Purpose of SENC
The success of SENC is ultimately determined by how well it will be adopted for real world use. However, we should not confuse the price of a token in the exchange for the value of a token. SENC is a utility token and is defined by the 6 major use cases explained in the whitepaper.
Supply and Demand
The ultimate goal for SENC is to serve as a medium of exchange for cross-border livestock- backed financing as well as the creation of local stablecoins called Local Currency Token (LCT). However, getting there in one step is not viable for several reasons. There is little incentive for the unbanked to use LCT unless they can address their credit problems. To address their credit problems, we need to help them create collaterals. To create collaterals requires solving the provenance problem (livestock identity registration). And ultimately, the key to provenance lies in successful attestation by, and hence the use of, livestock insurance companies.
There are 3 main players in the LCT supply chain:
- Service Consumer. These are in-country companies that requires the use of LCT as payment for CrossPay services. In the case of Myanmar, Myanma Insurance (MI) and Myanmar Livestock Breeding Veterinary Department (LBVD) are examples of Service Consumer. Financial institutions coming onboard to provide livestock-backed loans will also be Service Consumers in the future.
- LCT Wholesaler (WS). These are in-country supplier of LCT and operator of CrossPay network as service providers to the Service Consumers. LCT Wholesaler adopts a blockchain-as-a-service (BAAS) model and receives LCT as payments for services. There must be at least one Wholesaler for each country that CrossPay operates in. In Myanmar, this role will be performed by InfoCorp Myanmar.
- LCT Liquidity Provider (LP). There will be only one liquidity provider on Sentinel Chain initially and this role will be performed by InfoCorp AgTech.
The following example illustrates the supply chain flow:
- Myanma Insurance (Service Consumer) will pay in local fiat currency, called Myanmar Kyat (MMK), for LCT.MMK (Myanmar’s LCT) at a one-to-one ratio, i.e., 1 MMK = 1 LCT.MMK. Myanma Insurance will buy from InfoCorp Joint-Venture company in Myanmar called InfoCorp Myanmar (LCT Wholesaler). LCT.MMK will be required as service fee on the CrossPay platform when a livestock insurance policy is published onto the blockchain along with the attested farmer and livestock identities. During this process, the provenance problem of cattle ownership is resolved.
The purchase of LCT.MMK using MMK is similar to the purchase of a single purpose stored value facility. It requires a pre-payment of service fees which can be utilised for pay-per-use service similar to a vending machine.
LCT.MMK is used internally within the CrossPay network and does not involve public cryptocurrencies.
- In order to supply LCT.MMK to the Service Consumers, the LCT Wholesaler (InfoCorp Myanmar) must stock up on LCT.MMK first from the Liquidity Provider. Due to in-country regulations, it may not be legally viable for LCT Wholesaler to purchase public cryptocurrencies (eg. SENC/ETH/BTC). Also, in some countries, the local currency is not open and cannot be purchased outside of the country. As such, LCT Wholesaler will purchase LCT.MMK using USD based on the spot foreign exchange rate and SENC price. This is similar to importing a product from overseas, and in this case a digital asset called LCT.MMK, which is an asset-backed stablecoin. This is achieved through bilateral agreements between the LCT.MMK wholesaler and the LCT liquidity provider which is a business-to-business trade to avoid legal ambiguities.
- The Liquidity Provider issues LCT.MMK to the LCT Wholesaler in order for the latter to supply LCT.MMK to Service Consumer. This is the most critical part of the process. To avoid a breach of trust and uncontrolled issuing of unbacked-LCTs, the LCT must be created by SENC via smart contracts on Sentinel Chain, thereby offering full transparency. There can be two methods for LCT to be issued using SENC
(i) Fiat-Backed Stablecoin Method
In this method, SENC is sold immediately and converted to fiat (MMK) and stored with a local bank. This method requires an in-country banking account. SENC is returned to circulation, thus increasing the circulating supply.
(ii) SENC-Backed Stablecoin Method
In this method, SENC is not sold but used as a collateral to back the creation of LCT based on a negotiated collateral ratio between the wholesaler and liquidity provider. For instance, if the collateral ratio is 200%, the amount of LCT.MMK issued must be backed by at least 200% worth of SENC in MMK. If the value of SENC were to fall, then liquidity provider will need to top-up SENC in the escrow contract to prevent liquidation of SENC by the wholesaler.
