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What problem is the protocol trying to address?
A number of companies located in or focusing on Latin America and the Caribbean (LATAM+C) that wish to borrow funds face a unique set of difficulties in taking out loans, as do the investors who wish to provide the funds. Often these difficulties result from inherent flaws or relative under-development of the local financial markets within the countries these entities operate in, including factors such as liquidity crunches, weak local currencies, corruption or simply a lack of financial infrastructure, among others.
The same issues have an impact on the ability of these borrowers to seek funding outside their country of operations, or if they work closely with one of these countries (geographic bias). Entities acting internationally can also face strict global regulations that can severely limit the scope of their activities. Finally, issues of mistrust arise between debtors and creditors when the selection pool of potential partners is small, as is often the case, delaying or preventing the completion of a loan agreement.
A common way to overcome these issues is through the use of a Cash Flow Financing Scheme (CFFS), the use of a company’s future income, minus operating expenses, to secure debt. In emerging markets, this is sometimes carried out through an SPV acting as a third-party intermediary. As the funds used to pay back the investors often do not enter the country where the borrower is located, this avoids many of the problems associated with the borrower’s country, such as a liquidity crunch.
The use of an SPV, usually developed by a large and trusted financial institution, also appeases regulatory concerns, and resolves issues of mistrust amongst entities. If the flow of funds is of high quality, a strong credit rating can be awarded, which can also help reduce geographic bias as well as regulatory concerns. The use of CFFSs in emerging markets may allow borrowers to break through their local debt ceilings, allowing them to attract a much larger variety of investors compared to other types of unsecured debt available in emerging markets. Despite their relative success, processing billions of dollars in LATAM+C alone, CFFSs remain a niche solution reserved to a small number of use-cases.
Widespread adoption is primarily limited due to the extensive administrative resources required to be deployed, with agents often needed on the ground to navigate local lending and international regulations. Finding a reputable financial institution to act as a third-party intermediary is also extremely difficult, especially for smaller amounts, due to the high costs associated with administering this kind of transaction as well as the high levels of risks these deals pose. In the end, current CFFSs are often too expensive for small-to-medium-sized enterprises (SMEs) and are only used by larger, more reputable institutions who have stable and predictable cash flows, can afford the CFFSs’ high costs, and who can convince banks to administer these deals.
Since 2020 there have been major developments in the cryptocurrency and blockchain space that are changing the status quo in this segment of finance. The development of collateralised lending protocols on DeFi over the last 3 years, an important initial step to help investors monetise their digital assets and create new sources of yield, has paved the way for the parallel development of uncollateralized lending protocols to also take place, a far more attractive offer for SMEs in emerging markets to access working capital compared to traditional collateralised lending. The proliferation of stablecoins and digital exchanges around the world also provide a growing number of bridges between the traditional financial world and the cryptographic one, significantly easing the difficulties of conversion of digital assets to fiat and vice versa. These developments, coupled with technical innovations such as smart contracts, are setting the groundwork for exciting and innovative opportunities for SMEs in emerging markets to raise working capital with greater ease.
The Trilobyte protocol hopes to build on these recent cryptocurrency developments and offer a product tailored to the needs of investors and borrowers who face difficulties giving or taking loans, due to working in LATAM+C, through the use of CFFSs. The protocol will significantly reduce the entry cost for participation in a CFFS by removing the significant administrative and monetary burden associated with using a third-party intermediary and replacing it with a smart contract.
Additionally, Trilobyte aims to facilitate the use of digital CFFSs by SMEs and other emerging market companies who may have difficulty accessing working capital in traditional financial markets for the reasons described above. In practice, this usually leaves an under-served market segment for loans in the $100,000 to $20 million range.
For loans under $100,000, borrowers are likely to find local lenders that can loan them the amounts in local currency. For loans above $20 million, the opportunity for profit is high enough for larger international lenders to become involved, using either collateralised or uncollateralized debt instruments, including CFFSs. For the niche in-between, however, borrowers and lenders become wedged out of both local and international financial markets.
Furthermore, use of CFFSs for these loan amounts is severely constrained by major scaling issues such as the high cost of a reputable third-party intermediary and the administrative burden to manage such schemes. By removing the need for a third-party intermediary and automating a large portion of the administrative processes (especially concerning KYC and AML), Trilobyte will be able to significantly reduce the cost of participating in a CFFS, both for the borrower and for investors.
With the use of a single platform where investors and borrowers can interact directly, Trilobyte hopes to connect willing borrowers and lenders in a manner similar to crowdfunding platforms. These features will allow Trilobyte to service smaller companies, both on the borrowing and lending sides, that may presently have difficulty accessing desired transactions on attractive terms, ultimately leading to stronger companies and growing economies in the targeted emerging markets