Debt Representation in UTXO Blockchains

TL;DR

This paper introduces an extended UTXO blockchain model capable of representing both credit and debt, enhancing privacy and transparency in financial markets like reverse mortgages.

Contribution

It extends the traditional UTXO model to include debt representation as unmatched inputs, maintaining privacy and scalability advantages.

Findings

Successfully models credit and debt within UTXO framework

Protects borrower privacy while enabling aggregate market transparency

Prototype implementation in Tendermint demonstrates practicality

Abstract

We provide a UTXO model of blockchain transactions that is able to represent both credit and debt on the same blockchain. Ordinarily, the UTXO model is solely used to represent credit and the representation of credit and debit together is achieved using the account model because of its support for balances. However, the UTXO model provides superior privacy, safety, and scalability when compared to the account model. In this work, we introduce a UTXO model that has the flexibility of balances with the usual benefits of the UTXO model. This model extends the conventional UTXO model, which represents credits as unmatched outputs, by representing debts as unmatched inputs. We apply our model to solving the problem of transparency in reverse mortgage markets, in which some transparency is necessary for a healthy market but complete transparency leads to adverse outcomes. Here the pseudonymous properties of the UTXO model protect the privacy of loan recipients while still allowing an aggregate view of the loan market. We present a prototype of our implementation in Tendermint and discuss the design and its benefits.