These weren’t digital art or NBA clips being digitised and put on the blockchain. Instead, they represent things as diverse as handbags, watch straps, and replacement laptop batteries.
While art and collectibles dominate the NFT headlines, there is a quiet revolution occurring in the world of finance. Hash structures have long been used to lock and provide a standardised form of proof for finance data. NFTs have married this well-known and understood form of data control to a low friction, flexible financing pool. This has opened the multi-trillion dollar world of trade and inventory finance up to direct links with investors, removing centuries of inefficient practices in one sharp cut.
All large enterprises now run ‘source of truth’ systems that they’ve built themselves or that are provided by firms like Oracle or SAP. By verifying that data or the data of their downstream logistics providers or storage facilities, an accurate record of physical products can now be trusted as a basis for financing. This has created a new ‘underlying’ in finance terms or Real World Asset RWA as the crypto community refers to them as. These digital souls underpin the world of Decentralised Finance by acting as collateral for stable coin loans, and as of just a couple of days ago, also the peg that anchors one of those coins to the real world currencies it mirrors.
With transactions occurring on public blockchains, the nirvana of perfect price transparency is upon us. Individual investors can assess the risk of the underlying assets, the collateral ratio to any loan, the quality of third-party verification of the systems involved, and most uniquely, the same return being generated down to the second. Those receiving the finance, in this case, Amazon Sellers, can see their NFT’s representing their current inventory and check its valuation. The system’s ‘Oracle’ monitors the collateral value from source data, checking it does not drop below the borrowed amount by looking at the data stream of sales and replenishments. All of this information can be compared against the other NFTs in the pool of liquidity, giving proof of fair, non-predatory costs of capital to thousands of small businesses in need of growth capital.
Already, simple financial structures are in place to provide services to investors at different risk levels — a stable coin is deposited and risk-taker tokens (that accrue value) transferred in return. If one of the brands in the pool defaults, these token holders have agreed to cover the loss first in return for their higher potential returns. A second token with lower risk and constant returns is issued for the bulk of the financing; this token receives a level of protection senior to the risk-takers. This allows the community to recognise different risk appetite levels and provides a level of community-based insurance for those with a lower risk appetite.
Those in the traditional finance industry should be thinking hard about the role of both loan departments in banks, the reinsurers that make a fortune off ensuring those loans, and even the market places that join institutional lenders and borrowers. All have been quietly replaced with a smart contract and a less artistic but equally defiant to the status quo, use of an NFT.
