At DeFi Summit London, Paperchain & Centrifuge leveraged funding from the Maker Foundation, one of the teams contributing to the Maker Protocol, a decentralized finance protocol, to advance US$60,035 in Spotify revenue to a Paperchain record label customer.
Author: David Gogel (Paperchain)
Editor: Daniel Dewar (Paperchain)
- At DeFi Summit London, Paperchain worked with Centrifuge and the Maker Foundation (“Maker”) to advance $60,000 USD in Spotify revenue to a Paperchain record label customer;
- While media consumption has shifted to streaming and on demand models, the revenue and payments process hasn’t changed;
- Revenue from a Spotify stream can take 3 months to reach a record label; 6 months to reach an artist. $100 billion USD sits trapped in 90 day accounts receivables across the wider digital media industry;
- The advance was issued live on stage using Centrifuge’s Tinlake finance application, and was originated in less than 30 minutes at a transaction cost of less than $3 USD;
- Decentralized Finance (DeFi) has the potential to disrupt traditional financing and secured lending products through programmatic, data-driven asset creation, and low origination costs
This document describes the process of tokenizing synthetic account receivables from digital media companies to issue short-term secured loans. This is demonstrated in the pilot transaction outlined below. The loans are originated by Paperchain, with the intention of being used as collateral in the Multi-Collateral Dai Credit System 1 through integration with the Tinlake administration system developed by Centrifuge.
The pilot provides a roadmap for digital media companies to tokenize real-world assets and pledge them as collateral in decentralized finance (DeFi) applications, enabling industry participants to access credit from a fully open and permissioned financial system run by smart contracts.
Entities & transaction team
- Daniel Dewar (Co-founder/CEO)
- Rahul Rumalla (Co-founder/CTO)
- Dave Tomaselli (Co-founder/CRO)
- David Gogel (Advisor/Finance lead)
- Polsinelli (Legal)
- Lucas Vogelsang (Co-founder/Head of Engineering)
- Lea Schmitt (Product Partnerships)
- Dennis Wellmann (Product Manager)
- Martin Quensel (Co-founder/COO)
Centrifuge 3 is a blockchain software developer that has built a peer to peer network for data exchange, a set of smart contracts on the Ethereum blockchain and user interfaces for issuing Non Fungible Tokens (NFTs). Centrifuge developed the Tinlake system which allows minting ERC20 Tokens from Centrifuge-originated NFTs for use as collateral in the Maker Protocol.
- Maker Foundation
- Greg DiPrisco (Head of Business Development)
- Maker Legal Department (various members)
- Cyrus Younessi (Head of Risk)
Maker 4 has contributed significantly to the development of the Maker Protocol, a smart contract platform on the Ethereum blockchain that backs and stabilizes the value of Dai, a collateral-backed cryptocurrency, with a value stable to the U.S. dollar.
While media consumption has shifted to streaming and on-demand models, the revenue and payments process hasn’t changed. Revenue is trapped in inefficient and long pay cycles. Revenue from a Spotify stream can take up to 3 months to reach a record label and up to 6 months to an artist.
This problem is sustained across most digital media verticals, where US$100B sits trapped in 90-day accounts receivable across the entire digital media industry.
Paperchain addresses this problem by pricing the daily trend and analytics data of the world’s leading digital music and media platforms, allowing music and media companies to immediately recognize and advance forthcoming revenue.
These markets, music in particular, have typically been underserved by traditional finance. High-interest credit products are typically offered, or long-term, speculative advances on revenue that are structured to bypass usury laws and results in capital costs up to 45% APR 5.
DeFi as a source of capital
In a short period of time, the DeFi ecosystem has accrued a total locked value of $618.7M (as of Oct 30 2019 according to DeFi Pulse 6), with 51.14% locked within the Maker protocol. This is mainly comprised of collateralized loans. In comparison, the total addressable market for non-securitized loans is $62T 7, which suggests that DeFi’s opportunity is massive. Paperchain’s solution to bridge real world assets will help to expand market share for decentralized financial protocols.
