Someone should fix it: Smooth sailing in volatile blockchain waters with the Dai stablecoin
A partnership demonstrating how B2B settlements can be handled with a decentralised stablecoin
One of the fundamental challenges to any B2B blockchain use case involving settlement is the question of how to deal with volatility.
Tradeshift Cash is an instant invoice financing solution that gives micro, small and medium sized enterprises (MSMEs) access to instant cash flow based on their outstanding receivables. You can read more about Cash here, and the vision behind it here. In Tradeshift Cash, we utilize the ethereum blockchain as a receivables marketplace towards Investors. Sellers and buyers have no well-defined way of handling settlement directly on a blockchain, so a workable bridge needs to exist between the blockchain and real-world currencies.
A decentralized peg
Enter Dai, the world’s first decentralized stablecoin based on the Ethereum blockchain. Whereas other digital currency instruments either tumble around on stormy blockchain waters or tie themselves hard to a particular currency or commodity, Dai casts out an anchor (‘CDP’ in technical terms) that allows whole families of soft-pegged currency pairs to be put into circulation.
This provides a clear vision of how to establish a bridge between real-world currencies and blockchain-based digital tokens that is true to the blockchain spirit of decentralization. Since its launch in 2017, Dai has maintained a soft peg to the US dollar, and is now expanding into other currencies. It is a vision that we find very exciting.
This is why today, I’m very happy to announce a partnership between Tradeshift Frontiers, the digital innovation arm of Tradeshift, and MakerDAO, the creator of Dai. The partnership brings together Tradeshift Cash, Dai and decentralized marketplace components created by MakerDAO to demonstrate a scalable pattern for handling settlements in a receivables financing context.
A Dai-based investor marketplace
The first product of the partnership, currently being pilot tested, is a Dai-based investor marketplace that allows small businesses to request early payments based on their receivables, to a community of investors that in turn will compete for access to a tokenized volume of receivables. This will provide an alternative way to solve critical growth and stability challenges for MSMEs who make up the vast majority of companies in most supply chains, and are hit the hardest by long payment terms.
The various attempts at creating stable currencies, pegged to real-world currencies and commodities are testimony to the challenge involved and the potential it can unlock. The trade receivables market in general is a market of tight margins which leaves no room for a volatile digital currency as instrument for settlement. In this context, the MakerDAO Dai represents a unique vision for a transparent and stable coin that allows anyone to represent real-world currency settlements on the blockchain.
Democratizing access to financing
Tradeshift has always been about helping businesses transform through technology. Financing options for MSMEs are often invasive, expensive or inaccessible. Factoring remains a relative small and illiquid market. The root cause for these challenges are the lack of information and insight into the business and trade relationships of the MSMEs.
The ability to create liquidity for digital currencies, ICOs and digital assets has been the hallmark of blockchain since it’s inception. So the key question we tried to answer was basically how you could utilize the blockchain to create liquidity for a type of assets that has lacked both liquidity and transparency.
That is why we decided to demonstrate the viability of a marketplace since this brings together all the elements: A volume of strongly defined receivables shared by users of the Tradeshift platform, smart contracts defining how investors engage with the receivables and the MSMEs seeking finance, the Dai stablecoin for settlements, and the Tradeshift app platform for the end user experience.
A marketplace of this kind opens the opportunity for investors of any size — reaching from small scale, private peer-to-peer investors to institutional financiers to engage and model investment instruments on top of it. It would be simple for anyone to establish a virtual factoring company here.
This is why we speak about democratizing the access to financing. We believe it should be done by creating a more liquid and transparent market: One that can actually leverage the information that exists in digital supply chains today to lower risk and increase accessibility.