Florence Finance: Bridging DeFi to Real-World Lending

December 5, 2023

In conclusion

Most of you who have been around these markets for a while have probably heard of the proverbial ‘hot ball of money’. 

It’s essentially a reference to the constant rotation of money from one hot narrative to the other. This industry is largely an attention economy, so narratives change quickly, some stand the test of time but most usually fade into the abyss. 

Over the past year, a narrative that most crypto proponents have spoken about is the rise of the real-world asset (RWA) sector. A narrative that we firmly believe is here to stay. 

The lay of the land 

The realm of RWAs is vast. In general, it refers to DeFi products that interact with assets in the “real world” to get the best of both worlds. It can essentially span to include almost any non-cryptocurrency asset that we interact with. 

Some of the more popular ones that we already see in DeFi are things like tokenized treasury bills, tokenized real estate, access to start-up investing, tokenized equities, and tokenized agricultural land amongst other things.

The rise of this sector is only natural. 

Over the past five years or so, DeFi has seen a ton of interesting innovations. From smart contract-based lending markets to AMMs, the progress has been nothing short of impressive. But despite the innovations, the industry has always remained closed in the sense that yield had to be generated on-chain either through spread or fees. As both are highly correlated to crypto asset prices, yields are more often than not derived primarily from unsustainable ponzinomics. 

DeFi giants such as AAVE, Compound, and MakerDAO have done a brilliant job at creating lending markets that don’t require any third parties/intermediaries. However, they do this through overcollateralization, limiting collateral to that which is liquid and on-chain. 

Therefore, the only logical next step is to use the technology we’ve developed and integrate it with non-crypto assets to “import” real-world collateral on-chain. Thus, we have the birth of the RWA sector. 

One such crossover between RWAs and crypto that’s been relatively under-discovered is RWA collateralised lending. 

There are trillions of dollars in non-crypto assets that could be used as collateral, and there are millions of people who would like to use a lending market with no intermediaries but simply don’t have the capital required for overcollateralized loans. But nobody has been able to successfully bridge this gap. 

Within real-world lending, there are many different segments that one could target. One of the most lucrative is SME lending. 

So what is SME lending?

Small & Medium Enterprises (SMEs) are crucial to the world economy. They roughly represent 90% of businesses and 50% of employment worldwide. 

In emerging economies, formal SMEs account for roughly 40% of the GDP, and this number goes much higher if you take into account informal SMEs. These SMEs also contribute to over 70% of formal jobs within these emerging economies. With a growing workforce, governments have to focus on continuing to help SMEs grow as it makes up a major chunk of their economic output.

The issue, however, in emerging economies is that most SMEs don’t have access to financing. The International Finance Corporation (IFC) estimates that roughly 65 million firms in emerging economies have unmet financial needs of $5.2 trillion every year. This only accounts for formal SMEs. With the informal SMEs, this number is significantly larger. 

If we look at developed nations, SMEs are just as important. They account for almost 99% of non-financial corporates in Europe and provide 70% of total employment in the EU. While the issue with financing in places like the EU is not as grave as emerging economies, there are still some major shortfalls that need addressing. 

SMEs depend on banks for 70% of their external financing, so when there is a gap between loan demand and loan supply, it creates an overall constraint on the SME sector leading to lower economic growth. Some estimates suggest that the SME lending gap in the EU is well over $400 billion at the moment. 

This is all to say that there is a very real and very large gap in the market that needs addressing. Florence Finance is here to bridge that gap.

Florence Finance: Overview 

Florence Finance works with existing SME lenders to get access to SME credit exposure. By identifying and partnering with well-reputed SME lenders, Florence Finance can provide DeFi users with yield backed by real-world lending on a plethora of different crypto assets. 

We all love our yield, but we’ve been rugged enough times to know that the ponzinomic yield is not the way to go. Florence Finance offers you a way to provide your stablecoins as liquidity into their vaults which will then generate real-world yield based on the credit exposure in the SME market. 

In its simplest form, Florence Finance is essentially a bridge between DeFi and SME lenders. 

Looking a little deeper, the protocol works a bit like this. 

The platform consists of multiple loan vaults. Each loan vault will target a different sector and have varying degrees of risk involved. Users can choose a loan vault that fits their preference and then provide their stablecoins to become a funder. 

Initially, the platform will have two loan vaults on offer. The Caple loan vault & the Junior loan vault. 

The Caple loan vault is made in partnership with Caple and is an ESG-compliant short-term working capital-focused lender with a phenomenal track record of originating and administering SME credit. 

The Junior Loan Vault is focused on funding smaller SMEs through junior funding to lending partners like SwishFund (founding partner) who have a long track record of operation in that market. 

These two initial vaults have been operational for over two years and have been limited largely to the founders' funding capacity to date. Now that the migration to Arbitrum is complete they are ready to onboard 3rd party capital and more vaults to get to a sustainable scale. The general flow for the vaults is laid out in the following paragraphs. 

