Centrifuge is opening the floodgates to Supply Chain Financing

Photo by Nicole Geri

Fabric Ventures is excited to back the Centrifuge team in their latest $3.7M round — official announcement by Centrifuge.

When we talk about the financial supply chain, we refer to the flow of information, data, and eventually money between companies doing business with each other.

The archaic tools used by businesses to transact and exchange business documents have not substantially changed since medieval times, with the advent of double entry bookkeeping and invoices. The introduction of software solutions in the last century reduced friction to these processes, without fundamentally redesigning them.

Today, millions of businesses around the world are supplying goods and services against invoices that are on average paid with a 60 days delay. At any given time, approximately $30 trillion* are locked up in these outstanding payments, and SMEs must often find ways to bridge this liquidity to grow or survive. They do so through traditional factoring, loans, or credit card borrowing, although these options remain largely inaccessible to the majority of suppliers worldwide (the long tail of suppliers). As supply chains become ever so complex and intertwined, entire economies are slowed down due to these inefficiencies, and there is a clear improvement opportunity.

Centrifuge is building a global network that will allow any business, regardless of its size, to transact while maintaining ownership of their data, including their company details, their reputation, business relationships, and subsequent transactions. The vision is to map the counter-parties of the world’s supply chains, by creating a Global Business Graph of buyer-supplier relationships (see illustration below).

As these buyer-supplier relationships become clearer, this allows the long tail of suppliers to leverage the creditworthiness of their buyers, to be financed by a global market as opposed to the traditional closed marketplaces (e.g. Taulia [$300M], Tradeshift [$1.1bn], SAP Ariba [$4.3bn]), creating supply chains that are less brittle and more adaptable with a wider range of financing options.

Fabric Factory has to pay an invoice to their supplier Cotton Grower, and they are expecting to be paid by their customer Shoelaces, itself expecting to be paid by Nike, itself paid by Stores… Illustration, courtesy of Centrifuge.

Leveraging decentralisation to redesign Supply Chain Financing

Encoding incentives for global coordination: Centrifuge can encode rules at the protocol level to incentivise and coordinate global actors towards a common goal: from securing a record of transactions and business reputation to risk-assessing an unpaid invoice creditor or coordinating liquidity pools to finance supply chains. As the rules are defined upfront and verifiable by all, actors can easily engage in new trust-minimised interactions ; with the option to resolve conflicts at traditional dispute resolution venues and the expectation that smart contracts will greatly reduce the need and cost of doing so, fostering innovation across the entire supply chain.

Digital Scarcity: The introduction of digital scarcity allows for digital representation of physical assets such as unpaid invoices, with strong guarantees that they have not been tampered with or duplicated as the digital assets are traded on-chain. Furthermore, the advancement of cryptography, and in particular Zero Knowledge Proofs, allows companies to attest their credit-worthiness without revealing business-sensitive information. This could be used to attach a risk-score to an invoice, generated by specialised third parties that had access to the necessary information whilst encrypted, without revealing any of the underlying information to the network.

Composability: The third killer feature of a decentralised network for Centrifuge is the ability to interact and leverage other protocols and applications. In practice, this means Centrifuge can easily leverage other financial applications, and equally, anybody can develop a service dedicated to Centrifuge. Therefore, while the team intends to build the initial applications on Centrifuge, such as Tinlake, the expectation is that anyone can and will innovate on top of this underlying infrastructure.

Investment Thesis

Outside of money and Open Finance, Supply Chain is frequently mentioned as an opportunity for “blockchain” or “Web 3.0”. With the latest company Fabric is backing, all these areas are combined.

Open Finance can be defined as a growing set of composable financial primitives living on blockchains and mostly on Ethereum. These familiar financial applications, such as borrowing, lending, derivatives, insurance, trading, are accessible by anyone, hence Open Finance. While Open Finance has been thriving with on-chain assets, we believe it will show its real potential with the addition of off-chain assets. Centrifuge bridges these two worlds by creating a unique digital representation (tokenisation) of real world financial assets which can be risk assessed, financed and traded through Open Finance.

For example, Centrifuge recently introduced Tinlake , an application which enables someone to draw loans against real world assets, such as invoices, royalty payments or artwork. The initial proof of concepts include:

1. Streaming Royalties: A partnership with Paperchain was announced to advance a portion of future music revenues, by leveraging artists’ real-time revenue analytics with data from Spotify, Apple Music, and other distribution channels. Read more about this $60,000 loan on Centrifuge blog post.
2. Real Estate Loans: $70,000 loan with NewSilver to finance the repair and resale of a real estate asset, and a $100,000 residential second-mortgage with FutureFin (cost saving of 35%). Announcement here.
3. Logistics Invoices: $20,000 advanced for 60 days invoices in the logistics industry. Read more here.

Borrower creates a digital representation of their asset as a Non Fungible Token, which is transferred to the lending facility as collateral to release liquidity in the form of a digital USD (stablecoin). The NFT holder is the owner of the collateral until the loan is repaid, and can potentially resell it until that happens. Illustration taken from Tinlake’s official description here.

Furthermore, Centrifuge started a close collaboration with the Maker Foundation in anticipation of Multi Collateral Dai launching on November 18th, simulating a reality where tokenised real-world assets will be used as collateral to take out loans in Dai.

There is a large unaddressed demand from the long tail of suppliers and asset owners desperate to unlock value from their illiquid assets. Equally, there are large pools of capital looking to diversify their portfolio into new financial products with attractive returns, through open finance, ranging from professional funds to retail investors.

Centrifuge is building the infrastructure to bridge the two, leveraging a decentralised ledger to frictionlessly transfer ownership of these assets, and privacy-preserving technologies to offer strong guarantees on the risks of these assets without revealing confidential information to the world. The offering is attractive to both sides of this equation, and the platform stands to have strong network effects, as members of the world’s supply chains advocate for Centrifuge to improve the financial health of their buyers/suppliers.

Since first meeting the Centrifuge team over the summer of 2018, it has become evident that they are the best possible team to deliver on this vision. The founding team has worked together for many years, previously founding Taulia where they reached the limits of a centralised supply chain financing marketplace. Equipped with deep expertise of the traditional supply chain financing, and with an equally strong understanding of the decentralised world, the team of 18 based in Berlin has been executing at an incredible pace and we are excited to be part of this journey with them.

Conclusion

Centrifuge allows to create a network of networks for deep tier financing, where trust and reputation of large companies ripple down the supply chain through transparent business relations. These suppliers will also be able to easily prove their credit-worthiness as they build a reputation, and in turn will help the long tail of suppliers to obtain financing.

Areas of the financial supply chain that will be disrupted by Centrifuge include:

• e-invoicing (a multi-billion dollar market)
• decentralised digital identities of businesses (by some estimates a $20 bn market)
• supply chain finance in its various forms (a multi-trillion dollar market).

Centrifuge is opening the floodgates to Supply Chain Financing. Off-chain assets are coming on-chain. Expect liquidity to flow.

Additional Resources

Centrifuge’s Website | Twitter | Medium | Whitepaper | Technical Whitepaper | Presentation at Fabric Stage CogX (Summer 2019 — London)

If you would like to join this incredible team, Centrifuge has a few open positions at their office in Berlin. Check out openings here.

To learn more about Fabric Ventures, you can visit our website , follow us on Twitter and read our investment thesis.

*Centrifuge Analysis