Accountable: Unveiling Liabilities and Hidden Accounts in Crypto Lending
Tackling Transparency Challenges and Hidden Risks in the World of Crypto Lending
➡ Where Are We Now?
The crypto lending market is at a crucial point. Currently, the entire un(der)collateralized lending space in crypto relies heavily on self-reported claims by borrowers. These claims range from unaudited financial statements and screenshots (of bank or exchange accounts) to PDFs and proprietary slack bots reporting balances. Diligent credit underwriters find it extremely challenging to assess borrowers and make informed lending decisions. Given the series of fraudulent events in 2022, confidence in these traditional "proofs" has plummeted. As a result, many lenders have either ceased un(der)collateralized lending altogether, drastically reduced their capital allocation, or redirected their capital exclusively to counterparts like Flow Traders or Galaxy, which are publicly listed and thus inherit trust from their quarterly audited financial statements. The rest of the market participants are left without a means to credibly demonstrate their balance sheets — not to mention performance or risk parameters — and prove they are reliable counterparts for lending.
At Accountable, we challenge the status quo by starting with a fundamental yet often overlooked question: Do you have the money?
Until now, borrowers had no way to conclusively prove ownership of the assets they claimed, providing little assurance to lenders. With the Accountable V1, you can demonstrate your asset ownership across all relevant venues — from banks and custodians to CEXes and hardware wallets. We provide our users with the means to verify their comprehensive "net worth" components live and display their venue and asset type concentration. While this might not seem like a revolutionary step to some, transitioning from "trust me bro, I have the money, everything is going to be alright" claims to verifiable and live balance ownership is a significant advancement for the entire lending space.
However, let’s temper our enthusiasm. While this is a breakthrough in our approach to the assets side of the balance sheet, it only tells part of the story. How much of these so-called assets truly belong to the borrowers, and how much constitutes liabilities?
What if the $100 million that a borrower reports from their Binance account is actually another loan from a different lender?
How will Accountable make the system more complete and address the issues of liabilities and hidden accounts?
🔐 1) Signalling by Other Lenders/Data Reporters
Accountable enhances communication between lenders, enabling them to signal the presence of third-party loans while preserving the borrower’s privacy. This signaling mechanism may only reveal a simple flag indicating whether a party has a loan, without disclosing specifics like terms, amounts, or currencies.
Lenders using Accountable will have access to signed APIs, allowing borrowers to easily retrieve and view their liabilities aggregated on their dashboards. This setup facilitates the inclusion of such data in reports sent to other parties. Moreover, we employ privacy-preserving verification methods, such as Merkle-Sum Trees and Zero-Knowledge Merkle Proofs, ensuring that liabilities known to lender A are accurately reflected in reports received by lender B.
To illustrate how Accountable approaches this problem, consider the following scenario where a borrower has a loan from Lender A and seeks a new loan from Lender B:
a) Fully Decentralized with Peer-to-Peer Communication
The borrower adds Lender A as a data source for their liabilities, similarly to how they would add a custodian or an exchange as a holder of owned assets.
The borrower’s dashboard reflects the loan as a liability, and a Merkle Summation Tree is constructed over all assets and liabilities, generating a Merkle Proof to certify the loan's contribution to the total figures.
Lender A receives a Zero-Knowledge Merkle Proof validating the inclusion of their known loan in the totals.
When the borrower seeks a new loan from Lender B, they send a report of assets and liabilities, which may reveal venue concentration or merely demonstrate solvency, depending on the chosen level of transparency. This report includes attached proofs.
All lenders on the platform are interconnected in a mesh network, and Lender A can verify the signed Merkle Root Hash received by Lender B with their ZK proof, confirming that the liabilities they know about are properly reflected in the data Lender B received, all without revealing any sensitive information.
Obviously, if Lender A does not have a ZK to check against Lender’s B received root hash, an alert is immediately triggered.
b) Decentralized with Proxies
As the network of lenders grows, using proxy nodes to relay information naturally becomes the next step to alleviate the need for a fully connected peer-to-peer mesh. This setup uses encrypted transport, preventing proxies from seeing the data, and simplifies the setup by minimizing firewall configurations since all communication happens passively, without active connections between lenders.
c) Decentralized with Public Proofs
With the future Accountable V2 lending chain and if privacy concerns allow it, root hashes, signatures, ZK proofs, and their verification status could be stored on-chain, providing an additional layer of transparency and security.