Key transaction details
On September 11 2019, we successfully completed a pilot transaction. We advanced US$60,035 in Spotify revenue to one of our record label customers at an annualized interest rate of 7%, assuming a 73% LTV ratio. This is the first time a receivable has been financed using decentralized finance. We’re excited to have earned a place in DeFi’s short history.
The pilot transaction advance was originated in less than 30 minutes, with an origination cost of less than US$3 (Ethereum gas costs).
The pilot investment offered a short-duration fixed-income security that paid an effective period interest rate of 1.02% over a 51-day period.
The pilot transaction structure combines a special purpose vehicle (SPV) holding the assigned rights to future revenue, a token to reflect the real-time value of the portfolio, and a set of legal agreements.
Centrifuge provided the smart contract development for integration into a simulated Maker Protocol Multi-Collateral DAI system.
In the event of default
- An on-chain auction is held for the ERC20 tokens representing a claim on DAI
- Paperchain sells the assets in a more liquid market (eg. to a factoring company, private equity fund, bank, etc.)
- Keepers (on-chain buyers) bid on the ERC20 tokens using the on-chain data to make a value assessment of the assets
- Paperchain takes the proceeds of the off-chain sale and converts them to DAI
- The DAI is sent to the keepers holding the ERC20 tokens
Asset Selection & Risk Management
Paperchain acts as a non-bank originator.
- Engage the customer via analytics dashboard
- Gather information
- Price the deal
- Structure the deal
- Gather documentation
- Assess credit
- Prepare loan package
- Obtain deal approval
- Create documents
- Appraisal review
- Close the deal
- Quality assurance
- Book the deal
- Fund the deal
- Manage collateral
- Pledge assessment
- Store documents
- Retrieve documents
- Record collateral
- Secure collateral
- Release collateral
- Maintain client file
- Process payments
- Issue advances
- Records payoffs
- Remove deal record
Paperchain’s Per Unit Rate Analysis transforms media analytics data into revenue insights enabling businesses to advance their future revenues instantly.
- Data is received directly from the sources like Spotify and Apple without any 3rd-party intervention.
- These are a result of direct data partnerships our team has established with these players.
- We import thousands of files every data into our data warehouse for our machine learning models to run and price them accurately.
Risk management framework
We’re working to pioneer risk for digital accounts receivable financing.
- Assessment of Creditworthiness
- Analysis of DSP’s public financials (Apple, Spotify, Google)
- Analysis of historical repayment rate from statement vs. actual amount sent to bank account
- Analysis of media company’s accounting data from general ledger
- Assessment of Cash Flow
- Paperchain’s per-unit-rate analysis is based on historical data.
- Underwriting Standards
- At first, Paperchain focused on financing receivables from high quality, publicly listed technology companies such as Spotify, Apple, and Google
- Credit Administration & Controls
- Internal structure allows us to scale credit portfolio
- Loan Structure
- Term loan is secured by secured by the Borrower’s receivables with a lien placed on the Borrower
- Collateral Margins & Evaluations
- 70-90% LTV ratio
- Statement received indicating whether revenue assessment is close to actual
Paperchain’s unique data allows for comprehensive & leading risk assessment of small business credit in the music industry.
Per unit rate analysis
Our machine learning model allows us to develop per-unit-rate estimates for Spotify revenue within 1.38% of the actual per unit rates. The more data we collect, the better our estimates.
As a result of our per unit rate analysis, our estimated revenues have an average delta to actual revenues of -0.73%.
Spotify is a low/medium-risk counterparty with low existing debt issued at low rates, and low operational metrics but high solvency & liquidity ratios. Repayment risk is largely a result of commercial disagreement with record label resulting in binary outcome.
Apple is a very low-risk counterparty with a very low cost of debt. Apple has high operational, solvency & liquidity ratios. Repayment risk largely a result of commercial disagreement with record label resulting in binary outcome.
Transaction Execution: Origination
Preparing the asset for funding.
