financialization involves fractionalising NFTs** or locking them up in vaults such as NFTX. **This however takes away ownership of the underlying asset** from the original owner and potentially gives rights to someone else to claim that NFT.
Hence, some people may not prefer fractionalizing their NFTs in pools for liquidity since they lose control/ownership of it, but they do not want to sell their NFT in the open market either. **PawnSpace acts as a gateway for borrowers and lenders to safely and mutually agree on loan conditions** and carry them out with smart contracts.
### Example
Jacob wants to invest in and try out a new DeFi protocol but does not have enough liquidity on hand to do so. He is no longer comfortable taking out loans on AAVE as it would put his Health Factor in danger. Jacob however has some Decentraland Real Estate that he owns. He knows that his NFT real estate is really valuable and wants to keep ownership of it long term and hence cannot afford to sell it in the open market.
Jacob decides to use PawnSpace and list his NFT as collateral for a valuation & interest rate he deems is fair. Luckily, Belle an NFT & Decentraland Enthusiast sees Jacob's listing and feels that the valuation of the NFT is fair/undervalued and is willing to risk giving her funds to Jacob with the NFT as collateral in case of default. Belle agrees to an "Instant Loan" for Jacob's Loan Order, and the loan takes place smoothly.
Jacob receives his funds and tries to make profits on the new DeFi protocol he wanted to try out. He uses some of the gains to pay back the interest, gives back the principal and keeps the rest as profit. Jacob is happy as he receives his NFT back from escrow when he closes the loan. Belle is happy to get back her principal + interest from lending the loan.
# Key Features
### "Instant Loan" Conditions
A borrower may choose to provide **“Auto-Accept”** or **"Instant Loan"** conditions (loan amount, interest amount, and loan duration) to their Order upon its creation. Should a lender agree with these parameters, they **may choose to accept the Instant Loan conditions and initialize the loan immediately at the given parameters.** This **eliminates the necessity for borrowers to manually accept loans**, as well as for lenders to wait for their loan to be accepted, and hence **reduces competition with other lenders' Offers.**
### Debt & Credit Tokenization
A key characteristic of PawnSpace is that **both the Order and the Offer exists as ERC721 tokens (Debt & Credit tokens respectively)**, meaning borrowers and lenders can dispatch their assets while a loan is in progress. Orders are tokenized immediately (before an offer is accepted) enabling the borrower to sell their locked collateral. **Active Orders represent an obligation to repay a debt (hence, Debt Token)**, which can also be transferred. Lending offers become tokenized at the time they are accepted by a borrower or on Instant Loan. This allows the lender to transfer their **rights to the debt and the rights to receive repayment of the loan.**
This feature enables the borrower and lender to take advantage of market changes while a loan is in progress, removing the barrier of remaining locked into the asset during the lending period. This also opens the possibility of **creating derivatives on top of PawnSpace loans (e.g. CDOs and CCOs)**, as well as participants in a loan to **undergo Credit (or Debt) Delegation**, to minimize losses if they lost their borrowed funds through either liquidation or some other reason. (We will explore examples and usecases in later sections of this documentation/whitepaper).
**There are NO systemic fees for transferring either the Debt or the Credit Token.**
### Price Discovery and Valuation
A key challenge in NFT markets is the accurate discovery of price. Every NFT is different, and two tokens from the same smart contract may have very different valuations. PawnSpace facilitates a value discovery system through a **“bid and ask” structure**, where borrowers wait and see what offers they receive. Inevitably, loan offers are likely to be below sale prices on other platforms (such as Opensea), while borrowers will seek out offers as close to comparable sale prices as possible. **PawnSpace will be aggregating and analyzing information from Opensea to assist both borrowers and lenders to find approximate valuations of the given collection.** We however give users the freedom to decide the valuation themselves, and create loans on the platform.
Stable collateral prices should result in the relative stability of repayments. However, price fluctuations are inevitable, and PawnSpace enables both borrowers and lenders to dispatch the rights to their orders and/or offers at any time (through tokenized representations of their debt/credit).