There are a number of risks to be highlighted with this method:
- To address currency exchange risks and volatility, we have to use certain assumptions, one being that SENC appreciation against USD has to be higher than MMK appreciation against USD. Since developing countries’ currencies tend to face higher levels of inflation and SENC’s value increases in demand with LCT, therefore the probability for this risk is lower in the long run.
- If LCT.MMK has been sold to Service Consumers and in circulation, that means even if the Wholesaler wants to redeem back in cash, it will be limited to the amount of LCT.MMK in stock with the Wholesaler.
Operationally, LCT Liquidity Provider will stock up SENC at an appropriate price level for purpose of creating sufficient buffer against liquidity risks. Future articles will be written to explain this process in more detail.
The current implementation makes use of the second approach, which is the SENC-backed stablecoin method. This means, as long as LCT.MMK remains in circulation within CrossPay, the supply of SENC in the open market will be reduced. This is explained in the diagram below.
Some projects practice token burning to reduce the supply of tokens. This is an artificial approach to create scarcity of tokens to achieve an increase in the token value. Sentinel Chain does not make use of token burning to control supply. The supply and demand for SENC is largely determined by the supply and demand of LCTs.
If the demand for livestock insurance policy increases along with the demand for livestock-backed loans, the demand for SENC can increase simultaneously with the decrease in supply of SENC.
Sentinel Chain is designed as a B2B marketplace to facilitate wholesale purchasing. For commercial reasons, the Liquidity Provider can accumulate SENC when the price is low and use it to create LCT when SENC price is high. Conversely, the reverse is also true. If there is an oversupply of LCT in CrossPay, the Wholesaler can sell LCT to the Liquidity Provider for cash. In this case, the SENC tokens locked in escrow will be sold in the open market.
In the whitepaper, use case 3 describes using SENC as collaterals by third party local financial providers to borrow from offshore lenders. It will be more beneficial for local lender to accumulate SENC when price is low. When the price of SENC increases, it is then used as collateral against asset such as USD at an appropriate collateral ratio negotiated with the offshore lender. Such a use case will be possible once SENC reaches a certain level of liquidity in the open market.
Can LCT be issued without using SENC?
It is possible that LCT can be issued without the use of SENC. However, this opens up the risk of breach of security or trust by the issuer of LCT as LCT is not backed. Although an audit firm can be engaged to audit the amount of LCT against the local currency in a local bank, the risk associated with the issuing process itself is not fully mitigated. Therefore, in our case, SENC (as a digital asset) is used as collaterals for the creation of LCT through a smart contract. Future articles will provide a more in-depth explanation on stablecoin and LCT design.
Why use SENC as a collateral instead of USDT or even BTC or ETH for that matter?
The reason is tokenomics. In today’s cryptocurrency market, the prices of all the altcoin are dictated by the price movements of the major cryptocurrencies. That is because most of these tokens do not have a real-world supply and demand use-case that does not correlate with the cryptocurrency market. The prices of tokens with a real-world use-case should be driven by the economic activities for its purpose and are independent of crypto market conditions. For instance, in a bear market, tokens without a real-world use-case will have less buyers. SENC, on the other hand, has a real-world use-case, therefore SENC is needed regardless of cryptocurrency market condition.
Will SENC be used only by the unbanked?
The answer is no. SENC can be used by anyone as described in use cases 4, 5 and 6 in the whitepaper. SENC can be used to facilitate overseas crowdfunding, donation and eventually payments. Even though Sentinel Chain itself is a consortium blockchain, SENC can enter into Sentinel Chain via future Sentinel Chain partners offering these services. This is the reason why, ecosystem development is also an important aspect of Sentinel Chain.
Are these the only use cases for SENC?
The answer is no. Sentinel Chain makes use of a native SENC-pegged cryptocurrency called SENI (Sentinel Chain Internal Token). SENI is used as transaction payments within Sentinel Chain itself. SENC ERC-20 token is converted into SENI Sentinel Chain native token via the Sentinel Chain bridge. As described in the article on the Bridge To Two Worlds, Sentinel Chain as a an ecosystem is not limited to access by SENC alone. It opens up the possibility for other ERC20-to-ERC20 tokens to enter into Sentinel Chain to provide their service offerings. However, in order to do this, SENC will be required as fuel for accessing the Sentinel Chain ecosystem. This will be explained in more detail in future articles on cross-chain.
