Tokenized commitments to future cashflows as an essential tool for the decentralized financial ecosystem
Any interaction in the financial ecosystem can be presented as an exchange of cashflows between two parties: capital providers (users/lenders) and capital utilisers (service provider/borrower). Here we introduce the Commitments to Future Cashflows (or “C2FC”) - a financial primitive, which enables seamless transfer, exchange, batching or trading cashflows, linked to/emitted by any economic agent.
What is C2FC exactly?
The proposed financial instrument, The Commitments to Future Cashflows (or “C2FC”) represents a digital right to operate with future cashflow, that arrives in any form to any Ethereum address within a given time frame. This instrument exists in the form of a digital token, which acts as programmable right to claim whole or in part this defined future cashflow. Simply put, it looks like relay: C2FC issuer had to get payments within this specified period, but they fully or partially are forwarded to C2FC token holder address. Therefore, the future cashflow of individual, company or service takes the form of measurable digital unit, that can be easily exchanged, traded or used as collateral.
How we came up with this idea?
We came up with this idea during the recent work on financial user cases and additional products, that possibly could make the operation of Akropolis’ digital pension funds more convenient and stable. An essential element in pension fund management is risk control, and the risks relate not only to investment activity but also to incoming cashflows from contributors. Commitments and de-facto receipts can significantly differ, that affects fund’s investment policy, actual balances and consequently the overall stability of its operation. Trying to find a solution to hedging this risk, we noted that contributors, in general, made their payments frequently, mostly on a monthly basis. Based on this we proposed a simple idea: these cashflows can be digitized, tokenized and therefore became a measurable digital unit, that can be easily accounted for on balance and traded. Pension funds would be able to aggregate payments flows and trade them to anyone, attracting the additional liquidity in needed. In some case, this looks similar to emission and trading debt obligations which allowed banks to hedge credit risks. However, it is clear that mentioned “pension fund task” it is just a particular case and field of C2FC application is much broader and can affect very different business challenges.
Why should DeFi care?
The decentralized finance group or simply #defi at the moment is represented by a number of prominent projects, such as MakerDAO, Dharma, Centrifuge, Compound and some others. Majority of them are developing financial services that include a cashflows as a natural part, and a simple example is debt repayment. However, at the present moment cashflows are not considered as a specific object to operate with, besides the joint Dharma-Centrifuge case of an invoice-collateralized loan, which very conditionally could be construed as a sale of future revenue. Meanwhile, numerous products could become more valuable in case of integration a one-click possibility for emission and trading the tokenized C2FC linked, for example, to loan repayment or revenue stream of business. Besides, this could enable to provide more integration cases for #defi services and provide a new instrument for risk-hedging in decentralized financial space.
What is the market?
In considering the traditional banking system, the market volume for CDO (Collateralized Debt Obligations) that is logically quite close to C2FC is hundred of billions USD order. Taking into account that C2FC concept is significantly broader by initial design as it can operate not only with debt repayments but with any cashflows at all, the possible area of implementation seems to be quite extensive. Besides this, thanks to initial appearing in a web3 ecosystem, C2FC integration to other financial products is not complex, that can result in a vast number of integrations. It could improve the practical usability of C2FC and bring it to a broader market.
There are two main groups of players on this market: issuers - persons or business who would issue C2FC and sell/exchange them or use as collateral for attract funding, and liquidity providers, who would do business on lending against C2FC collateral or buying future cashflows of individuals and organizations with discount. The C2FC issuers are quite evident and include almost any company, that operates with cashflows in the web3 ecosystem. The liquidity providers can be, for example, capital management companies who invest money in money markets, decentralized loans and other similar directions. At the mature stage of the C2FC usage, a risk assessment would be not hard, and profits can be entirely predictable as one of the famous cases that can be pointed out is the cash gap financing.
Of course, at the moment decentralized finance space is quite narrow and unadopted by major institutions. But, taking in accordance significant benefits of tokenized C2FC, such as real transparency of issuer transaction history and C2FC itself as well as secure and effortless storage and exchange it seems that it can be a useful tool not only for the intensive growing #defi group but in some cases for usage at a traditional market.
What is the product-market fit?
The most obvious application area for C2FC is the provision of liquidity using future cashflow as collateral or, in some cases, simple exchange future cashflows for “money now.” There can be different user cases, but the majority of them fits the definition “cashflow/revenue/income-collateralized loan.” Almost any business or service, operating in decentralized finance and having a revenue stream is a potential user of C2FC as the issuer. From another side, organization (in this context - investor) with free capital can be liquidity provider, buying the future cashflows with discount and earning profit from this deal if the risk appraisement was correct. Considering the transparency of the C2FC itself and related indicators, the risk assessment would be no harder and in some cases can even be more reliable than in traditional finance.
What are the user cases and how they can be monetised?
In this section we would discuss the use cases for C2FC and business models than can be build on top of the concept. It is interesting that beyond blockchain space there are at least two commercially-validated cases that are using C2FC-like idea at the core level.
PayJoy. This company builds a business on providing loans for purchase electronic devices to unbanked people with no credit score. It works as follows: the borrower purchase device and makes a commitment to repay the debt. If the debt is not repaid properly, the device is blocked as the manufacturer initially integrated this option on the hardware level. In fact, PayJoy unlocked giant market for selling electronic devices by combining C2FC concept with a sort of feedback loop for managing borrowers behavior.
