While financing is a core leverage in any economy operation, it has traditionally been a quiet strategic lever. Financing accelerates economic growth. Leveraging financing options enables companies to fund operations faster, optimize cash flow and create more value from operations. Déjà vu: It is the best of times; it is the worst of times. Money supply is skyrocketing; but the actual economy is waning. On one side, the capital market is facing "asset shortages" and considerable funds cannot find suitable asset targets; on the other side, small and medium-sized enterprises SMEs are still struggling with "fund shortages” — facing difficulties in financing, expensive loans and slow processes. Without sufficient supporting documentation, financing is an impossible dream. How to provide more legitimate data and efficient processing of the data to support the lending process is fast becoming a major challenge to supply chain finance.

The emergence of cryptocurrencies is on the verge of revolution with the potential to transform the current financial system to more transparency, efficiency, accessibility and equity. DeFi (decentralized finance) may be the perfect lever to effect the transformation. DeFi is poised to transform the financial system to operate as if the system is without banks and without a middleman to execute supply network ecosystem business transactions. DeFi uses smart contracts or computer code, such as Blockchain (Ethereum), that securely automates the process.

Code Is Law

DeFi isn't owned by any single person or entity, it is governed and operated by secure code.

DeFi offers decentralized financial instruments without relying on traditional intermediaries such as brokerages, exchanges or banks. Instead, it uses smart contracts leveraging blockchain technology (blockchain technology is “crossing the chasm” of technology adoption).

Unlike traditional financial transactions, DeFi all transactions are electronically secure, auditable and fully transparent.

For example, lending transactions in DeFi ensures the borrower provides collateral for the loan and the lender earns interest. The transactions are all recorded on a public edger that everyone can see.

Different from traditional business trades where all parties have their own ledgers and internal databases for recording the transactions, blockchain processes and maintains all of the transaction data in an open way that anybody can track the progress of that trade.

In the world of DeFi, this ledger is called a “smart contract,” and blockchain technology supports a network of computers built to record transactions and distribute by cryptography, so that each transaction is secured, verified and forever traceable. Every computer on that network has an identical copy of that ledger, so that all of the data is fully transparent.

Many loan agreements are opaque by design. Moving fundamental debt protocols to blockchain could provide many efficiency gains, including open access to information, transparency and programmability.

Everyone can access the blockchain-based lending services because all protocols created on blockchain are transparent.

The Smart Contract is a decentralized protocol, which means that anyone can use their development tools and smart contracts to initiate, underwrite, issue and manage loan agreements without the need for a specific central third party.

Blockchain-Based Supply Chain Financing

Almost every enterprise is in a chain of upstream and downstream relationships, purchasing from upstream and selling to downstream. All important business data is derived from this chain. If these data can be fully displayed and analyzed, the enterprise evaluation will be more accurate, which is essential in supply chain financing.

For blockchain-based supply chain financing, the principle is to leverage distributed accounting to allow more ecosystem nodes to participate and contribute the data to achieve more point-to-point interaction. Because all data on the blockchain is verified and traceable, it’s becoming an important asset in capital circulation. The following scenarios explain the benefits:

• Reducing the burden on core enterprises. Core enterprises no longer need to verify each transaction for the role of loan guarantee, but only contribute transaction data with upstream and downstream to participate in the value chain.
• Improving finance efficiency for SMEs. Building a DeFi platform allows multiple nodes to contribute data and interact quickly to achieve rapid financing. With fast entry, process efficiency and interaction, SMEs can achieve accelerated, almost immediate financing.
• Syncing data throughout the chain. By sharing data to the chain, the transaction data of SMEs can be accessed by the financing institutions in an open and authentic way without any third-party auditing agency as a guarantee. Therefore, the SME data isolation dilemma will be fundamentally resolved.
• Eliminating dependence on credit authorization. In supply chain financing, the success of SME financing depends directly on the credit level of the core enterprises who provide the credit guarantees. This pivotal position allows core enterprises to add additional conditions while authorizing credit guarantees, such as requiring the SME to pay for goods in advance, delay the settlement or other actions.