There will be two avenues that a user can choose to earn yield:

  1. Loan vault to earn SME loan-backed yield 
  2. Staking pool to earn the native token FFM (to be enabled post-FFM listing)

First, a user will have to use their stablecoins (USDC) and purchase the FLR token. FLR is the native currency of the Florence Finance protocol. It is backed 1:1 by the principal amount of performing loans outstanding plus the accrued interest. The FLR is pegged 1:1 to the EUR to match the loans that have been given to the SME lenders. 

Once the FLR tokens have been acquired, the user can choose to either put them into a loan vault or the staking pool. 

If they put them in the loan vault, they will receive loan vault tokens which represent their position in the vault. Once the FLR tokens are supplied to the vault they will instantly start earning yield. Once a user wants to withdraw, they will receive their initial amount plus the accrued interest over the length of time they held their FLR in the vault. 

Once enabled, a user can also choose to stake their FLR in the staking pool through the Dapp and earn rewards in the native token FFM. They can claim their FFM tokens at any time and also unstake their FLR at any time. 

From here, Florence Finance will settle all loans with the SME lender in FIAT mostly through Euros on FIAT rails. This, however, will only happen initially as the SME lenders won’t be familiar with using crypto. Eventually, the aim is to directly provide the lenders with stablecoin liquidity to provide even more transparency. 

Just like that DeFi users get access to sustainable yield, while SMEs benefit from an increased availability of financing. 

Just before we move on to tokenomic talk, there are two more important things to keep note of – liquidity and default risk. 

The funds “locked” in a vault can only be returned upon redemption of underlying loans and thus the ability to enter/exit the vault is dependent wholly on secondary market liquidity (i.e. the willingness of others to enter/exit the protocol through the FLR/USDC liquidity pool). Florence has provided the initial liquidity for this pool and it will be made more liquid as the protocol grows 

In the event of a default on a loan, Florence Finance Europe BV, which is a limited liability real-world company (Lender), will come into action. Once the matter is settled through them, the proceeds from the liquidation/resolution will be adjusted for through the principal in the loan vault. History shows that in a well-diversified SME loan portfolio, credit losses over time should only amount to a fraction of the actual yield generated.

Okay, now we can get to some token talk. 

Tokenomics 

Let’s start with the FFM token. When we mentioned earlier that it’s the staking reward token, you probably wondered what it’s used for other than that. Surely they aren’t just giving out a token to users which has no other utility, right? Well of course not. 

For starters, a portion of the interest earned through the loan vaults will consistently be used to buyback and burn the FFM tokens. Since this yield is agnostic to the crypto market conditions and fairly stable, FFM itself should perform fairly well as there will be consistent buy pressure to counter the selling pressure from stakers. 

Secondly, it will also be the governance token. The eventual aim is to fully decentralize the protocol in which scenario the FFM token will play a major role. 

Below is the distribution & vesting schedule for the FFM token. 

Maximum Supply: 1,000,000,000

The vesting looks like this:

The Origins of Florence

Every great product has a great team behind it, and the story behind Florence is nothing short of exceptional. 

In the year 1998, the founder was travelling to Italy. 

He went to Florence where he ended up visiting the Plazo Medici. Being the tourist he was, he ended up purchasing a coin. This coin was a commemorative coin for the 500th death anniversary of Cozmo de Medici. 

Fast forward to 2018, and the founder was introduced to crypto through one of his friends. And helped launch the second-only ICO in the Netherlands. Intrigued by the whole thing he found himself speaking to other crypto natives looking for an on-chain “safe haven” asset to weather the next bear market. At the time Tether was the only stablecoin of any size and government bond yields across the globe were still negative. 

He was intimately familiar with tra-fi due to past work experience, and having understood blockchains and smart contracts it instantly hit him how he could combine the two to create the ultimate yield-bearing safe haven asset whilst simultaneously addressing the real-world funding shortage for smaller businesses. 

Much like the revolutionary figure Cozmo de Medici five centuries ago, the founder set out to revolutionize finance & lending once again through Florence Finance, a platform to connect the liquidity in DeFi to the lack of funding for SME financing. 

The founder in question is Chiel Ruiter, an ex-investment banker turned crypto OG whose track record and experience in trad-fi give him the tools he needs to lead Florence into the future. Once MD at Goldman Sachs & UBS (in the Netherlands), Chiel now leads the charge of bridging DeFi with the real world through Florence Finance.

Concluding thoughts

Our space has seen ample innovation over the years, but we have yet to see all this technology be used for anything useful in the real world. Now is the time we start to see that happen. 

We always laud the revolutionary impact this industry can have on the finance industry and the world in general, but nothing real has materialized. All we have to show is a couple of dead memecoins and god-awful NFTs in our wallets. 

Florence Finance positions itself at the forefront of protocols looking to effectively use this technology for good and push it out to the mainstream. The only way we onboard the masses is if we give them something genuinely useful to them. Florence Finance provides exactly that. 

Also, as you can see, around 50% of the token allocation is towards the community. This means two things: the team is committed to ensuring that their community is appropriately rewarded and those early adopters of the platform just might get rewarded for their participation. So stay ahead of the curve and join the Florence Finance revolution.

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