Debt Representation in UTXO Blockchains
This work addresses the need for flexible financial representation in blockchain systems, particularly for applications like reverse mortgages, by combining the privacy and scalability of UTXO models with balance-like functionality, though it is incremental as it extends existing UTXO concepts.
The authors tackled the problem of representing both credit and debt in UTXO blockchains, which traditionally only support credit, by introducing a model that uses unmatched inputs for debts and unmatched outputs for credits, enabling privacy and scalability benefits. They applied this model to improve transparency in reverse mortgage markets, protecting borrower privacy while allowing aggregate market analysis.
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.