** anonymized/redacted for public consumption.
Secured Loan Parameters: Interest Rate & LTV
We recommended a 7% annual interest rate and 73% Loan-To-Value parameters associated with the CVTs entering the CDPs.
|High-grade counterparties||The counterparty exposure to the underlying portfolio of receivables are high quality, publicly listed technology companies such as Spotify, Apple, and Google.|
|Over-collateralization||73% loan-to-value ratio.|
|Secured by Lien||Loan is secured by the Borrower’s receivables with a UCC lien placed on the Borrower.|
|Rerouting payments||In the case of the pilot, borrower received the funds from the streaming providers and then paid Paperchain. This increases the risk of repayment. In the future, Paperchain will install its own bank account information into its Borrowers’ business account on each platform and collects payment directly from each distribution platform.|
|SPV Structuring||SPV structure effectively creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left completely unaffected by the parent’s financial, operational and/or legal health.|
|Post origination monitoring||Paperchain closely monitors the actual statements of the borrower. We now have the actual Spotify statement for August that our advance estimate was based upon. The difference between our estimate and the actual was 0.25%.|
NFT creation process
Through Paperchain’s partnership with Centrifuge, we have developed an end-to-end platform to tokenize synthetic account receivables.
|Paperchain per-unit-rate & Analytics UI||Centrifuge Node||Tinlake UI|
|Used to price daily revenue, forecast monthly digital revenue & finance working capital.||Used to create, manage and exchange financial documents/assets and to mint a digital representation of these documents (NFT).||Tinlake is a set of smart contracts that enables a borrower to draw loans in DAI against NFT, such as invoices.|
|Borrower (Paperchain) Sets up Ledger with Tinlake. Admin (Paperchain) sets up Ledger with Tinlake, evaluates NFT and sets Appraisal, Principal and Interest Rate||Borrower (Paperchain) creates document and mints NFT; provides Admin (Paperchain) with Token ID and document information||Borrower (Paperchain)takes out/repays loan // Admin (Paperchain) whitelists NFT|
Transaction Execution: Deployment
Testnet Deployment on Kovan
We tested the pilot transaction on September 9 on the Kovan testnet with fake currency (DKTN) to ensure the process worked correctly.
We successfully received 60,035 DAI to fund the transaction.
We successfully minted the NFT on September 10 on Mainnet.
Transaction Addresses on Ethereum
|NFT creation transaction||https://etherscan.io/tx/0x7f9f78b02dda538525263d08a0ee22944739a2949bc1acd856560963b56687c9||0x7f9f78b02dda538525263d08a0ee22944739a2949bc1acd856560963b56687c9|
|Testnet deployment transaction||https://kovan.etherscan.io/tx/0x1790fbdf78900d356e0fb8f1e0fca4734ec6b558f1223857a062ff9967d09ea2||0x1790fbdf78900d356e0fb8f1e0fca4734ec6b558f1223857a062ff9967d09ea2|
|Mainnet deployment transaction||https://etherscan.io/tx/0xc3189cbd5f9b22dcd428619ed3791caa69232f9ab98adbe06b38356e2df82854||0xc3189cbd5f9b22dcd428619ed3791caa69232f9ab98adbe06b38356e2df82854|
|Mainnet DAI funding transaction||https://etherscan.io/tx/0x2311fcdb80d8677bf6293add8fdf0c52e8703eb5760afccfc551f7c2af425c27||0x2311fcdb80d8677bf6293add8fdf0c52e8703eb5760afccfc551f7c2af425c27|
- Paperchain 9
- Centrifuge 10
- “Centrifuge uses Ethereum to help Paperchain execute Spotify revenue advance” 11
- “Paperchain Advances $60K Spotify Royalties In 30 Minutes” 12
Learnings & outcome
While an end-to-end pilot transaction demonstrates Paperchain’s ability to execute, there are still some steps to go to full automation and productization. However, we can move ahead with sustained origination volumes based on our established partnerships and workflow.
- We will:
- Continue scaling customer acquisition and refining our price modeling and data pipeline
- Finalize documentation to provide to MKR governance community in order to get approval for collateral in MCD
- Integrate Tinlake API into the Paperchain app/user workflow
- Evaluate more DeFi-enabled products on Paperchain (weekly & daily secured loans)
- Develop DSP-centric risk score across all active customers
Questions or queries on this document or on Paperchain’s future activities can be directed to:
David Gogel, firstname.lastname@example.org
Daniel Dewar, email@example.com
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