{% hint style="info" %}
We will research to automate or increase efficiency of this process in the future, but we think that this process works for now in a low gas environment like Polygon.
{% endhint %}
# The PawnSpace Protocol
PawnSpace is a decentralized NFT-collateral lending platform, which primarily functions in a P2P “bid-and-ask” model. This approach allows PawnSpace to not only allow any NFT to be collateralized but also allows the market to decide the valuation of the NFT, and reach a mutual agreement on its valuation, just like in a traditional NFT marketplace.
NFTs are growning to be an alternative asset class and the introduction of NFT Financialization has been gaining traction. PawnSpace acts as a platform that allows an individual to financialize their NFTs by locking it up as collateral. This allows for users of the platform to stay away from instant liquidations due to leveraged over-collateralized positions on traditional ERC20 lending protocols. PawnSpace however complements the use of existing DeFi platforms as borrowed funds may used to earn yield on different protocols. PawnSpace acts a NFT focused DeFi primitive that allows access to capital to whomsoever seeks it.
PawnSpace is a completely decentralized protocol since its inception and was designed with decentralization in mind, with every action on the protocol taking place on-chain. This move encouraged to build on Polygon first for its cheap and fast transactions on-chain.
{% hint style="info" %}
Governance of the protocol will also be progressively decentralized as we move forward. More information will be released as time proceeds and the protocol evolves.
{% endhint %}
# Borrowing/Lending Flow
.png?alt=media)
## **Borrowers collateralize NFT (Create Order)**
The loan process consists of a multi-step procedure, beginning with the creation of a loan Order. A borrower who wants to take out a loan against their NFTs will first create a loan order and lock their NFTs within the PawnSpace contract. The user has the option to collateralize multiple NFTs within a single Order, provided they are issued from the same ERC721 contract. The borrower can then specify their preferred loan conditions for an Instant Loan and list it on the PawnSpace platform.
## **Lenders Create Offers**
Once an order has been created, prospective lenders will be able to submit pending offers for the loan. Lenders in the market will scout the PawnSpace platform for Orders and either create Offers or accept the existing loan conditions for an Instant Loan.
If the lender chooses to create an Offer, the lender will specify their preferred loan conditions (loan amount, suggested interest rate, and duration for the loan) based on what they think is the valuation of the NFT and the risk factor of the loan (optimal LTV).
## **Borrowers Accepts an Offer**
The borrower will then be able to view and accept an offer. Only one Offer can be accepted per Order. Upon accepting an order, the loan period initiates, and the borrower receives the loan principal (minus platform fees). The borrower has until the specified deadline to pay back the principal and interest.
## **Repayment or Default of Loan**
Failure to pay off the loan in time results in the lender **having the ability to claim the collateral NFT(s)**. Upon expiration of the loan period, **the lender must initialize the `withdraw` process to CLAIM the collateral**. This means that **the borrower may pay their loan back after the expiration of the lending period to RECLAIM their NFT collateral, provided the lender has not yet withdrawn.**
# Architecture
The PawnSpace architecture consists mainly of 3 main contracts.
* `PawnFactory.sol`
* `PawnSpace.sol`
* `PawnOffer.sol`
Let us go through what each contract does in brief:
### `PawnFactory.sol`
The protocol begins with a `Factory` contract which deploys a `PawnSpace` for each existing NFT contract on the parent chain. A `PawnSpace` consists of two smart contracts: one to house the `Order` NFTs, and another to house the `Offer` NFTs.
### `PawnSpace.sol`
`PawnSpace.sol` keeps track of `Orders` and their specific parameters. It contains functions for creating `Orders`, modifying `auto-accept/instant-loan` parameters, accepting `Orders`, paying back loans, and withdrawing an NFT from a defaulted loan.
### `PawnOffer.sol`
It primarily tracks the `Offers` in the protocol. The `Offer` contract contains functions for creating `Offers` towards an existing `Order`, and auto-accepting loans.
{% hint style="info" %}
Cancelling/burning offers and orders that are in-active is also possible.
