EVE Forum Experiments

Standard Protagonist Offering Rates and Konditions (SPORK)

Version: 1.0

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TLDR

SPORK is a way to auction off loans that has some nice advantages over simply setting a fixed interest rate and asking for creditors (see below). If you're potentially interested in lending to a SPORKing borrower, just post a bid, consisting of both the amount you'd be willing to lend and the minimum interest rate you'd accept. For example:



That's it! The auction process determines whether your demanded interest rate was low enough to be included or not. Details and edge cases are spelled out below.

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Purpose

The "Standard Protagonist Offering Rates and Konditions" (SPORK) describe a system for auctioning off debt within a range of interest rates. Many borrowers simply offer to borrow X billion at Y % a month; this is a simple and easy way to set the terms for a loan, but setting a fixed interest rate is essentially guesswork. Guess too high and you'll pay more than you had to; guess too low, and you won't fill the loan.

Instead of setting a fixed rate, a loan auctioned off via SPORK has an interest rate maximum (ceiling) and minimum (floor), and creditors bid the interest rate down until those willing to accept the lowest rate fill the loan. The auction system used (loosely equivalent to an open-bid uniform-price auction, if that means anything to you; see below) has several advantages:

1. By setting an interest rate range instead of fixing it at a specific value, the borrower fills the loan at the lowest rate possible, without having to know that rate in advance.


2. Creditors aren't penalized for bidding below the eventual actual interest rate of the loan.


3. Because of (2), creditors can simply place one bid reflecting their true minimum required interest and then walk away, letting the auction system resolve who wins, rather than being forced to babysit their bid and update it as needed.

That's the thinking behind SPORK. Let's go over how it works, so you too can be SPORKing in no time at all:

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Starting Off

To start off a SPORK debt auction, the borrower needs to provide certain information:

1. The principal: the size of the loan


2. The auction close date: the time by which the borrower must close bidding on the debt and announce the winning creditors


3. The funds due date: the (later) time by which winning creditors must have transferred their portions of the principal


4. The payment schedule: the timing and size of all payments from the borrower to the creditors, including both interest and the return of principal


5. The ceiling: the highest monthly interest rate he's willing to pay


6. The floor: the (lower) monthly interest rate at which creditors can guarantee they'll be a winning creditor ("buying out" the loan)

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Bidding

Once the borrower has set the terms of the loan, above, creditors bid to fill the loan. When bidding, creditors must include both the amount they're willing to lend, as well as the minimum interest rate they'd be willing to accept. (The rate they receive may actually be higher; see below.)

Additionally, creditors may optionally make their bid conditional on the total loan principal not exceeding a maximum total loan principal, and, again optionally, a higher conditional interest rate if the total principal does exceed that amount.

For example, the following are all legitimate bids:

1. "5B @ 10%/month"


2. "5B @ 10%/month, contingent on the total principal not exceeding 10B" [above which you rescind your bid]


3. 5B @ 5%/month, contingent on the total principal not exceeding 10B, in which case I'd demand 10%/month"

This concept of a maximum total loan principal is helpful if you, as a potential creditor, think that the loan becomes riskier as the principal grows. For example, if a particular borrower has previously borrowed and returned 5B uncollateralized, you may accept a relatively low interest rate as long as the borrower's total debt remains at or below 5B, but demand a higher interest rate for higher amounts.

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Selecting winners

At any given time (whether updating current winners or closing the auction), the winning creditors are selected by picking a bid with the lowest demanded interest rate, adding it to the list of winners, and repeating until either all bids are exhausted or the loan is filled. In the event of interest-rate ties, the borrower is free to choose at his discretion, with the exception of bids at the buyout interest rate, in which case earlier buyouts must be honored. (This is to guarantee that a creditor that buys out part of the loan early can be confident they'll be a winning creditor.)

All winning creditors receive the clearing interest rate, the interest rate demanded by the last-accepted bid. Isolated bidders demanding low interest rates thus aren't penalized by receiving low interest payments.

If the last selected winning creditor makes the sum of bids greater than the actual loan balance, that creditor has the option of either lending part of his bid (enough to fill the loan) or rescinding his bid, in which case the borrower moves on to the next bid.

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Payments

Payment is easy: it's outlined by the borrower as the payment schedule in his OP. One potential complication is prorated payments. For example, if a particular loan is for 10B, starts in the middle of January, and has payments on "Feb 1 (prorated), Mar 1, and Apr 1," with an interest rate of 10%/month, the Feb 1 payment will be prorated. In this case, it'd be cut in half, since the borrower only actually had the funds for half of the month.

Reserved.

Reserved.