Decentralised Commerce, Web3 and the role of Self-Custodial Collateral

Commerce has been a societal primitive since the early days of civilisation and although it has evolved, trust and certainty have always been a requirement for its efficiency.

The implementations of trust and certainty have evolved due to the advent web3 to the point that commerce has the potential to evolve with them. This progress gives raise to decentralised commerce.

To better understand what decentralised commerce is, lets describe a great web2 commerce framework for commerce and compare it to a decentralised version aiming to achieve similar goals. The web2 framework is we.trade and the web3 framework is TradeFlows.

Disclaimer

I am a core contributor to the TradeFlows protocol and I have not used we.trade. My views about we.trade are entirely based on my interpretation of their webpage and I believe their product is an outstanding web2 product. According to their webpage, “we.trade is a joint-venture company owned by 12 European banks and IBM, with shareholders including CaixaBank, Deutsche Bank, Erste Group, HSBC, KBC, Nordea, Rabobank, Santander, Societe Generale, UBS and UniCredit. we.trade’s technology is currently licensed by 16 banks across 15 countries.”

Comparison

Let’s start by stating that the goal of these frameworks is to make trading more efficient.

First off, we.trade is a web2 company while TradeFlows is web3. This might sounds like a simplistic statement but it comes with many consequences.

Let’s unpack.

we.trade seems to be a conduit for banks to offer more efficient trade solutions to their clients. It streamlines the workflow and appears to offer a great user experience for businesses that trade, require financing and certainty. It uses HyperLedger to share information / metadata of the trades in a secure and distributed way between the banks. Banks then use their own traditional networks to execute the fiat transfers, offer financing, insurance and FX conversions at fees of their choosing. If you do not bank with any of the 16 banks in the licensing the technology, I guess you can’t use it.

On the other hand, TradeFlows is a permissionless and trustless service hosted on a public blockchain (Ethereum / StarkNet). It aims to offer certainty through efficient and transparent workflows rather than insurance products or financing solutions.

TradeFlows

TradeFlows is a platform where a service provider can create a set of non-fungible digital assets that uniquely describe a trade onchain. The platform then sends an invoice to the counterpart that is linked to the trade for agreement. The counterpart then attaches the relevant collateralises the cashflows in order to show the availability of funds.

It delivers a solution where invoices are standardised, transferable and the settlement of these payments is fully trackable on the public blockchain. Certainty allows service providers to be efficient, offer better pricing and even find cost effective funding solutions if required.

Self-Custodial Collateral

Collateral is nothing new to trade. Self-custodial collateral is because it requires web3. TradeFlows allows payments to be collateralised while allowing the collateralising counterpart to control the cashflows by pausing them or even withdrawing the collateral at anytime with instant settlement at minimum cost. The collateral sits in smart contracts that segregate the funds from the buyer’s general balance. Service providers are able to see any action linked to the collateral in order to increase transparency and mitigate uncertainty.

Settlement risk due to the potential of operational errors increases the need of over collateralisation. This collateral simply sits idle and comes at high funding costs for many businesses. Collateral is a very important part of risk mitigation but TradeFlows aims to ensure it is optimally deploy across the supply chain.

Consequences

In TradeFlows, both the trade information (encrypted) , the value / currency transfer and the collateral escrow happens on-chain meaning that banks do not play a role in the core piece of the deals execution. TradeFlows works even if you are unbanked. It offers the possibility to programme bullet payments and continuously flowing streams… because its are web3.

Additionally, it enable and encourage payers to collateralise their payments in order for providers to know with certainty that the funds are available and that settlement will happen as expected, instantly. This trustless collateralisation of payments negates the web2 need for early payment or even financing in certain scenarios.

Furthermore, TradeFlows describes a trade as an NFT (ERC721) and the cashflows are attached to the trade NFT. The trade NFT can then be transferred to someone else (financier) meaning that the trade NFT’s balance and future payments can be withdrawn by the new beneficial owner. Please note that TradeFlows is not a financing solution but is a pure trading platform although financing partners can use it in order to gain transparency and certainty when deploying the financing capital for those who need it, hopefully at a lower cost due to the lower risk.

The aim of TradeFlows is to make capital more efficient and liquid. It believes that financing is required in many cases because the banking infrastructure is very opaque, slow and lucrative for the financiers. Although financing is important in certain scenarios, it is always expensive and should be mitigated through more transparent and certain workflows.