Centrifuge
Published in

Centrifuge

Tinlake Pricing and Valuation Series — Part 1: How to Price Real-World Assets

This post is the first in a multiple part series about how valuation and pricing of real-world assets work within the Tinlake ecosystem.

Introduction

Centrifuge’s Tinlake is an asset-backed smart contract lending platform built to responsibly bridge real-world assets, such as invoices, mortgages or streaming royalties to the DeFi ecosystem. This post is the first in a multiple part series about how valuation and pricing of real-world assets work within the Tinlake ecosystem. Collectively, this series will form our knowledge base on real-world asset pricing and will be used to educate the DeFi community as we bridge non-native crypto assets into the decentralized finance ecosystem.

Financing an invoice

For our purposes, an invoice is a bill sent from one entity (supplier) to another (buyer) in connection with the delivery of goods or services. Key data points on an invoice usually are:

  1. Counterparty name and address
  2. Issuance date
  3. Due date
  4. Line items (e.g. type and quantity of goods)
  5. Payment terms and conditions

Factors for pricing invoices

There are several different factors to consider when setting advance rate and fee/interest rate for financing an invoice. These different factors are relevant for both the Asset Originator as well as the Lender. For brevity, I will refer to both parties as just the Lender in the section below.

Buyer credit risk

The value of an invoice is firstly based on the buyer’s ability and willingness to pay. In some cases, this can be represented by publicly available credit ratings. In others, credit bureau data, the payment history of the buyer or publicly available news may be used.

Supplier credit risk

The stability of the supplier is another important factor to be considered. Lenders are underwriting the supplier as much as the invoices themselves. The suppliers working capital management is of particular importance. Is the supplier’s net working capital positive or negative? How have its metrics trended in the past? What is the supplier’s collection history with this specific buyer? Also, what is its history of commercial disputes and/or failures to deliver?

Industry & Country

In addition to the supplier’s and buyer’s individual credit risk, the market impact on pricing by industry and country is another important factor. While some industries have a robust, constant supply chain, other industries may be subject to seasonality or prone to disruption. Each country carries with it some amount of systematic risk that trickles down to suppliers and its ability to pay. Further, the recovery of defaulted amounts or the ability to collect an overdue payment often depends on a country’s legal system.

History

There is inherent bias baked into repeating relationships that can be either positive or negative. If a Lender has some track record with a supplier/borrower, then the impact of a continuing relationship will work its way into the pricing. For instance, if an efficiently run supplier has a long track record, with invoices based on contracts with stable counterparties, they will get favorable pricing on its invoice population.

Portfolio volume

The most important factor when estimating the advance rate/fee for invoices is volume. To a Lender, a large number of invoices means the risk of non-payment is spread across a number of counterparties — more invoices are better than less. If one is pricing a pool of invoices, the statistics around the invoice pool can be considered. One can think of a distribution function where a great sample amount means a smoother distribution. Lower invoice counts mean that collecting on the discrete, single invoice has a more significant impact on the pool’s return.

Estimating Advance Fee and Rate

One of our users is ConsolFreight, which is a SaaS freight technology provider that advances working capital finance to freight forwarders’ operations (e.g. air, ocean, rail, road, multi-modal, etc.) and collects from shippers (e.g. supermarkets, hospitals, office supplies, etc.). The founding team combines 50+ years of experience running successful freight forwarding businesses in the U.S., Latin America, and Europe.

Outlook

Let’s take a step further and assume this invoice would be financed through Tinlake. ConsolFreight would be connected to a Tinlake pool. The financed invoice would be tokenized into an NFT, and this NFT could be used as collateral to draw a loan from a DeFi lending protocol.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store