Creditworthiness encapsulated in the Silta dNFT

Dynamic NFTs have enormous potential to reflect the ongoing authenticity of continuous data streams and valuation related to real-world assets. The Silta dNFT will do just that as a representation of the creditworthiness of an infrastructure borrower.

For those following our project, you are likely aware that Silta has been developing a robust, yet approachable project scoring system to assess the creditworthiness of a project, its social and environmental impact commitment, the project risk load and other key success factors. The goal of this “Silta Scoring” system is to weigh the likelihood of success of a project that Silta helps connect to loan pool liquidity.

Silta Scoring

The Silta Scoring system will generate useful data that will be of continuing value to the borrower and third parties, outside of Silta. This data comprises:

• The Silta Score: our rigorous, standardized assessment of the creditworthiness and risks associated with a project, as well as a method to measure the social and environmental impact of the project.
• The Silta Due Diligence Report: a summary of the off-chain due diligence performed by our specialized due diligence team.

We recognized early on during our product design that our Silta Score lends itself well to authentication as an NFT. Our team has been developing the mechanism for ensuring the integrity of our Silta Score for a project by minting it as one or a series of NFTs.

For example, a project will receive a multi-factor Silta Score from us, as well as an off-chain due diligence report by our lawyers. Both the score and the due diligence report have value as independent assessments of a project’s readiness for investment and lending. By minting this data as an NFT, the project can take this authenticated data to third parties, which saves time and cost on such third party’s own due diligence or investment decisions. This NFT can be transferred to various third parties who need a trustworthy snapshot of a project.

The Silta Score is the first step in our assessment and underwriting of a project to be funded by a loan pool. After the initial assessment, the project will require ongoing monitoring and evaluation from construction through service of the loan.

The Need to Monitor Projects

In a typical project financing, the borrower has contractual reporting obligations through the term of the loan. During construction, the borrower issues periodic reports on the progress of construction and achievement of milestones that have been identified in the loan agreement. From a lender’s perspective, construction is typically the highest risk period of a project as there are many many suppliers, contractors, authorities and other parties involved who each need to meet their respective obligations on time in order to complete construction on time. In addition, climatic events, such as one ill-timed storm, can ruin a project’s best laid plans.

Thus, a robust monitoring and evaluation program needs to be integrated as a follow-on from our Silta Scoring to protect our collateral loan, and the underlying loan pools. This is where dynamic NFTs come in.

The Silta Score encapsulated in a dynamic NFT (Silta dNFT)

We recognized that Silta will be monitoring a project through its entire loan service period. This means then that the NFT based on our Silta Score should be updated throughout the loan service period if it is to maintain value to third parties. More about that below.

The rise of the dynamic NFT

While NFTs have become the darlings of 2021, the market is rapidly recognizing the power of dynamic NFTs. A dynamic NFT is an NFT that can be “updated” with fresh data taken from online sources, particularly oracles for data integrity, to then create new functionality in the underlying NFT. Initially, interest in dynamic NFTs grew out of a desire to introduce greater randomness and therefore rarity within large drop NFT art collections. An easy conceptualization of a dynamic NFT would be an artwork that adjusts its image based on local weather data which is aggregated by an oracle and transmitted to the NFT.

“Only when we move beyond static digital collectibles to truly dynamic NFTs will the blockchain ecosystem and the world realize the true value of this new unique asset class.” Nasdaq

This blog post from Chainlink caught our attention at Silta because the authors also recognized that dynamic NFTs have enormous potential to reflect the ongoing authenticity of continuous data streams and valuation related to real-world assets. The Silta dNFT will do just that. During continued monitoring of a project and loan repayment by a borrower, data will be streamed in real time to an oracle which then updates the NFT. (Forgive us if we don’t detail the mechanics of that in this blog, as we don’t wish to give away the recipe of our secret sauce just yet.)

As the borrower completes milestones and services its loan repayments, the Silta dNFT will make adjustments to certain sub-scores within the underlying Silta Score. The Silta dNFT then continues to apply an up-to-date and relevant Silta Score to a project, which the borrower can demonstrate to third parties who may be assessing the borrower’s creditworthiness and ability to successfully implement a project.

