How We Worked With Centrifuge And The Maker Foundation To Advance $60,000 Worth Of Spotify Revenue.

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)

tl;dr

Executive summary

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] [A] 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

Paperchain
Daniel Dewar (Co-founder/CEO)
Rahul Rumalla (Co-founder/CTO)
Dave Tomaselli (Co-founder/CRO)
David Gogel (Advisor/Finance lead)
Polsinelli (Legal)

[Paperchain] [B] 2 transforms media analytics data into revenue insights enabling businesses, artists and creators to advance their future revenues instantly.

Centrifuge
Lucas Vogelsang (Co-founder/Head of Engineering)
Lea Schmitt (Product Partnerships)
Dennis Wellmann (Product Manager)
Martin Quensel (Co-founder/COO)

[Centrifuge] [C] 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] [D] 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.

Transaction timetable

paperchain pilot txn timetable

Transaction Rationale

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.

paperchain pilot txn rationale

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] [E] 5.

paperchain pilot txn rationale 2

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] [F] 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] [G] 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.

Transaction structure

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.

paperchain pilot txn structure

Centrifuge provided the smart contract development for integration into a simulated Maker Protocol Multi-Collateral DAI system.

paperchain pilot txn tinlake

For more information on how Tinlake works please see [tinlake.com] [H] 8.

Transaction lifecycle

paperchain pilot txn flow

In the event of default

paperchain pilot txn default

  1. An on-chain auction is held for the ERC20 tokens representing a claim on DAI
  2. Paperchain sells the assets in a more liquid market (eg. to a factoring company, private equity fund, bank, etc.)
  3. Keepers (on-chain buyers) bid on the ERC20 tokens using the on-chain data to make a value assessment of the assets
  4. Paperchain takes the proceeds of the off-chain sale and converts them to DAI
  5. The DAI is sent to the keepers holding the ERC20 tokens

Asset Selection & Risk Management

Paperchain acts as a non-bank originator.

Originate
Engage the customer via analytics dashboard
Gather information
Price the deal
Structure the deal
Underwrite
Gather documentation
Assess credit
Prepare loan package
Obtain deal approval
Close
Create documents
Appraisal review
Close the deal
Quality assurance
Book the deal
Fund the deal
Post-closing
Manage collateral
Pledge assessment
Store documents
Retrieve documents
Record collateral
Secure collateral
Release collateral
Service
Maintain client file
Process payments
Issue advances
Records payoffs
Remove deal record

Data-driven underwriting

Paperchain’s Per Unit Rate Analysis transforms media analytics data into revenue insights enabling businesses to advance their future revenues instantly.

paperchain pilot txn dashboard

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.

paperchain pilot txn comparison

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.

paperchain pilot txn pur

As a result of our per unit rate analysis, our estimated revenues have an average delta to actual revenues of -0.73%.

paperchain pilot txn revenue

Counterparty risk

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.

paperchain pilot txn issuance ** 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.

Credit Enhancement Commentary
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.

paperchain pilot txn kovan

paperchain pilot txn kovan 2

Mainnet Deployment

We successfully received 60,035 DAI to fund the transaction.

paperchain pilot txn mainnet 1

We successfully minted the NFT on September 10 on Mainnet.

paperchain pilot txn mainnet 2

paperchain pilot txn mainnet 3

Transaction Addresses on Ethereum

Agreement Link Transaction Hash
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

Press

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, david.gogel@paperchain.io
Daniel Dewar, daniel.dewar@paperchain.io

  1. MakerDAO Roadmap [A]: https://makerdao.com/en/roadmap/ ↩︎

  2. Paperchain.io [B]: https://paperchain.io ↩︎

  3. Centrifuge.io [C]: https://centrifuge.io ↩︎

  4. MakerDAO [D]: https://makerdao.com/en/ ↩︎

  5. “Hedge Fund’s Route to 30% Fees: Cash Advances to Hip-Hop Artists”, Bloomberg [E]: https://www.bloomberg.com/news/articles/2019-04-02/hedge-fund-s-route-to-30-fees-cash-advances-to-hip-hop-artists ↩︎

  6. DeFi Pulse [F]: https://defipulse.com/ ↩︎

  7. “Here’s what the $294 trillion market of global financial assets looks like”, Business Insider [G]: https://www.businessinsider.com/global-financial-assets-2015-2 ↩︎

  8. tinlake.com [H]: https://tinlake.com ↩︎

  9. “Paperchain, Centrifuge, Maker Foundation Perform World First, Real-Time Advance of $60,000 USD in Spotify Revenue Using Decentralized Finance”, Paperchain.io [I]: https://paperchain.io/press/releases/paperchain-perform-world-first-real-time-spotify-advance-using-defi/ ↩︎

  10. “Centrifuge Tinlake and Paperchain join forces to accelerate music streaming revenues”, Centrifuge [J]: https://medium.com/centrifuge/centrifuge-tinlake-and-paperchain-join-forces-to-accelerate-music-streaming-revenues-c83324d116e7 ↩︎

  11. “Centrifuge uses Ethereum to help Paperchain execute Spotify revenue advance”, Cyrpto Ninjas [K]: https://www.cryptoninjas.net/2019/10/02/centrifuge-uses-ethereum-to-help-paperchain-execute-spotify-revenue-advance/ ↩︎

  12. “Paperchain Advances $60K Spotify Royalties In 30 Minutes”, Hypebot [L]: https://www.hypebot.com/hypebot/2019/10/paperchain-advances-60k-spotify-royalties-in-30-minutes.html ↩︎