SMEs are often forced to accept loans because they are in urgent need for loan financing, which creates an unfavorable situation where large enterprises have a strong lever in the supply chain while the SMEs have to bear the disadvantage of higher financing costs.

With the intervention of blockchain, SMEs will be on a relatively equal base with larger enterprises; in addition, financing institutions can directly evaluate the operational conditions and default risks of SMEs through data on the chain, without relying on large enterprises to provide third-party credit guarantees.

• Verifying invoices and business transactions. In supply chain finance operations, due to the defects in traditional business document management, violations of business ethics and regulatory compliance, such as bill forgery, multiple sales on one invoice, etc. occur from time to time. SMEs with smaller staffs, nontransparent financial information and low credit levels are more prone to error or security breach and limited supply network transparency. Therefore, when an SME applies for loans, banks distrust SME invoices as evidence, as the authenticity of the transaction is difficult to verify. To avoid the additional cost of review, financing institutions tend to be reluctant to lend to SMEs and/or offer higher cost rates of interest.

Blockchain is among the most feasible solutions to verify invoices. Since most invoices have unique identification numbers, with immutability of blockchain, one-to-one correspondence between invoice and identification numbers will be fully publicly available data.

Looking to the not-so-distant future, DeFi systems, if enabled with NFT (non-fungible token) based currency, can not only confirm the ownership, but also facilitate tracking. Additionally, the transaction of various NFT assets can be the basis for subdivided financial market markets accelerating the leveling of the competitive landscape.

For example, the consumers of a product can invest in a token backed up by a portfolio of the Consumer Goods company’s invoices and inventory. They can increase their investment further by using a bond token as collateral in DeFi lending protocols to obtain more liquidity. Additionally, the Consumer Goods company’s suppliers will have more efficient ways to obtain funding and optimize cash flow.

Zoe Zou is an engagement manager at Tata Consulting Services Limited (TCS).

While financing is a core leverage in any economy operation, it has traditionally been a quiet strategic lever. Financing accelerates economic growth. Leveraging financing options enables companies to fund operations faster, optimize cash flow and create more value from operations. Déjà vu: It is the best of times; it is the worst of times. Money supply is skyrocketing; but the actual economy is waning. On one side, the capital market is facing "asset shortages" and considerable funds cannot find suitable asset targets; on the other side, small and medium-sized enterprises SMEs are still struggling with "fund shortages” — facing difficulties in financing, expensive loans and slow processes. Without sufficient supporting documentation, financing is an impossible dream. How to provide more legitimate data and efficient processing of the data to support the lending process is fast becoming a major challenge to supply chain finance.

The emergence of cryptocurrencies is on the verge of revolution with the potential to transform the current financial system to more transparency, efficiency, accessibility and equity. DeFi (decentralized finance) may be the perfect lever to effect the transformation. DeFi is poised to transform the financial system to operate as if the system is without banks and without a middleman to execute supply network ecosystem business transactions. DeFi uses smart contracts or computer code, such as Blockchain (Ethereum), that securely automates the process.

Code Is Law

DeFi isn't owned by any single person or entity, it is governed and operated by secure code.

DeFi offers decentralized financial instruments without relying on traditional intermediaries such as brokerages, exchanges or banks. Instead, it uses smart contracts leveraging blockchain technology (blockchain technology is “crossing the chasm” of technology adoption).

Unlike traditional financial transactions, DeFi all transactions are electronically secure, auditable and fully transparent.

For example, lending transactions in DeFi ensures the borrower provides collateral for the loan and the lender earns interest. The transactions are all recorded on a public edger that everyone can see.

Different from traditional business trades where all parties have their own ledgers and internal databases for recording the transactions, blockchain processes and maintains all of the transaction data in an open way that anybody can track the progress of that trade.

