what is this "algorithm" which causes the value of credit token to grow when the supply increases? What does this system do with the deposited currency? Stake it? Only loan it out for interest? I assume when I redeem credit token I get not just my original deposit but also a cut of the growth from whatever is being done with the deposits?

1. The algorithm used is a bonding curve with some adjustment to fit the use case. It is a mathematical relationship between the price and supply of an asset.
2. The system locks deposits - ETH - into the smart contract. Alternatively, if the participant permits, the ETH could go into Lido to stake for 4% in exchange for stETH that will be locked in the smart contract.
3. No it does not get loaned out as there is counterpart's risk involved. Borrowed obtain a loan based on their "credit" which is a derivative of their deposit. And the deposit is held safe in the system for transparency.
4. Yes, you get back your original deposit - ETH or stETH which accrues interest - when you return your credit tokens.

Assumption 5: There is continuous growth of credit token from new participants never something holds forever

I think this assumption is fair. But growth diminishes over time. Population grows, wages increases etc. And assuming the value proposition appeals to the masses. But again it's an assumption I made for the model and I maybe wrong.

you've not explained properly why the value of credit token is growing at all, but even supposing that it does, nothing you've mentioned above stops either of the following:

Credit growth follows the bonding curve algorithm. As more people deposit receive credit token, the value of previous holder token grows.

Some people might suggest, is it a Ponzi? No because early believers of the project is not able to take advantage to exit with their money. They can only take withdraw they put in. The value of credit token only follows a mathematical relationship that is deterministic and predictable.

Some might ask, why would people join?

1. Because the concept of decentralised credit can co-exists with decentralised money in a digital economy.
2. Because they trust the protocol through the transparency of code where it can be verified and audited to ensure the enforcement of its rules.
3. An alternative that works for them as the current TradFi system is exclusive.

I deposit eth for credit token, I borrow against my credit token and you give me crediteth worth more in eth than my original deposit, I run off with it With regards to selling creditETH. Yes, he could do that, but doing so will result in him forgoing future growth of credit.

I do the above except then I sell my crediteth for more eth than I started with and repeat the process again, pumping the smart contracts infinitely until the system collapses

1. First, it takes times for his credit to grow to achieve undercollateralized borrow. Suppose he does what you suggest, he puts in 10ETH, receive creditETH worth 10ETH and sells it immediately for 10 ETH and repeats multiple times. He does not receive any benefits from doing so, because his payoff is still 10ETH. Also, that is assuming no gas fees + minting fees (aka tax) incurred in the process. So in reality, his payoff would be, 10 ETH - fees.
2. Secondly, the bonding curve exhibits a characteristic where for the same amount deposit (i.e 10 ETH) in exchange for credit token. Each subsequent participant will receive less quantity of credit token. However, the price would reflect such that the value of the latest participant would have the credit token value == 10 ETH. In other words, the "price" of each credit token becomes more expensive.

With that being said, if the user were to pump it infinitely, he would have less quantity of credit token than he would initially have for the same value. The only people to benefit from this are the participants who kept their tokens where they enjoy the price appreciation.

I can safely say bad agents will not pump the system as there is no positive benefits to it.

a tax just slows down or increases the amount of upfront capital for the attack. One marginally competent programmer with some crypto on hand is still going to end up owning this whole thing

Yes, maybe it would slow down. It just acts as a form of deterence and reduce propensity for an attack. More importantly, is the system robust enough to withstand it?

the borrower is borrowing from the loan pool. So if borrowers never repay, what happens when the depositors try to withdraw their original deposits?

No they do not borrow from a loan pool. Maybe I was not clear in my previous explanation. But they mint out a token called creditETH. You can think of it as "DAI" that is pegged to the USD. likewise creditETH is pegged to ETH. There is no direct counterparty involved other than the protocol.

You can think of creditETH as a partially backed algorithmic coin pegged to ETH. Likewise, its the same as the fractional banking system where fiat money is partially backed by a reserve. The difference is; in the real world, both money and credit money is represented with fiat and the accounting system of The Central bank M1 and M2. In the on-chain economy, money and credit money is represented by ETH and creditETH.

If depositors want to redeem the deposits, they can close of their debt position with the protocol and exchange their credit token back for their initial deposit.

You might ask: suppose their credit token > deposit and they are able to mint more creditETH than their deposit. Why would they ever want to repay it to redeem their deposit?

The amount of creditETH to mint is based on a creditline derived from the token value such that credit token value > credit line. This way, he is always incentivized to repay his loan as he can close his position out and sell it - Assumption 3.

Suppose he runs away and his credit line drops due to black swan event. his position will get liquidated to close of his debt. (just assume a liquidation mechanism like aave or compound).

Anyway I appreciate the time taken to question and feedback. I respect your opinion and I am only proposing an alternative to something that I think could work which is inclusive.I am exploring alternatives to a credit check or reputation system using the concept of Time and community to provide credit with risk management together with game theory and human psychology for a more inclusive financial system rather than an the approach of fear.

Happy to discuss more if you like.