GET Event Financing Update — Turning tickets into DeFi collateral
In 2019 we discovered that financing in the entertainment space is broken and promotes centralisation. We set out to change the way capital is formed in our sector ever since. It has been a while since I last updated the community about the status of the Event Financing Module(abbreviated with EFM). We have a lot of ground to cover so let’s get into it.
By Kasper Keunen blockchain developer at GET Protocol.
Overview of topics to be covered:
- Reflecting on the first pilot
- The end-product of the Event Financing Module (EFM)
- The first external partner: Teller Finance
Reflecting on the first event financing pilot
About 2 months ago we completed the first event financing which spanned a event cycle of about 3 months. The pilot went as smooth as can be. All involved parties were satisfied with the bottom line result of the financing. As was expected for a first pilot we did identify quite a lot of improvements. Before getting down into the weeds, a quick summary of what has transpired to refresh the memory.
Together with our ticketing partner XTIXS, we funded a Lewis Capaldi booking by a prominent venue in Iceland for a total of $125,000.
Decentralizing Event Financing — Liquidity x DeFi x NFTs
For the last couple of months we have been working hard on adding a new feature set to our protocol. In this blog I’ll…
It is great to see we have come a long way since the initial blog describing this solution to the summary of the first successful pilot!
XTIXS awarded reputation badge
XTIXS was rewarded with a reputation badge, attesting to their good borrower(bond issuer) behaviour in this pilot. These reputation badges are soul-bound (unmovable) NFTs that will be used in future on-chain borrower credit/trust score calculations. Borrowers with higher credit scores on average will enjoy lower yields and lower collateral requirements.
Due to the release of Lewis Capaldi’s new album the venue, promotor and the ticketeer decided to postpone the event to next year. The postponement didn’t have any effect on the loan/bond since at the moment this postponement was decided upon, the loan was already repaid.
Not that this would have mattered since an inventoryBond repayment isn’t dependent on if the event is a success or if the event takes place as originally planned.
A bond needs to be repaid by the bond issuer no matter what. Of course we will offer ways for these entities to offset and manage risk (await the deepdive article for more details).
Mechanisms for pricing risk in a bond interest rate
A lot of thinking and experimentation is going into designing the relation between the event organiser (EO), ticketing partners (TC) and the bond-buyer(DeFi investors). Main challenges are around the topic of how to ensure how we will ensure that our ticket partners are able to quantify, price and scale the risk they are taking on by packaging and reselling their event loans with the help of the EFM.
In the next couple of weeks I will publish a deep dive blog that will break down the intricacies of this endeavour and will share our risk pricing latest design.
The product of the Event Financing Module
In the long run the EFM will be governed and further developed by the GET DAO. To lay the groundwork for this eventual role it is important to have a common understanding in the community on what the goal of the EFM product-line exactly is. In the following section of the blog I will provide context and background on what the product really is.
First of all:
The product of the Event Financing Module isn’t financing events directly. The set of contracts have as purpose to make it easier for those that want use the tokenised event loan and ticket inventory as collateral for loans. With this collateral asset lenders will have better collateral of the borrowers. Removing this uncertainty and friction cost will ensure that borrower and lenders will find each other at terms they both are satisfied with.
Connecting lenders with borrowers by means of tokenisation
In order to make it easier for borrowers and lender to ‘meet’ we use smart contracts to tokenise a loan to an event organizer. We call this token an inventoryBond (an ERC721 NFT). Owning this NFT gives the owner certain claims and abilities. The process of issuing a token that encodes and gives the owner certain cryptographic claims is called tokenisation. The diagram below shows the process from a very high level.
Now we have established our aim is to ensure lenders and borrowers meet more effectively. To properly understand how friction is reduced we quickly need cover why there is demand for loans, how and by whom this demand is currently met (or not met) and why the current market design can be improved.