Myanmar — A National Scale Use Case
The value of SENC ultimately hinges on the success of CrossPay implementation locally. This will require a critical mass adoption at a national scale. Hence, it is important to understand why our first reference project in Myanmar is important for Sentinel Chain’s success.
Completion of Myanmar Government Joint Pilot
A joint pilot was launched in Myanmar with Ministry of Finance (Myanma Insurance or MI) and Ministry of Agriculture, Livestock and Irrigation (Livestock Breeding and Veterinary Department or LBVD) on the 8th of May 2018. The pilot covers 3 regions and the key purposes are:
- to carry out operational readiness testing of CrossPay on the ground
- to ascertain the risk of infection by government authorities regarding the use of physical livestock identification RFID tag.
The three areas selected for pilot were:
- Lewe in Nay Pyi Taw
- Kanbalu in Sagaing
- Sin Phyu Kyun in Magway
In-country support comprises of a team of thirty (30) veterinary field officers from LBVD and a team of nine (9) insurance officers from MI. The pilot has 4 phases — translation, localisation, adoption and field deployment. It has been successfully completed.
On 20 Aug, it was reported in Asia Insurance Review that the Myanmar government will launch a policy covering livestock insurance for the first time in 30 years.
Huge Impact to a Huge Population
To understand the importance of CrossPay solving the financial inclusion problem, it is useful to watch this interview with one of our local pilot users. It was unexpected that our pilot has coincided with one of the largest flood disasters in Myanmar’s history. An entire plain of Irrawaddy was covered in the flood up to the horizon as shown in this video, The video highlighted the plight of farmers as a consequence of the flood. Besides the lost of human lives, a plain once used for cattle grazing was lost and farmers had to rely entirely on purchased livestock feeds. This requires financial support from both insurance and loans.
Although Myanmar has the largest cattle population in Southeast Asia (17 million), the cattle industry is still facing unmatched demand and is severely under-invested. CrossPay is needed for the monitoring of the cattle population, management of disease control as well as the control of unofficial export of live cattle due to increased demand from China and Vietnam.
The Sentinel Chain project has successfully met all previous milestones in accordance to the whitepaper. With the conclusion of the pilot, we are now in the preparation phase for production launch and are still on track for the Q1 2019 launch, barring any unforeseen circumstances.
The actual process flow maybe subjected to further changes due to customer or regulatory constraints.
About InfoCorp Foundation
InfoCorp Foundation Limited (IFL) is a Singapore-incorporated public company limited by guarantee, set up to provide affordable and secure financial services to the unbanked via the Sentinel Chain, a blockchain-based international marketplace for cross-border financial services and the world’s first platform to accept the use of livestock as collateral. Taking a unique approach to the last mile problem of financial inclusion, the Sentinel Chain model establishes livestock provenance through the creation of livestock insurance on blockchain — the registration of livestock provenance on blockchain provides the unbanked with a new opportunity: the real possibility of accepting livestock as ‘collateral’ for loans. Sentinel Chain is a project developed by InfoCorp Technologies.
About Sentinel Chain
Sentinel Chain is a blockchain-based international marketplace for cross-border financial services and the world’s first platform to accept the use of livestock as collateral. Taking a unique approach to the last mile problem of financial inclusion, the Sentinel Chain model establishes livestock provenance through the creation of livestock insurance on blockchain — the registration of livestock provenance on blockchain provides the unbanked with a new opportunity: the real possibility of accepting livestock as ‘collateral’ for loans. Sentinel Chain is a project by InfoCorp Technologies.
About InfoCorp Technologies
InfoCorp Technologies Pte. Ltd. is a fintech company that provides the infrastructure to accelerate financial inclusion to unbanked and underserved communities through the use of blockchain technology. It designs solutions for small bank consortiums in emerging countries to facilitate inter-bank transactions using distributed ledger technologies and provides consultancy services to clearing house and central banks on implementations and testing of real-time payment systems, and also to corporate clients on implementations and operations of distributed ledger technologies for production use. For more information:https://infocorp.io/