{% endhint %}
# Use Cases
#### Example 1 - Instant Loan Conditions
Jacob wants to invest in and try out a new DeFi protocol but does not have enough liquidity on hand to do so. He is no longer comfortable taking out loans on AAVE as it would put his Health Factor in danger. Jacob however has some Decentraland Real Estate that he owns. He knows that his NFT real estate is really valuable and wants to keep ownership of it long term and hence cannot afford to sell it in the open market.
Jacob decides to use PawnSpace and list his NFT as collateral for a valuation & interest rate he deems is fair. Luckily, Belle an NFT & Decentraland Enthusiast sees Jacob's listing and feels that the valuation of the NFT is fair/undervalued and is willing to risk giving her funds to Jacob with the NFT as collateral in case of default. Belle agrees to an **"Instant Loan"** for Jacob's Loan Order, and the loan takes place smoothly.
Jacob receives his funds and tries to make profits on the new DeFi protocol he wanted to try out. He uses some of the gains to pay back the interest, gives back the principal and keeps the rest as profit. Jacob is happy as he receives his NFT back from escrow when he closes the loan. Belle is happy to get back her principal + interest from lending the loan.
#### Example 2 - Debt Token
From the previous example, everything went well for Jacob, and he was able to pay back the loan in time. But what if it didn't? In this scenatio, Jacob borrows funds from Belle with his NFT as collateral. However, the new DeFi yield farming protocol that Jacob invested in crashed significantly overnight which resulted in him losing his borrowed funds. Jacob knows he has to pay back his loan so that he doesn't incure further losses from the NFT that he collateralized and decides to get rid of his debt. He knows he will lose his NFT nevertheless, because he is no longer able to pay back the loan, and wnats to minimize his losses and sell his collateralized NFT. Jacob does this by trying to sell his obligation to repay the loan or otherwise known as the **'Debt Token'**. The Debt Token being a representation/derivative of his debt for the underlying collateral has the valuation of the underlying debt. Anyone who sees potential in the growth of the collateralized NFT could buy this Debt Token and repay the loan to gain the NFT.
Bob sees Jacob's DebtToken listing on Opensea at a valuation of 2 wETH while the loan to be repayed with interest was 3 wETH. Bob knows that during the duration of the loan, the floor price of the collateralized NFT had increased to about 6 wETH. He realizes that by buying the debt from Jacob and repaying it, he is still able to get that piece of land at about 4 wETH, and still get a profit of 1 wETH if he sells that land at the current floor price of that NFT collection (6 wETH).
This ensure that Jacob minimizes his loss from the loan even though he loses his NFT worth atleast double the loan price at the time. Bob is ecstatic that he was able to make a couple of trades that allowed him to technically arbritrage his way to owning an NFT at lower than its actual floor price. Belle still comes out as a happy lender as she gets back her capital with interest.
#### Example 3 - Credit Token
Let's take similar scenarios from **Example 1 & 2**, Jacob takes out a loan against his collateralized NFT, and receives a *Debt Token*; while Belle, provides him with liquidity and lends him the funds for the mutually accepted loan duration (hence receives a *Credit Token*). Now Belle - the Lender - wants some instant access to liquidity, or she feels like the value of the NFT collateral will go down and wants to exit her lending position. Belle can always dispatch her rights to a loan or 'the obligation/right to get repayed', by transferring the ownership of the Debt Token to someone else, or by selling it in the open market, or even collateralizing it on PawnSpace (hence, creating a derivative).
Belle can potentially take the following approaches to gain access to liquidity:
* **Sell 'Credit Token' on a marketplace such as OpenSea:** Since the Credit Token has a clear valuation due to its financial nature, Belle can easily find a suitable valuation for her NFT and sell her "potential" credit to someone in return for instant access to funds. Someone else in the market, say Alice, decides to buy Belle's Credit Token and is now the owner of the loan, and any repayment done by Jacob at this point will be redirected to Alice's wallet. Alice also now has the right to claim collateral incase Jacob defaults on the loan.