Clearbanc . Their core business lies in investing capital in the scale-up process of expanding companies, primary field of interest and expertise is eCommerce. During an ordinary deal, they provide money for funding expenses of digital marketing campaigns such as Google Adwords. It attracts new customers and therefore increases company cashflow while Clearbanc receives one flat fee. Consequently, Clearbanc invests in money in the well-controlled process of cashflow expanding and receives profit in future, when cashflow increased. This model successfully works, providing the added value to both sides: owners do not giveaway company shares while the lender has determined the risk/profit ratio together precisely control of funds usage. Concerning this article, Clearbanc invests in C2FC issued by company claim initially defined fee.
User cases for C2FC Inside DeFi:
The user cases presented in this section is a result of our analysis of #Defi services. They are not commercially validated yet and need to be tested in practice.
Examples of B2B use cases:
Example of revenue-collateralized loan for Decentraland-based company. Suppose there is a company that owns one or more LANDs that providing some kind of income, for example, from rent. One day it needs to receive additional liquidity for scaling, and taking in account conditionally stable cashflow from long-term rent, they can issue a C2FC and sell it to the capital provider, who can earn profit from providing liquidity and correct risk assessment.
Solution for funding the relayers in 0x ecosystem. The relayers in 0x ecosystem play an essential role but unfortunately don’t have appropriately established mechanisms of funding at the moment besides grants or venture capital. As their business has a commission-based nature and is fully-transparent to any observer, using C2FC they can tokenize their future commission revenue, sell it or receive loan using C2FC as collateral. It can be quite an elegant way to fund successfully operating relayers.
Solution, enabling debt-reselling in Dharma. Traditional financial system has a broad range of instruments to work with debts, credit debt obligations are most known. Debts can be aggregated, traded, used as collateral and easily transferred between financial institutions. Decentralized finance space cannot offer such broad functionality now. However, tokenization of debt repayments by using C2FC approach would organically bring all this functionality to #defi. C2FC tokens, that constitute flow of debt repayments can be easily aggregated in pools, traded at 0x-powered marketplace and used as collateral, for example in Dharma protocol. Selling C2FCs, linked to debt, lender de-facto resells the debt itself.
Examples of B2C use cases:
Personal income-collateralized loan on example of Gitcoin/crypto freelance job. Suppose there is an individual that is a contractor on Gitcoin or another freelance platform. He has continuous order and payments are separate and executed on an ongoing basis. If he needs money for some reason, he can issue C2FC that can be bought by some liquidity provider/borrower if he has a transparent history of payments and overall reputation. This case can be applied to any job paid in crypto by stages. It is important to point out that besides financial side it can also be considered as a reputation-creation tool, as any successful case boost the person’s business reputation.
Loan secured by future expected income. This case is built by combining Augur and C2FC. Suppose there is Augur-based market aimed to predict future income of the individual. In fact of crowd foresees income increasing, a person is able to issue C2FC for this future expected salary and trade it. The economic nature of this case is related to venture capital funding approach, remind that VC ordinary invest in shares of a company that under ideal conditions reflects the revenue streams and profits. This case obviously can be expanded to investing in the future cashflow growth of the companies based on the prediction market assessment.
###What has been built to date
At the present moment, C2FC was implemented in the form of ERC271 Ethereum token, that grants to a holder an automatically executed right to receive fully or partially a cashflow to the address for a given period. On a top of the 0x protocol, a marketplace for C2FC tokens is developed. It provides an opportunity to trade this C2FC tokens and start to apply C2FC instrument to real business cases now. Mentioned services are operating both in Ethereum mainnet and Kovan test network. What has been considered and disregarded and why We consider that C2FC is a financial instrument which requires qualitative analysis of risk connected with its use. Thus, for mass adoption from our point of view, it is necessary to create some assessment methodology as well as a reputation-based system for issuers. Currently, we are not working on it as it is more important to focus on building the tech for principal concept first. However, the product for working with C2FC that we are building is designed to allow anyone to develop rating system, UI and whatever else on the basis of the core.
The C2FC at the primary level is a rather general and abstract instrument for decentralized finance space. It means that it is quite flexible and can be customized to a wide range of use cases. In this regard there are many directions for future development; here we highlight only the most important: To integrate C2FC core with side projects on the smart contract level. It means that cashflow would be forwarded to the C2FC token holder from smart contract logic of side service, for example, Dharma and therefore would work native and secure. To create custom logic structures of C2FC tokens for some particular use cases To develop a rating system and monitoring system for appraisement risk of C2FC issued To create automatic money markets from C2FC marketplace. It means that one side (C2FC issuers) would offer their future cashflows to be funded now to the market (with a discount, of course) and another side (liquidity providers) would fund them. Management of bid and ask a smart system would execute side, that would appraise this C2FC by issuers reputation (for example past repayment). We see it as a Compound-like system that allows to place funds and earn some interest. For example, it can solve a problem of financing cash gaps of companies. Conclusion In this introductory article we described some features of brand new financial instrument for #defi space that we are working on at the moment. Currently the first contracts that bring the concept alive are developed and successfully operating in both Ethereum mainnet and Kovan test network and ready to serve first business cases. In future pieces we would highlight our further development of C2FC and related topics.