In addition to knowing all the liabilities from the parties that are on our platform, we also aim to integrate with existing lending platforms (CeFi and DeFi), Prime Brokers and other relevant infrastructure to be able to do privacy preserving checks of all liabilities they know about.
🤝 2) Trusted Third Parties
Technology alone cannot fully address the issue of hidden accounts. Involving auditors or other trusted third parties in the verification process enhances the credibility of financial reports. Auditors ensure that all accounts are fully integrated into Accountable, streamlining the process by avoiding the need to run time-consuming and costly calculations independently. Importantly, auditors do not require access to any keys; their role is solely to confirm that all accounts are accurately accounted for.
To clarify, annual audited reports remain a critical component of the puzzle for credit underwriters as they provide a definitive “double check” on the borrower’s past reporting. Lenders can compare the information received throughout the year with these audited reports to determine if the details match. Knowing that any discrepancies will eventually be uncovered, borrowers are less likely to falsify information. This aspect of game theory ensures that borrowers who engage in deception are naturally excluded, promoting a more honest and transparent system. Such mechanisms make Accountable a vital tool in reinforcing trust and accountability within financial operations.
🌐 3) Venue Deploys
The primary use case for the Accountable Data Sharing platform involves operating on-prem, minimizing the need for private data sharing unless explicitly required. Once a critical mass is achieved and a standard for financial data sharing is established, Accountable plans to embed itself directly at source venues with a simple opt-in mechanism. This integration means that all users of a venue running Accountable become capable of utilizing it for their needs and sharing reports in a trustless manner with third parties.
To enhance transparency, a borrower can generate an authorization token for a lender, detailing the aggregated reports to be shared, which is then sent to custodians or exchanges. This facilitates easier onboarding and scaling without compromising security. It also enables other lenders using Accountable to verify that the liabilities they are aware of are accurately reflected in the aggregated numbers reported by the borrower, all while maintaining privacy and not revealing additional details
💪 Benefits for Lenders
Lenders significantly benefit from Accountable's robust architecture. With Accountable, they gain access to our neutral infrastructure layer, which supports a wide array of credit operations - Accountable enables them to leverage advanced features such as the Data Platform, RFQ, and settlement services, among others. The benefits of participating in our ecosystem extend beyond these functional features. By joining Accountable, lenders not only gain improved visibility and transparency into borrowers' financial exposures — including detailed insights into liabilities — but they also contribute to enhancing the overall network integrity. They can do this by signaling (in a privacy-preserving manner) their interactions with borrowers, such as issuing loans and monitoring the financial health of these parties. This approach encourages a mutual exchange of information where transparency and active participation improve safety and trust for all involved. As lenders signal issues or confirm the stability of a borrower’s financial status, they not only protect their interests but also strengthen the network, creating a more secure lending environment for everyone.
📄 Conclusion
These strategies collectively reduce information asymmetry between lenders and borrowers, making it significantly more challenging for borrowers to conceal liabilities or hidden accounts. While un(der)collateralized lending will never be entirely risk-free, Accountable does not aim to replace credit underwriters but rather to empower them. By providing tools to ask the right questions, verify responses, and continuously monitor relevant data and metrics as well as the money flows — and eventually enforce them through a risk engine and walled garden — Accountable supports more robust, transparent lending practices.
It is important to recognize that no technology can uncover every hidden transaction, such as informal loans not recorded digitally. This underscores the continuing need for skilled credit underwriters who can ask pertinent questions and now, with Accountable, verify and monitor (and soon enforce) them more effectively.
On top of that, Accountable should be actively used as a signalling tool to other ecosystem participants. Whether that is a signalling of a liability owned by other party or indication of loan agreement breach, all participants should feel that we are collectively building a system that will become more and more complete over time.
As we continue to refine and expand our capabilities, Accountable will play a pivotal role in shaping a more trustworthy and efficient lending landscape. We are committed to evolving with the market, ensuring that our technology remains at the forefront of innovation — helping to illuminate the shadowy corners of financial transactions and build lasting confidence in the crypto lending market.
Through proactive community engagement and ongoing development, we are paving the way for a system that not only meets the current demands of the market but also anticipates future challenges.