In the world of DeFi, this ledger is called a “smart contract,” and blockchain technology supports a network of computers built to record transactions and distribute by cryptography, so that each transaction is secured, verified and forever traceable. Every computer on that network has an identical copy of that ledger, so that all of the data is fully transparent.

Many loan agreements are opaque by design. Moving fundamental debt protocols to blockchain could provide many efficiency gains, including open access to information, transparency and programmability.

Everyone can access the blockchain-based lending services because all protocols created on blockchain are transparent.

The Smart Contract is a decentralized protocol, which means that anyone can use their development tools and smart contracts to initiate, underwrite, issue and manage loan agreements without the need for a specific central third party.

Blockchain-Based Supply Chain Financing

Almost every enterprise is in a chain of upstream and downstream relationships, purchasing from upstream and selling to downstream. All important business data is derived from this chain. If these data can be fully displayed and analyzed, the enterprise evaluation will be more accurate, which is essential in supply chain financing.

For blockchain-based supply chain financing, the principle is to leverage distributed accounting to allow more ecosystem nodes to participate and contribute the data to achieve more point-to-point interaction. Because all data on the blockchain is verified and traceable, it’s becoming an important asset in capital circulation. The following scenarios explain the benefits:

• Reducing the burden on core enterprises. Core enterprises no longer need to verify each transaction for the role of loan guarantee, but only contribute transaction data with upstream and downstream to participate in the value chain.
• Improving finance efficiency for SMEs. Building a DeFi platform allows multiple nodes to contribute data and interact quickly to achieve rapid financing. With fast entry, process efficiency and interaction, SMEs can achieve accelerated, almost immediate financing.
• Syncing data throughout the chain. By sharing data to the chain, the transaction data of SMEs can be accessed by the financing institutions in an open and authentic way without any third-party auditing agency as a guarantee. Therefore, the SME data isolation dilemma will be fundamentally resolved.
• Eliminating dependence on credit authorization. In supply chain financing, the success of SME financing depends directly on the credit level of the core enterprises who provide the credit guarantees. This pivotal position allows core enterprises to add additional conditions while authorizing credit guarantees, such as requiring the SME to pay for goods in advance, delay the settlement or other actions.

SMEs are often forced to accept loans because they are in urgent need for loan financing, which creates an unfavorable situation where large enterprises have a strong lever in the supply chain while the SMEs have to bear the disadvantage of higher financing costs.

With the intervention of blockchain, SMEs will be on a relatively equal base with larger enterprises; in addition, financing institutions can directly evaluate the operational conditions and default risks of SMEs through data on the chain, without relying on large enterprises to provide third-party credit guarantees.

• Verifying invoices and business transactions. In supply chain finance operations, due to the defects in traditional business document management, violations of business ethics and regulatory compliance, such as bill forgery, multiple sales on one invoice, etc. occur from time to time. SMEs with smaller staffs, nontransparent financial information and low credit levels are more prone to error or security breach and limited supply network transparency. Therefore, when an SME applies for loans, banks distrust SME invoices as evidence, as the authenticity of the transaction is difficult to verify. To avoid the additional cost of review, financing institutions tend to be reluctant to lend to SMEs and/or offer higher cost rates of interest.

Blockchain is among the most feasible solutions to verify invoices. Since most invoices have unique identification numbers, with immutability of blockchain, one-to-one correspondence between invoice and identification numbers will be fully publicly available data.

Looking to the not-so-distant future, DeFi systems, if enabled with NFT (non-fungible token) based currency, can not only confirm the ownership, but also facilitate tracking. Additionally, the transaction of various NFT assets can be the basis for subdivided financial market markets accelerating the leveling of the competitive landscape.

For example, the consumers of a product can invest in a token backed up by a portfolio of the Consumer Goods company’s invoices and inventory. They can increase their investment further by using a bond token as collateral in DeFi lending protocols to obtain more liquidity. Additionally, the Consumer Goods company’s suppliers will have more efficient ways to obtain funding and optimize cash flow.

Zoe Zou is an engagement manager at Tata Consulting Services Limited (TCS).