Traditionally, business financing has often been operated by manual, handwritten contracts forming the legal basis. Although today’s technology allows for much more reliable methods of settlement, it often defaults to trust as the underlying collateral holding a deal together.
However, Smart Contracts on the blockchain offer a more secure alternative to handwritten, legally-enforced methods. Let’s take a look at two of the inspirations behind AlphaNu’s revenue contracts which can be automated with the use of the blockchain!
1. Invoice Factoring
Factoring is a type of financing which allows sales of accounts receivables (invoices) to a funding source at a discount from the face value, in return for immediate cash. The process typically looks like this: You provide products and services to your customer and issue an invoice. Without factoring, you wait 30–60 days for payment. With factoring, the factor immediately purchases the invoice and advances an initial fee of approximately 90% of the invoiced amount. Your customer then pays the invoice in the 30–60 days payment period (directly to the factor), and you’ll receive the remaining balance less the factor’s fee.
Credit cards are in fact a form of factoring; the bank pays the cost of the product or purchase upfront, and converts the value of the purchase into debt that has to be paid by the user.
How can blockchain be used to streamline invoice factoring?
In invoice factoring, there is a level of trust involved as the factor has to ensure the customer will make the respective payment according to the terms of the invoice factoring. Decentralized solutions allow this trust layer to be adequately improved as consistent payment flows can be seen on-chain.
More importantly, blockchain-based contract factoring can conduct multi-party settlement at a fraction of the cost. Each factor is recorded as a beneficiary of the contract, and subsequent payments made by the customers are automatically split and distributed to the contract owners, with all amounts verified and seen on-chain for increased transparency.
AlphaNu has implemented revenue contracts with this advantage in mind — third parties can look at the revenue stream of an existing Algorithm and purchase future subscription revenue at a discount from their face value, creating an income stream that benefits directly from increased growth in Algorithm Trading.
2. Royalty Settlements
A royalty is a payment made by one party, the licensee, or franchisee to another that owns a particular asset, the licensor, or franchisor for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross of net revenues derived from the use of an asset or a fixed price per unit sold of an item of such. More complicated modes of compensation or agreements also exist.
How Can Blockchain Be Used to Streamline a Royalty Settlement?
Royalty payments often involve complicated calculations of the usage of the asset, percentage revenues and are highly dependent on per-item transactions. With so many calculations and small cash streams, royalty agreements often rely on bunching a large amount of transactions together and paying out in monthly, quarterly, or yearly payment agreement.
With a blockchain-based methodology for royalty settlement, even micropayment-level royalties can be executed at a miniscule price — even if the product costs only 10 cents and grants only 1% of that as royalty, the blockchain will be able to automatically calculate and transfer the royalty to the interest holder on an almost real-time basis.
AlphaNu will create fractional revenue contracts that can hold as much as a few hundred beneficiaries at a time, should the algorithm developer wish for it. Such contracts will be able to execute distribution of the revenue contract proceeds on each and every sale made by the Algorithm.
We are also exploring the possibility of allowing direct referral or affiliated sales to be executed in this manner — creating incentives for each and every beneficiary to promote the algorithms they hold revenue contracts for.
An Overview of Revenue Contracts in AlphaNu
Revenue Contracts are offerings integrated into the AlphaNu platform which allow developers to monetize the future revenue of their algorithms up-front. It allows them to convert up to 50% of the future revenue they would earn from the algorithm listing into a revenue contract, and sell fractionalized portions of this contract to potential investors or buyers who believe in the sales potential of the algorithm.
This mechanism allows developers to get a one-time lump sum payment, which may be a more attractive option to them than subscription-based payments. More importantly, it enables third parties to become stakeholders in the equation — these stakeholders are then incentivized to promote, market, and effectively resell the algorithm on the developer’s behalf, as they earn from any sales made of that algorithm.
Our goal in creating Revenue Contracts is to create an ambassadorship or affiliate model which is aligned with the needs of AlphaNu’s marketplace. Because Revenue Contracts are executed on the blockchain and visible to the public, we build a layer of trust on top of our affiliate model that contract buyers can refer to at any point they want to support an algorithm with existing issued contracts.
The added transparency from this mechanism also helps in dispute settlements; as all transactions are logged and executed on the blockchain, we maintain a paper trail of revenue rights and ownership that can easily be used to prove attribution.