The maturity and development of blockchain technology has brought innovations in decentralization, credibility and transparency, data security and privacy, efficiency, etc. DeFi, as a financial service based on blockchain technology, provides users with safer, more convenient and more transparent financial services through smart contracts and decentralization. The rapid development of DeFi enables people to conduct various financial activities on decentralized platforms, including loans, insurance, transactions, etc. The total locked amount of DeFi has increased from more than US$500 million in 2020 to US$52 billion today. The 100-fold growth demonstrates its strong vitality.
However, since the crypto bear market, the development of DeFi seems to have stagnated and is in urgent need of new growth points. The RWA track, as a bridge between TradFi and DeFi, seems to have become a new round of hot narratives. Unlike other DeFi products that rely heavily on trading volume and market activities to generate returns, real-world assets (RWA) are introducing a new wave of DeFi products whose value comes from real returns on real tangible assets.
RWA can represent many different types of traditional assets, such as real estate, gold, stocks, and bonds. The participation of financial institutions such as Binance, Goldman Sachs, and Siemens and leading DeFi protocols such as MakerDAO, Aave, and Compound has also attracted market attention to the RWA track. According to Rootdata data, there are currently 54 projects in the RWA track, including projects invested by top investment institutions such as a16z, CoinbaseVentures, and PolygonVentures. This time, R3PO will bring you an interpretation of the "RWA+DeFi" protocol Ploytrade.
Addressing the 1.7 trillion trade financing gap and solving the financing pain points of small and medium-sized enterprises
In the international market, trade financing has a history of nearly a hundred years, and it can effectively promote the development of import and export trade. However, the speed and convenience of trade financing are more for large enterprises, while small and medium-sized enterprises with weak financial strength and background are generally in a weak position in trade financing. The main pain points they face include:
1. Difficulty in financing: Due to their small size, low credit rating or lack of sufficient asset collateral, SMEs often find it difficult to obtain financing support from traditional banks or financial institutions, which limits their ability to turn over funds and expand their business.
2. High interest charges: Even if SMEs are able to obtain financing, they are often required to pay higher interest charges as they are considered high-risk customers, which increases the cost of trade financing.
3. Insufficient funds: During the trading process, SMEs may need to pay suppliers or supply chains, but customers often pay slowly, which may lead to poor capital turnover and affect the normal operation of the business.
4. Complex process: The traditional trade financing application and approval process is usually cumbersome and complicated, requiring a large amount of documents and approval time, resulting in a slow financing process and failure to meet the company's funding needs in a timely manner.
5. Lack of transparency: SMEs may lack understanding of the trade finance market and the pros and cons of various financing products and services, making it difficult for them to make informed financing decisions.
6. Demand mismatch: Some small and medium-sized enterprises may need smaller amounts of short-term financing, but traditional financial institutions prefer to provide larger amounts and longer-term financing products, resulting in a mismatch between financing demand and supply.
The current market size of the trade finance industry is close to 10 trillion US dollars. Although the market is huge, there is a huge trade financing gap. According to the WTO survey, the trade financing gap in 2021 is about 1.7 trillion. This gap is mainly caused by the imbalance between the demand and supply of trade financing for small and medium-sized enterprises. Based on this practical demand, Polytrade follows the trend and strives to simplify the accounts receivable financing experience for small and medium-sized enterprises, using the cryptocurrency liquidity pool to provide new sources of funds for small and medium-sized enterprises, and is committed to becoming the first platform to meet the trade financing needs of small and medium-sized enterprises.
Most of the Polytrade team members are from India. Before transforming into a blockchain platform, Polytrade was formerly known as Riqueza Capital, which was founded in Hong Kong in 2014 and has extensive experience in Web2 trade financing. By 2020, the company had provided trade financing to 5,000 sellers and provided financing services to 250 of them, with a total value of US$500 million. In March 2023, Polytrade completed its seed round of financing, with investors mainly including Matrix Partners, Polygon Ventures, Alpha Wave Global, etc.
Analysis of Polytrade's operating mechanism
In order to fill the financing gap and meet the financing needs of small and medium-sized enterprises, Polytrade has created an innovative system to obtain funds from crypto investors to invest in real-world assets.
Investors inject stablecoins into Polytrade’s liquidity pool, Polytrade converts these stablecoins into fiat currency and uses these funds for factoring/invoice financing.
The core components of the Polytrade platform include:
Asset Valuation: In trade finance, determining the quality of the underlying assets is a key challenge. Data such as the underlying assets and payment history will be recorded on the blockchain, and the protocol will determine the rating of each asset through an algorithm.
