I’d like to address a fundamental misconception about investing and crypto – Is it just about the APY?
I would argue people engage with crypto for a wide range of reasons.
Sometimes, people engage with crypto as a direct reaction to the financial crash of 2008 where the banks were too big to fail, and the little man took the hit. Sometimes interest is driven by the new world chaos we live in – and not just with the war in Ukraine and the final dying out of Covid. People can see that the world is broken, and governments and banks are simply not doing their jobs well enough. Sometimes people make this choice as they want to drive sustainable change by diverting investment to projects that can make a meaningful impact. And we know that Web3 offers the promise of something better.
Don’t get me wrong; I love insanely high yields as much as the next crypto trader. It’s a very powerful conduit to crypto. But I’m also a dad with responsibilities and cannot afford to put everything on the line with anonymous Ponzi-like schemes all the time. Nor do I want to. I believe in having a balanced investment portfolio.
As a father, I feel compelled to take matters into my own hands. I want my boy to grow up in a world that cares about sustainability.
With my co-founders, we came up with the concept of Silta Finance. I use the tagline that Silta Finance is a platform to perform credit assessments and underwriting using Web3 technology.
That is sometimes translated into crowdfunding for physical infrastructural asset backed investments returning a low return and high social impact.
So, back to the question – why do people invest in crypto? Are they only interested in making 1000 APY?
In a recent visit by a major crypto exchange team to our offices in Helsinki, the team described Silta as the exact opposite of a 1000 APY Ponzi-like project. They basically said: “You guys are at the other end of the scale, the ‘safer bet’ because you’re completely transparent on social media and helping to bridge ‘bond-like’ investments into something tangible within the real world.”
And they further asked: “So why on earth is the crypto community going to get behind investments into physical infrastructure?”
I think I had my road to Damascus moment just then when I realised it doesn't have to be a ‘this or that’ question anymore, it can be both.
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Let me first explain about the ‘safer bet’ that is Silta. For starters, we did not go down the security token route
Silta aims to build a more sustainable future by enabling physical infrastructure borrowers to access DeFi.
The most obvious way of achieving asset backed DeFi would be to create security token-based loan pools where lenders effectively buy ‘bond tokens’ to raise the capital needed by the borrower to build their infra project. Security token projects have shown reasonable success. Still, they come with limitations in that the security tokens owned by the lenders do not have an easily accessible secondary market function.
Since physical infrastructure projects have loan tenors of 3 to 10 years, it is perhaps a bridge too far for many crypto investors, at least in the current Web3 community. Outside of crypto, the banks, pension funds, and other institutions enjoy this type of investment in TradFi. While the institutional investor community is growing in crypto, it has a long way to go.
In the main, I think it is fair to say the DeFi community wants something more arousing and turbocharged to make it attractive.
We took the utility token path and that has made all the difference
Within Silta, we knew we had to do something other than the security token model. We needed to find a way to tear off the band-aid and make impact investing sexy. This meant finding a way to crack open the secondary market for loan pool tokens so that lenders can access instance liquidity. We need to make sure that investing in the wild west of crypto is still on the table, even in a safer bet model.
Put simply, Silta does two things: credit assessments and underwriting. For the purposes of this article, I am going to skip past the credit assessment part of what Silta does and get to the juicy part, because I know my fellow crypto investors have a short attention span.
Borrowers that pass the credit assessment and are approved by the Silta DAO receive ‘on-chain’ collateral. DeFi protocols like our partner Rari Capital operate based on over-collateralized loan pools. Let’s say we have a borrower that needs a 10M loan with a five-year tenor and a 6% fixed interest rate for their solar project. A loan pool is opened on Rari Capital that specifies a pool size, interest rate and term. An investor, let’s call her Laura, invests 10,000 USD stable coins into the pool. In return, Laura receives 10,000 loan pool tokens (fTokens). The fTokens represent her share in the pool and allow her to reclaim the principal and interest upon maturity. Laura has just done a fantastic thing. That 10M loan is being used to build a solar project that will power 40,000 homes and commercial businesses on renewable energy.
When the safer bet becomes the sexy bet
Now, here is where the fun starts. If the fTokens were securities, Laura wouldn’t be able to do much with those tokens. The secondary market is minimal for security tokens… BUT, since fTokens are not securities – they are utility tokens – Laura can do a whole lot of things. For example, Laura can create a new loan pool on Rari Capital, insert her 10,000 of fTokens as collateral and draw down a loan of say 5,000 USD in stable coins. She can then go to an exchange and buy some of those “wild west” high yielding tokens.
What Laura has achieved is a more balanced portfolio: She has a foundation investment of 10K yielding 6% fixed interest for the next five years, and on top of that, she has bought a further 5,000 “wild west” tokens that might go to the moon or the other direction – a risk she is happy to take because she’s a seasoned crypto trader. So long as Laura pays back the 5,000 stable coin loan, she can use her fTokens to reclaim that original 10,000 investment plus the interest.
Laura just unlocked the power of DeFi while helping to build a more sustainable world. Web3 can build a better world.