Who benefits from the Silta dNFT?

The Silta dNFT benefits all stakeholders involved in the lending to a project, as follows:

Benefits to DeFi protocol: The Silta NFT authenticates and informs the DeFi protocol of our Silta Scoring for each specific project. With the dNFT authenticating the progress of the project, the loan pool (and lenders below) are kept informed at all times of the status of the underlying project, without the need to search or investigate off-chain activities of the project. The work is already done for the protocol and is transmitted automatically.

Benefits to lender: Lenders enjoy the same benefits as the protocol, namely authentication of the original Silta Score by way of the NFT and real time progress reporting by way of the dNFT. The authenticating function of the original NFT assists the decision making process of lenders, whether lending is via a loan pool or through off-chain lending. The dNFT alerts lenders instantaneously to changes in the status of the project. Traditionally, this requires off-chain reporting by the borrower meeting its periodic reporting requirements and by third party consultants who are tasked to track a project. Reports are traditionally notified to the lender or its security agent pursuant to contract terms and require time between each reporting node. The dNFT places much or all of the reporting onto blockchain, which dramatically reduces the reporting time to the lenders. In short, lenders get necessary information faster with greater accuracy.

Benefit to Borrower: Usage of Silta NFTs and dNFTs for a project would save a borrower significant costs when seeking future credit or investment. If a borrower were to seek reputable certification of its creditworthiness to present to lenders and/or investors its options are to:

1. Hire a credit rating agency like Moody’s to obtain a credit score.
2. Retain an accounting firm to certify financial statements.
3. Retain a law firm to issue a due diligence report.

Each of those options would cost the borrower and/or require additional cost to potential lenders and investors. Hence, our Silta Scoring and due diligence has inherent economic value. As a point of reference, in 2006, Moody’s Investors Service (“MIS”) derived approximately 86% of its revenue from issuer (borrower/target) payments for credit ratings. Fees for Moody’s rating services range from $1,500 to $2,400,000, depending on company size and complexity.

Although Silta does not have the reach or reputation of Moody’s, we do in fact provide professional assessment services and due diligence on par with a law firm or financial analyst. That is because our scoring/due diligence system is designed by lawyers and financial analysts who will also provide the off-chain project assessment for each project, particularly during the first phase of Silta rollout. As Silta grows with a successful track record of funded projects, the credibility and the value of the Silta Scoring and the Silta dNFT should also grow.

Functionality of the Silta dNFT

Based on the above, we are working on the mechanics of embedding the Silta Scoring into a dynamic NFT to be minted on completion of the assessment and then updated at each key milestones of a project. The Silta dNFT would thus be presentable beyond its usage with our Silta DAO, as the borrower can present the NFT to third party lenders and potential investors to demonstrate its funding/investment readiness.

We anticipate that the Silta dNFT will capture the following:

• Silta’s overall score of the borrower/project
• Risk scoring of the project
• Impact scoring of the project, which can be dynamic as project outputs are monitored
• The key to accessing the due diligence report
• Loan performance, which is also dynamic as the loan is serviced
• Other relevant quantitative data generated by the project

In the early stages of lending, we will focus on ensuring that the scoring system is robust and generates a set of immutable scores that combine for a consolidated immutable score. It is this scoring which makes the NFT credible and valuable. In later stages we will add additional functionality, particularly aiming for dNFTs in respect of each project, with a focus on project performance, data capture, achievement of ESG targets and loan service (e.g. how well the borrower has paid).

Please continue to follow Silta as we develop the Silta dNFT. It’s these innovations that give our team so much energy and satisfaction as we seek to connect real-world impact projects to DeFi liquidity.

If you have any questions, don’t hesitate to reach out to us and the community at t.me/SiltaCommunity.

Disclaimer: This article is for informational purposes only and is not intended as any kind of investment advice. Read our full legal disclaimer here. For further information, email us at contact@silta.finance.