Credit is the practice of providing someone with money with the expectation of repayment, often with interest. Access to credit is crucial because it allows individuals and businesses to grow more rapidly than if they relied solely on their own resources.

However, traditional credit systems often restrict access, with decisions typically made by banks or algorithms that can lead to discriminatory practices. These systems prioritize the bank’s profitability over the borrower’s needs, creating significant barriers, especially in regions with underdeveloped financial systems.

The Union Protocol offers a solution by creating a decentralized credit network on the Ethereum blockchain. This protocol enables any address to build a credit line in a permissionless, crypto-native way. Rather than underwriting risk, the Union Protocol facilitates the trust needed for credit access.

What is Union Finance?

Source: Union Finance website

Union is a member-owned credit protocol built on the Ethereum blockchain, designed to democratize access to credit. In this decentralized system, members have the ability to underwrite lines of credit to other member addresses, creating a robust network of trust and financial support.

Union operates as a Decentralized Autonomous Organization (DAO), enabling any Ethereum address to accumulate a credit line on-chain in a permissionless, crypto-native manner. Unlike traditional financial institutions, the Union Protocol does not underwrite risk directly. Instead, it functions as a mechanism to lower the cost of coordinating trust into available credit, leveraging the decentralized nature of blockchain technology.

The protocol’s structure allows for the aggregation of lines of credit, enabling Union members to collectively source capital at a lower cost than any member could independently achieve. This aggregation fosters a virtuous cycle within the network: increased availability of credit leads to lower borrowing costs, which stimulates more lending activity. This system not only makes credit more accessible but also ensures that it is distributed more equitably, aligning the incentives of both borrowers and lenders.

Key Protocol Activities of the Union Finance Protocol

User Staking DAI

Users can stake DAI (or other tokens) in the UserManager contract, which deposits these funds into the asset manager. The asset manager can hold tokens as DAI or invest them in third-party lending pools like Compound. Staked funds are categorized as “Free Stake” (withdrawable and earning), “Utilized Stake” (non-withdrawable but earning), and “Defaulted Stake” (non-withdrawable and not earning).

Earning Union Tokens

Stakers earn $UNION tokens from the Comptroller contract, which distributes $UNION based on individual and global staking behavior. The distribution is governed by a half decay curve algorithm, ensuring that the more DAI staked, the less $UNION is claimable. Members earn higher rewards for actively backing non-defaulted borrows.

Members Borrow DAI

Members can borrow DAI up to their credit limit from a separate lending pool (uToken). The credit limit is determined by the sum of trust from other members. Borrowed amounts incur an origination fee and accrue interest. Loans default if the minimum payment is not made within 30 days. Borrowers can repay loans anytime, and interest is split between the reserve and uToken holders.

Vouching for Members

Members vouch for each other by setting trust limits. Vouches can be adjusted but not lowered below active usage. Members cannot vouch for themselves. Vouches can be removed if unused, and loans can be written off if overdue for a maximum period (60 days).

Applying/Becoming a Member

To become a member, an address must register and burn $UNION tokens to prevent spam. Members can add trust to any address, creating potential credit limits for non-members.

uToken Liquidity Providers

Anyone can deposit DAI into the uToken contract to mint uDAI, representing a claim on the deposited DAI. This DAI is lent to members, and repaid interest is distributed to uDAI holders or the reserve. uDAI can be burned to reclaim DAI at the internal exchange rate.

Asset Manager

The asset manager contract holds all tokens and can invest assets into other markets like Compound and AAVE. Interest earned from these investments increases available credit but is not distributed to $UNION holders, stakers, or uDAI minters.

Governance

The $UNION token governs the protocol, with $UNION holders voting on all parameters and upgradeable logic. The protocol can add new markets and parameters via majority vote. The initial $UNION supply is 1 billion, with an annual minting capability of 2% after four years.

Use Cases Of The Protocol

Union Protocol is a foundational framework for various credit products, such as credit unions, credit lines, installment loans, and venture debt. The flexibility of Union allows for a wide range of credit relationships:

Source: Union website

Types of Credit Relationships

• One to One: Although it might seem excessive for one person to lend a friend $20, this setup is valuable for recurring borrowing.
• Many to One: Groups can collaborate to lend to a person, for example, three people vouching $100 each to give a fourth person access to $300.
• One to Many: A type of credit relationships in which an underwriting contract can serve all members of a DAO.
• Many to Many: Multiple DAOs can lend to each other, creating a network of trust and credit.

Unique Advantages

• Efficiency: A single DAI can support multiple accounts and contracts.On-Chain Trust: Real-world trust can be brought on-chain while maintaining pseudonymity.
• New Market Opportunities: Union enables products with loan-to-value (LTV) ratios between 0% and 150%.
• Credit Lines for Smart Contracts/DAOs: DAOs and smart contracts can access credit lines.
• Investing by Extending Credit: Investors can extend credit instead of direct investment.
• Incentivized Vouching: New user experiences can be created, such as vouching for charities (microfinance) or investing in a DAO by vouching instead of depositing funds.

Transformative Impact

Union Protocol democratizes access to DeFi by enabling individuals with solid reputations but limited assets to obtain credit. However, it is crucial to remember that Union does not eliminate the risk of lending to untrustworthy individuals. Trust remains a critical factor in the success of any credit relationship.

Union Finance Tokenomics

The $UNION token is an ERC-20 utility token primarily used for governance within the Union Protocol, with the potential for additional functionalities as determined by the DAO. The $UNION team intends to commence with an initial supply of 1 billion tokens and has a strategy to incrementally create new tokens at a rate of up to 2% annually starting from December 22, 2025.

Below is a detailed breakdown of the UNION token’s and distribution:

• Community DAO: 20% (200,000,000 UNION)
• Initial and Future Team: 46.78% (466,666,666 UNION)
• Early Supporters: 33.22% (332,166,667 UNION)

How Community-Governed Treasury Allocations will be used

Here’s a simple breakdown of how 200 million UNION tokens are being used:

The total allocation for Community DAO: 200,000,000 UNION tokens

• Treasury Vester Contract: 150 million UNION tokens will be gradually given out from December 22, 2022, to December 22, 2025.
• Treasury Contract: 38.9 million UNION tokens are available right away for governance decisions.
• EthComptroller Contract: 9 million UNION tokens are ready now, with an additional 1 UNION token added every block from block #13816842 to block #15816842, making a total of 20 million UNION tokens.
• Merkledrop Contract: 2 million UNION tokens were distributed, but this has ended.
• ArbComptroller: 100,000 UNION tokens are available now.

Bridged Tokens

Arbitrum and Optimism: The $UNION tokens have been bridged to Arbitrum and Optimism networks to expand the utility and accessibility within the Ethereum ecosystem.

Conclusion

The Union Protocol advances decentralized finance by enabling flexible and permissionless credit relationships. By leveraging trust and collaboration, it democratizes access to financial resources for individuals, DAOs, and other entities. Union brings real-world trust on-chain while maintaining pseudonymity, supporting various credit structures, and fostering a more inclusive financial ecosystem. Its design addresses traditional credit limitations and introduces new opportunities for financial collaboration.