🏦 Transitional Lending Model in the Digital USD System

This document outlines how traditional bank lending and synthetic balance behavior can persist during the transition to a token-based settlement system. It preserves the user experience of fractional reserve banking while enforcing strict reserve discipline at the protocol level.

I. 🧮 Overview

In the digital USD system:

  • All real value is represented by tokenized USD issued by the Federal Reserve.
  • Banks cannot create real dollars — only synthetic entries in their internal systems.
  • Loans are disbursed off-chain as synthetic balances, while settlement always occurs in real tokens.

This model bridges the old world (fractional reserves) with the new (token-based finality).

II. 🏗️ How Synthetic Loans Work

  1. Loan Origination
    • A bank creates a synthetic balance in the borrower’s account on its website or app.
    • No real USD tokens are transferred yet.
  2. Loan Usage
    • When the borrower spends or withdraws funds:
      • The bank must settle using actual digital USD tokens.
      • These come from the bank’s reserves, not from freshly minted supply.
  3. Loan Repayment
    • Borrower repays in real USD tokens.
    • Bank burns the debt entry off-chain and recovers tokens into its reserves.

III. 💧 Sources of Reserves

Banks must maintain enough token reserves to meet outflows. Reserve sources include:

1. Customer Deposits

  • Individuals and institutions may deposit real USD tokens into bank-managed wallets.
  • Banks may offer yield-bearing accounts to attract deposits.

2. Staking-Based Liquidity Pool

  • Banks may borrow short-term liquidity from a shared staked pool.
  • Pool participants earn swap and lending fees.
  • Unstaking delay (e.g., 3 days) protects systemic liquidity.

3. Loans from the Federal Reserve

  • The Fed may lend digital USD tokens against collateral.
  • It cannot mint freely — token issuance must follow existing law:
    • Buying assets via open market operations
    • Purchasing bonds from the Treasury

IV. ⚖️ Role of the Federal Reserve

The Fed continues to serve as lender of last resort — but:

  • It must acquire assets (or receive Treasury bonds) to legally mint new tokens.
  • It may inject liquidity into the staking pool or directly loan to banks.
  • All loans are explicitly tracked, collateralized, and repayable in tokens.

This limits arbitrary expansion while allowing flexible crisis response.

V. 📊 Risk & Profit Structure

Banks no longer profit by conjuring synthetic dollars ex nihilo. Instead, they:

  • Accept credit risk on borrowers
  • Accept liquidity risk on reserve sufficiency
  • Earn spread between:
    • Lending rate to customers
    • Cost of acquiring reserves (deposits, Fed loans, staking pool interest)

Banks become true financial intermediaries — not creators of money.

VI. 🔄 Long-Term Transition Path

  • In early stages, most users will still keep funds in banks.
  • Over time, users may shift to holding wallets directly (e.g., direct deposit to personal KYC wallet).
  • As this happens:
    • Bank reserve pressure increases
    • Lending must be backed by real liquidity

The system naturally transitions to discipline without shock.

VII. ✅ Summary

This model allows:

  • Continuation of familiar bank-led lending
  • User-friendly synthetic balances
  • Real-value discipline at the protocol level
  • Fed backstopping via legal asset exchange

All lending is off-chain, auditable, and reliant on actual reserves — preserving flexibility while enforcing monetary realism.

VIII. 🏦 Interbank Liquidity Design

1. Staking-Based Interbank Liquidity

  • Banks and large holders may stake surplus USD tokens.
  • Staked liquidity is used by other institutions to fulfill short-term needs (e.g. withdrawal pressure).
  • The protocol mints yield as compensation.
  • The Fed sets the minimum yield rate to throttle liquidity velocity.
  • Replaces Fed Funds Rate and Interest on Reserve Balances (IORB) as transitional mechanisms.

2. Interbank Lending Remains Off-Chain

  • Interbank loans are managed through off-chain agreements between institutions.
  • The protocol does not include loan execution, enforcement, or collateral logic.
  • Lending behavior and risk management are left to the application layer.