Demand: Why event financing is needed
The event industry is considered to be a ‘high margin’ business, meaning that when done right there is enough room for it to be very profitable endeavour. However scaling up a successful and proven event concept is considered to be particularly hard. One of the reasons this is challenging is due to the fact that organising an event requires quite a lot of cash upfront. This followed by a period of no income with still steady costs, then finally all the money will come within a relatively short time period(the ticket sale). If an organizer mismanages and runs out of money before the ‘payday’ it puts the whole operation in danger.
There are a lot of event organizers that know what their customers want and they are able to consistently put up profitable events. However when running multiple editions simultaneously the cash management complexity described earlier compounds. To help with this cash problem, event organizers seek external financing.
Current supply: Enter your local ticketing monopoly
Ticketing companies are in the perfect position to be the financiers into events. This is for multiple reasons but in short it comes down to the fact that ticketing partners are highly knowledgable about what types of events sell. Maybe more importantly they are in an excellent debt collection position — since they are the ones collecting the proceeds of the primary ticket sale.
In 2019 we realised that the ability of larger ticketing companies to use their balance sheet to financialize the event loans they issue constituted a almost unbeatable edge. It became apparent that if our ticketing solution would not offer the ability for our ticketing partners to provide financing, the best events and tours would not be in reach of being serviced by a GET powered NFT ticket. This is due to the following factors (mainly):
- Lack of proper collateral for lenders: Only ticketing companies can enforce repayment. We can offer DeFi lenders the same assurances by tokenizing the access to tickets (restricting their movement if a loan isn’t repaid).
- Inability to fractionalize or resell a loan: Traditional loans aren’t easy to transfer and without something as incorporation it is hard for a group of people to own a small part of the loan. In DeFi the concept of fractionalizing ownership is quite simple and easy to scale.
- High legal costs of legal contracts and litigation: Whenever the borrower doesn’t respect the loan terms, expensive and slow legal systems need to be activated. Smart contracts allow these processes to be automated at a fraction of the cost and with predictable outcomes for the lenders(like confiscation of posted collateral and immediately swapping this for what is owed).
Similarities to the mortgage securitisation
Scaling up financing activities isn’t a issue only ticketing companies run into. Regional banks are generally very experienced and well positioned to provide mortgages. However if these banks are unable to ‘resell’ these mortgages they end up with highly regionally concentrated real estate on their books. With the help of securitization banks are able to sell these mortgages as yield products to investors.
The customers of the bank don’t notice anything of this process. The bank will still collect the monthly interest payments and the bank will also pursue the home owners legally when they fail to do so. This is also the case with the inventory tokenisation process of the EFM.
Obviously our goal is to only facilitate the tokenisation of proven high quality event loans by ticketing companies. Our mechanisms and process will ensure these event loans are legally sound (with protections and exit clausus for all parties). In addition these events will appropriate insurance and legal protections against unforeseen situations(like pandemics).
Now that we have established what the product does we have to shift towards who will be its buyers. Yes it will be ‘DeFi’ but what does that mean?
Why Decentralised Finance?
The promise of DeFi is that a borderless market will form that will match those seeking investment and those seeking yield on their assets. The blockchain knows no borders and due to this, borrowers will have access too much larger pools of capital as they would if they would seek financing locally.
Before getting into how what we are building fits into DeFi I feel the urgent need to take a slight tangent to describe what we are not building. Since DeFi or at least product that call themselves DeFi (cough, Luna, UST, cough)
Reflexive Decentralised Finance
Over the last couple of years, decentralised finance innovation came down to a combination of depositing crypto assets in a protocol and lending other crypto assets against them.
DeFi collateral meltdowns are by design
After several meltdowns and other issues it has that become clear that there are a few fundamental problems with this ‘old’ approach. In my view the main issue is that the collateral used at the base of most protocols, is itself a volatile crypto asset.
So even though all the clever mechanisms work in principle, they are built on top of a in-stable base of collateral. Whenever the base collateral would change in price, the systems built on top would magnify the change. To cover up for these risks these DeFi protocols would issue large inflationary rewards in order to incentivise investors to take on the risk.
