# Solving the Fundamentals

## Moral Hazard - Centralized and Fiat industry

Every time depositors deposit funds into a CEX or a Fiat Centralized party, they are bound by the term of loss damage waiver, which creates an assumption that the CEX or centralized party is not liable for the loss or damage arising from the usage of the platform.

They are effectively aware that they are not responsible for the loss, which creates a problem, **Moral Hazard** where managers would pursue maximum return with risk not favouring the platform or the deposit.

#### ***PeerHive***** answer**

{% tabs %}
{% tab title="Decision Making" %}
Due to ***PeerHive*** not being the direct *Middle Man*, <mark style="color:red;">**we do not process any investment decision-making on behalf of the lenders**</mark> where we only provide due diligence on the borrower. The decision of making an investment falls directly on the client/depositors, all information that the borrower provides will be relay directly to the potential lender after doing a set of basic Know-Your-Customer, Know-Your-Business, Anti-Money Laundering checks and borrower’s financial health check.
{% endtab %}

{% tab title="Revenue Generation" %}

* 0.5% - 1.5% interest charge
* 1% - 3% of successful fundraising amount
  {% endtab %}

{% tab title="Smart Contract" %}
One of the major differences between ***PeerHive*** and other platforms is that we <mark style="color:red;">**do not handle the transfer of assets between “Investors” and “Borrowers”**</mark>. So the investor’s assets are not regarded as Liabilities in ***PeerHive’s*** book, as a result, no liquidity transformation phase requires. Asset transfers are done directly by debiting the investor’s wallet directly to the borrower’s wallet, this can be **done via the usage of a Smart Contract**.
{% endtab %}
{% endtabs %}

Due to the decision-making proposition falling under the lender, we can significantly reduce moral hazards that place financial harm directly towards our investors on the platform. Well part of our revenue is also tied towards the performance of the Decentralized Lending Contract, to ensure no excessive risks are taken that can jeopardize ***PeerHive’s*** portfolio

## Adverse Selection - Decentralized and Post-Investment Management

Because borrowers tend to take risks more than lenders, they intend to utilize information asymmetry to obtain better loan terms than intended. Causing lenders to have a higher level of risk than selecting better-quality projects.

CEXs and DeFI platforms also do not require to go through scrutinized credit and compliance checks causing higher levels of Adverse Selection as much of the loan issued directly caters for trading speculation.

#### ***PeerHive*** answer

Although this can’t be eliminated due to the fundamentals of human nature, PeerHive has taken sufficient steps to reduce such risk.

{% tabs %}
{% tab title="Pre-Selection Compliance" %}

> In an effort to <mark style="color:red;">reduce the Adverse Selection</mark> faced by CEX and also FIAT centralized player, all potential Decentralized Lending Contract has to be backed by certain projects or companies this is to ensure the economic output of the Decentralized Lending Contract has been placed to good use.

Such check is as follows but not limited to:

1. Company Setup ≥ 1.5 Years
2. 2-Years of audited reports for Pte Ltd or Partnership equivalent
3. Annual Revenue that exceeds SGD 100,000
4. Liquidity Ratio ≥ <mark style="color:blue;">**30% (at all times)**</mark>

   $$
   LiquidityRatio = LiquidAsset/CurrentLiabilities
   $$
5. Asset Coverage Ratio ≥ <mark style="color:blue;">**50% (at all times)**</mark>

   $$
   ACR = \frac{(AssetBV-IA)-(CL-STDebt)}{TotalDebt}
   $$

   AssetBV = Total Asset Book Value

   IA = Intangible Asset

   CL = Current Liabilities

   STDebt = Short-Term Debt
6. <mark style="color:red;">Collateral Asset will go through an independent review by a panel of third-party valuers</mark>
7. Regulated KYC, KYB and AML/CTF review
   {% endtab %}

{% tab title="Post Investment Management" %}

> As ***PeerHive*** is a part of the lender consortium for all future lending contracts, ***PeerHive*** will work in line together with other lenders to ensure all the terms set out by the Protocol are being adhered to reduce the risk of default.

Though defaults are inevitable during the course of the investment cycle, ***PeerHive*** would maintain the following:

1. Case Default rate ≤ 10%
2. Amount Default Rate ≤ 15%

This is also combined with proactive communication among all stakeholders, in an effort to keep crystal clear transparency regarding the financial health, group-wide growth and short-term liquidity of the borrower.
{% endtab %}
{% endtabs %}