* **Collateralize Credit Token on PawnSpace:** Again, since the Credit Token has a clear valuation (due to its financial nature), Belle can list her Credit Token on PawnSpace for a loan. This NFT collateral would essentially become a derivative since its value is derived from the underlying collateral within the Credit Token itself. If Belle ever defaults on her derivative loan, the lender would be able to claim the original Credit Token. A scenario could arise where Jacob - *the borrower of the original loan* - defaults on the original loan which could prompt Belle to also default on her loan. In this case, the lender (e.g. Alice), can now claim the original Credit Token (collateral of derivative loan), and then use the claimed (original) Credit Token to claim the underlying original NFT collateral that was defaulted on. If Belle does not default, but repays the derivative loan to Alice, then Belle can claim the original NFT collateral while also gaining some additional yield/profits from her borrowed funds from the derivative loan.
*Note: Users can get creative on how they interact with the Debt and Credit Tokens, and their derivatives. We also see the potential of Credit-Farming with these derivative loans, but however caution users that they understand the underlying collateral before lending or Borrowing against it.*
# Getting Started - Outdated UI
# Configure a wallet
### **GETTING STARTED**
```
This page guides the user in connecting Metamask to PawnSpace, and configuring their wallet to Mumbai Testnet.
```
* Go to [**https://app.pawnspace.io**](https://app.pawnspace.io)
* When you access PawnSpace, it offers to open MetaMask. Click the wallet account that you want to use.
* If you see the message "Change to Mumbai Testnet" on the top right of the page, please change the Metamask network to Mumbai Testnet. If you haven't configured your wallet to connect to Mumbai Testnet, follow this guide to do so:
# Create an order (borrower)
```
The guide below shows you how to collateralize an NFT and create an Order.
```
* Click the **"Create Order"** button on the header menu.
* You can view your own NFTs. Select the NFTs you would like to collateralize (You can select multiple tokens to collateralize). Then, click "Select" at the bottom of the page
* Input **"Auto accept amount"** (will be replaced to "Instant Loan" in the new UI) and **"Auto Accept Interest"** (will be replaced to "Instant Loan Interest" in the new UI) which are the loan condition that you accept automatically if a lender offers it. If you do not want to set the condition, put "0" to both.
* **"Lending Period"** is the duration for which you want to borrow the funds for. \[The time you accept lending + this period] is the deadline to repay.
* Click on **"Approve NFT"** to allow PawnSpace to handle your NFTs.
* Metamask opens up a dialogue to `Approve`. Click the **"Confirm"** button, and wait for the approval to be recorded on-chain before proceeding.
Click the **"Create"** button to create and list your Order on PawnSpace.
# Create an offer (lender)
```
This page guides a user on how to Create an Offer on an Order.
```
* When you click "Explore" on the header menu, this displays the existing Orders that are waiting for someone to lend funds to.
* Select an Order and check the details of the Order.
* Input the **"Amount"** and **"Interest"** that you want to lend, and choose the **duration of the loan**.
* Click on either **"Unlock xxx USDC"** (approves the usage of limited number of USDC to be managed by the contract. You will be required to approve transactions for subsequent loans - recommended) or **"Infinite Unlock"** (approves unlimited usage of USDC by the contract. You will not need to approve USDC in future loans). This will allow the transfer of your tokens if the Borrower accepts your Offer.
* The Metamask shows a dialogue to approve it. Click the **"Confirm"** button.
Click the **"Create"** button to submit your offer.
# Accept an offer (borrower)
```
This page guides the Borrower on how to accept an Offer for their Order.
```
* Click the **"My Orders"** button on the header menu.
* The Orders (Debt Token) you own are listed. You can delete an Order by clicking the **"Cancel"** button. As you choose(click) an order, the Offers from Lenders in the market are displayed.
* If there is an Offer you would like to accept, you can click the **"Accept"** button.
* Metamask opens a dialogue. Click the **"Confirm"** button.