Luckily there is a entire sub-section of DeFi that is working on solving this reflexivity problem; RWA DeFi.
Introducing the Real World Asset (RWA) space
In RWA DeFi the first step of the leverage and liquidity creation cyclus is a tokenised version of a real world asset or cash flow. This can be a tokenised version of a mortgage, factored invoices or packaged consumer loans. There is a wide array of protocols building these products. For those interested in this subject I highly recommend the tweet thread below.
RWA are effectively physical assets that can be tokenised and represented on-chain, but the concept is not only limited to physical assets but also (any present or future) revenue streams or cash flows whose existence can be proven in some way (for example accounts receivable or music-video streams) or is just reflected on the balance sheet of a company. Actually the whole asset side of a company’s balance sheet could be considered as RWA. Source: CMC
Producing a DeFi collateral primitive for RWA DeFi
What is a primitive? As happens a lot with terms in crypto, the term ‘primitive’ is quite overused. My definition in this context is that you build a product/token that is usable and easy to objectively price for third party DeFi protocols.
The road for the inventoryBond to become RWA collateral
Getting your RWA asset to be accepted as collateral in external protocols is quite a endeavour. It is also the type of goal that isn’t realised without external input and collaboration. That is why, since the beginning of the year, we have been reaching out to collaborate with protocols that are in the business of handling RWA assets or are managing/providing lending markets.
Today we are proud to announce our first Event Financing partner!
How Teller works
“The Teller Protocol operates as decentralized software, enabling unsecured DeFi digital asset lending and borrowing through an open order-book model.
Through the protocol, borrowers can bridge off-chain data onto on-chain loan requests. Those requesting assets propose a loan request, and those supplying assets commit those assets to loan requests of their choosing. Lenders who agree to loan terms requested by borrowers, based on the data provided or required, transact directly.
Information appended to a loan request is at the borrower’s discretion. This may include details from a borrower’s financial stature, social status, identity, or other relevant data. The Teller Protocol is data agnostic and does not have an opinion on the user.” — Source
How we will use Teller
To ensure that both our borrowers and lenders will not run the risk of losing any funds, we have designed the integration in such a way that most of the value settled will run through the ossified and audited code base of Teller V2.
In other words we will use the Teller front-end and contracts out of the box. The inventoryBond will only be used in case a loan defaults. Even in this edge case scenario the two protocols will not write in each other contract state, reducing the attack and bug surface. This set-up ensures that we can scale up in a controlled and safe manner.
Why Teller Finance
We have specifically selected Teller as first partner because in their borrower/lender design there is no shared risk between loans. Every borrower has a single counter part lender. This keeps exposure and risk under control and this is paramount in these early stages of the product roll out.
Another very notable benefit is that Teller is deployed on the Polygon blockchain, which is the same chain as where our inventoryBonds are issued.
More partners to come!
As described in the product mission we aim to eventually be ‘accepted collateral’ in most well known DeFi protocols. We will continue working with said protocols to ensure that our tokenisation design is able to support all the flavours of capital formation.
Review & looking ahead
I hope the subjects covered made some sense — admittedly we had to make some detours. At the end of the day this product line is quite different from what we have built before. As such it is important that the community is aware of the DeFi context and the recent developments in the space.
As for what is next. Apart from a lot of coding and testing the community can expect new pilots. At this moment we are working on the legal contract between the foundation and the bond issuers — which is an essential protection for opening up the market for external capital.
As alluded to before I plan on releasing a deep-dive blog in the next weeks that will expand on how risk is priced in event financing. It is one of the most important subjects for scale and competitiveness of the EFM moving forward.
For those that want to discuss event financing or NFT ticketing in general, I will be attending Devcon Bogota (yearly Ethereum conference). Hit be up on discord of telegram and we’ll set it up!
Hasta Luego amigos!