Borrower evaluation: Similar to asset evaluation, borrower evaluation will also be defined by the protocol. Borrower ratings will be generated based on an algorithm using borrowers’ activities on the blockchain, personal data, and submitted financial documents. This rating will also affect the borrower’s loan interest rate.
Risk exposure: In risk management in trade finance, a key part is not to be overly exposed to a single asset or entity. When a certain percentage of the loan is made to a single entity or asset, it will be adjusted by the algorithm. Similarly, for the borrower, the rules ensure that the agreement is not exposed to the risk of a single borrower.
Governance: The governance of the platform adopts an on-chain governance model, allowing different network participants to reach consensus through a direct voting mechanism. Voting will adopt a weighted staking mechanism, which means that higher staking rights will receive greater voting rights. The governance team will formulate rules on staking, interest rates, risk management, validator staking, protocol fees, etc.
Through an example we can better understand its specific operation mechanism:
If John's furniture factory sells $4,000 worth of goods to IKEA every month with a credit period of 3 months, that means John's payment cycle is 3 months, and funds worth $12,000 are locked, and he needs to wait until the end of the 3-month credit period to get the money.
However, due to the small amount of funds and short term, John has difficulty in obtaining financing from traditional financial institutions. At this time, John can choose to enter the invoice and related documents into Polytrade and complete the relevant review. After the review is passed, Polytrade will immediately transfer the financing funds from the liquidity pool to John's account, and the interest rate of the loan will be adjusted according to the algorithm. When the payment is due, the funds remitted by IKEA will be injected into the liquidity pool.
John will receive $3800 from Polytrade instantly, and the difference of $4000 and $3800 ($200) is the profit Polytrade gets from this transaction.
In this trade financing, Polytrade demonstrated its advantages including:
Transparency: The transaction process of the Polytrade platform is open and transparent, and all transaction records are recorded on the blockchain, which can be viewed and verified by anyone. This improves the transparency and credibility of transactions and reduces the risks of transactions.
Speed: The transaction speed of the Polytrade platform is very fast, and transactions can be completed within a few minutes, which greatly shortens the financing cycle and improves the efficiency of capital utilization.
Flexibility: The transactions on the Polytrade platform are very flexible, and customized financing plans can be provided according to different needs and situations to meet the financing needs of different companies.
Low cost: The transaction cost of the Polytrade platform is very low. Compared with traditional trade financing methods, it can reduce financing costs and transaction costs and improve the profitability of enterprises.
TRADE Token
TRADE tokens are the main payment tool within the Polytrade platform, and are also a platform governance, protocol incentive, staking reward and settlement tool. TRADE tokens are issued on Polygon and BSC. The total issuance of TRADE tokens is 1 billion, of which 70% are used for public sales, 20% for the team and consultants, and 10% for community and ecosystem construction.
The main functions of TRADE tokens include:
Payment of platform service fee: Sellers need to pay a certain amount of TRADE tokens as platform service fee to obtain financing services.
Rewarding Participants: The Polytrade platform has a built-in reward system whereby participants are rewarded with a certain amount of TRADE tokens for each successful trade.
Platform governance: TRADE tokens can be used for platform governance, and holders can participate in platform decision-making and voting.
Protocol Incentives: TRADE tokens can be used to incentivize the execution and maintenance of the protocol and ensure the normal operation of the platform.
Staking Rewards: TRADE tokens can be used for staking rewards, and holders can receive additional benefits.
Settlement tool: TRADE tokens can be used for settlement and clearing within the platform to improve the efficiency and security of transactions.
Conclusion
Polytrade uses blockchain technology to build a bridge between TradFi and DeFi by exploring the pain points of trade financing for small and medium-sized enterprises in reality. In the future, with the further development and application of blockchain technology, Polytrade is expected to make greater breakthroughs in the field of trade financing. The decentralized nature of blockchain will bring broader market participation and more efficient transaction processes, thereby providing small and medium-sized enterprises with more choices and more flexible financing options. In addition, with the gradual popularization of the RWA concept, the field in which Polytrade is located may become an important development trend in the financial industry.
references:
https://polytrade.gitbook.io/polytrade-gitbook/
https://medium.com/@Polytrade/tokenization-of-rwas-how-polytrade-does-it-58f9bfa964eb
https://www.theblockbeats.info/news/36289
https://blog.polytrade.finance/defi/exploring-fractional-ownership-of-real-world-assets-in-defi/
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