# Repay or Withdraw
```
This page guides Borrowers on how to repay their loans and Lenders on how to claim their NFT collateral if the Borrower defaults.
```
## Repay (for borrowers)
* You can pay back the debt within a limited time (mutually accepted loan duration). After repayment, you will be able to reclaim the NFT that was deposited as collateral.
* Click on **"My Orders"** on the header menu.
* Click the **"Repay"** button for the debt that you want to pay back. If the **"Approve"** button is shown on the bottom of the Order, you have to click and approve to allow the funds to be handled by the PawnSpace smart contract.
* Metamask shows a dialogue. Click the **"Confirm"** button.
## Withdraw (for lenders)
* If the repayment is not done in time, the Lender may withdraw the collateral NFT.
* Click on **"My Offers"** on the header menu.
Click the **"Withdraw"** button, and a Metamask dialogue shows. Click **"Confirm"** to withdraw and claim the defaulted loan's collateral.
# NFT loan derivatives
The tokenization of both loan Orders (Debt Token) and active Offers (Credit Token) creates a new asset class of NFT loan derivatives. `Debt Token` and `Credit Token` holders will have the freedom to trade their derivative asset tied to the loan. Since collateral is locked within the PawnSpace contract, an Order is tokenized and tradeable the moment it is created. Orders that have not yet been accepted a loan should contain a value equal to the locked collateral, minus the host blockchain’s (in this case Polygon's) transaction fee for unlocking the collateral. When an Order enters a loan, its value will immediately change. Since an active Order (or Debt Token at this point) represents the obligation to repay a loan, its value should theoretically become negative (debt). The time remaining to repay the loan should also affect valuation of the Debt Token; potentially in a similar manner to expiration times in Options Markets.
Upon creation of a pending Offer, it exists only as a non-transferable record coupled with the corresponding order. Since value transfer does not occur prior to acceptance, the Offer’s intrinsic value would be zero while it is still pending. When an Offer is accepted and currency is loaned to the borrower, the value of the Offer should represent the total repayment amount (loan principal plus interest) minus risk factors and transaction fees and is tokenized (Credit Token). There exists a number of variables, both external and internal to pawnspace, which could be considered when evaluating risk factors for the Credit Token.
External risk factors could include the type/quality of the collateral and its associated project, as well as the potential for price volatility in that asset. Internal risk factors include PawnSpace features, such as smart contract security (just like any other DeFi protocol). A Credit Token whose corresponding Debt Token is not owned by the original loan receiver could also be considered riskier.
Other risks include Debt Farming - where a borrower borrows funds against an NFT, and then sells the Debt Token on the market for more money with no intention from the beginning to pay it back, and dispatches all repayment obligations to the new owner of the Debt Token. This could result in bad actors and could be restricted with the introduction of debt & demerit scores that signal the reputation of the borrower. However the team is still researching ways to create an algorithm that could defend against sybil-attacks for such a scoring or reputation mechanism (mentioned in the next page).
Overall, the loan derivatives market is going to be an experimental feature with truly unknown outcomes. As time progresses, data from the loan derivative market will be used to identify and develop new features and lending strategies to further improve the platform. There also exists potential for future protocols and developers to build on top of PawnSpace and its loan derivatives to utilize their secured value in unique ways. Some examples of financial instruments that could be thought of are, CDOs (Collateralized Debt Obligations) and CCOs (Collateralized Credit Obligations).
# Decentralized Credit Score
As mentioned in the previous section, lending and borrowing of NFT assets and its derivatives could lead to gamification, that could potentially prove fatal to the trust of Lenders in the market. To combat this in a meaningful way, the PawnSpace team will be researching ways to create a decentralized Reputation Scoring algorithm or mechanism that would help reduce sybil-attacks on the platform, and also encourage the repayment of loans. We believe such approaches will help develop trust and usage of PawnSpace in the long run, thus benefitting both borrowers and lenders in the market.
{% hint style="info" %}
However, such a mechanism has not been implemented in PawnSpace V1, and will be incorporated in future updates or later versions of the protocol.
{% endhint %}