DappCon 2023: Aligning The Crypto Funding Landscape With Revenue-Based Financing - Kiba Gateaux

Transcript

cool so I'm going to be talking today about uh Revenue based financing and how that changes the incentive mechanisms and the possibilities of what we can fund within the crypto ecosystem uh so first a little bit about me I'm a software developer uh used to do web 2 web apps and then I moved into crypto web 3 do kind of everything from Smart contracts to subgraphs to token economics um and then I also have a background in design doing design thinking service design uh systems design and that's also kind we got into crypto was very much interested in how can we take all these different very like complex systems and make it so that humans can coordinate effectively within them um and so that's why I started Deb Dow was I saw this Gap in the market where a lot of dows can't get the

finance they need to do their day-to-day operations and they're kind of forced to either sell tokens or do liquidity mining or just generally do these Equity based things which might not be in their best interest because they don't have other options and so we are focusing on Revenue based financing as this uh alternative financing option for Dows to kind of help them better execute on their missions uh so first what is revenue based financing um just show up hands has anyone anyone heard of pipe before in the fch space okay um or income share agreements that kind of boot camps do with their software developers no okay a little bit um so basically what Revenue based financing is is it's a loan um like you're typically used to but they secure the loan with your future income

and so instead of putting up some type of assets as collateral like you would with a house and a mortgage um you say you will earn 15% of all the money that I make um in order to repay back this loan that we're doing so it's very popular with SAS companies um that have these kind of subscription based models um but then also kind of income share agreements like they do with software developers and U personal loans uh so before we go into kind of like why Revenue based financing is the solution that we think is best for this kind of um financing I kind of want to go into how we ended up at Revenue based financing in the first place and so the the kind of goal that I was getting at with uh Deb Dow was I was working at at this Dow called index Co-op and they

were spending millions of dollars a month on liquidity Mining and contributor incentives and kind of you guys know the deal um and it was kind of really hurting their token price and it was very inefficient to organize all these programs and then it was also um just not efficient like a financial perspective of how much they were spending versus how much they were actually earning from these products and so I kind of set out um to figure out how they could do Capital efficient borrowing um so they weren't putting up a massive amount of tokens that they would probably have to sell their tokens to get in the first place um while also making it fully Anonymous and fully trustless so the anonymous aspect is um no kyc so that they could still do it as the Dow itself they didn't have to do some type of legal wrapper um where some

kind of like Foundation or something was taken on the risk quotequote for the Dow um I wanted to be fully Crypton native and then also trustless where uh you didn't have to actually trust the Dow and it was um entirely kind of like what you do with a where you know that you can be repaid even though it is capital efficient and they're not putting up the capital up front so kind of balancing these three uh constraints where it's Capital efficient or under collateralized completely Anonymous and completely trustless uh was actually a pretty difficult problem to solve because they're all kind of competing and currently people do kind of reputation based lending uh you're in some kind of onchain credit score um but that I would not consider Anonymous or trustless you're trusting that someone's going to repay based on some kind of personal history um even if that history

is associated with an anonymous smart contract wallet or something um so another way to frame this is how can Dows effectively and sustainably finance their operations U while remaining autonomous and Crypton native so allowing the Dow to remain a DA and not create all these other legal structures and other kind of power structures um through offchain entities that are in charge of like executing on their behalf but making it so that the dowo is what is in the smart contracts and the Dow can control those smart contracts dally um which means you're not kind of like delegating decision making power um to other people offchain while also allowing the Dow to do what it wants to do better um by having these financing options and so what we're doing at deow is doing economic and Technical research

and development into coordination mechanisms and alternative financing to better enable Dows to finance their operations and give autonomy to them um and allow them to build things better without these perverse incentives from equity and VCS and some other things and specifically with Revenue based financing and debt financing it's a lot better for public goods infrastructure because you don't necessarily want someone to own you know the roads or the internet you want that to be completely free in public for everyone to use um equally and so without um Equity based financing then you have this alternative where public goods can now get the financing that they need while also repaying investors while also not having the protocol be captured and become uh a private good it can remain as public goods and through all this we've come up

with Crypt native credit which is essentially allowing Dows and onchain entities to take out loans and Lin of credits and any type of debt financing completely onchain um which is in contrast to things like Maple or clear pool or Goldfinch which while they do Capital formation and have their pools onchain all the lending infrastructure is offchain so you don't necessarily know where the money is going to or what they're spending the money on um you don't know what the actual business operations and the financial accounting of the companies that you're lending to necessarily are um like we saw with FTX it's a great example they were technically had these assets but they were double promising them across different lenders um and they obviously didn't know what their books really were and so Crypton native credit kind of addresses a lot of these issues that we

saw with the collapse of the bull market um a few months ago where a lot of the issues were caused by lack of lending infrastructure to more corporate entities and currently we're at the funding of the commons uh residency here in Berlin where we're exploring a lot of these ideas and partnering with a lot of other teams to explore how we can better uh Finance public goods and get them the money that they need to build you know like fully open source and trustless uh software and yeah so this is kind of like the landscape that we're looking at um that we mentioned with the kind of difficulties of doing Anonymous um trustless and capital efficient and so these are kind of like the different ways that people kind of raise money um so at the top there's technology where

you're just saying we want to build cool things together and then community on the side where it's like I want to build cool things with cool people and profitability is I want to build cool things that just make me money and then you have these three different kind of financing options that lean towards um like two of those sides there are like ways that grants or VCS can kind of be more inside the triangle but this is just for explanatory purposes and so um the main two that we'll talk about are grants where you have your focus on technology and community and not so much about profitability and VCS where you're looking at technology and how it can be profitable towards you and we'll look at how that kind of dichotomy plays out and where debt Revenue based financing fits in um so just looking at BCS um the pros

are that's usually easy money to get because there are aligned incentives um between the founder and the funders where um the uh the people that are giving you money are directly benefiting from whatever you're getting and you're also benefiting from the same thing because you have this Equity structure and everyone's on the cap table um it's really good for getting clout and like social signaling because now you can say they raise from these investors and they also give you support um from services like hiring to security audits to introductions Business Development um you guys are probably familiar um but the cons are that it's generally adverse to community and so you're going to have to profit off of someone and return the VC's money somehow and usually that comes from your users and so it kind of creates this Dynamic where you're getting money from these people but you

have to take it from this other group um but the group that you're taking money from are usually the people that you want to be the most aligned with because they're actually using your product and then you have this kind of like VC obligation where a lot of Founders like feel the need to wake up every day and like provide shareholder value which is generally not what anyone wakes up and wants to do with their life but people feel obligated to do it because they've not taken this money and uh they have a literal like legal obligation and then the con is that you just have to go through the fundraising process like always which whether it's species or grants or Revenue based financing um you always have to do and then the issue with this BC model is that they all have the same operating

principles where they are trying to get like 100x growth and that means they have to invest in specific things and everyone kind of treats everything like a software a startup where they expect um very low cost of acquisition and that you can scale super fast and that if you just pump enough money in then you'll take over the market and then you'll have a monopoly and then you can like exit to someone uh but that only works with specific models and specific business models and um financial and operational models and so when you pigeon hole the financing of these projects you also um pigeon hole like the actual things that can be built and so this is also John from uh cabin da and he has a bunch of great tweets I recommend following um and this kind of like leads to the theory of the greater fool where

everyone knows who what everyone else's investment strategy is and they just try to get in early and then try to exit from these later groups in their financing rounds so um Aptos for example I don't know has anyone ever used Aptos before no one no okay well it's a billion dollar project yeah and no one's using it so like why is it worth a billion dollars and that's generally because the VCS know that if they get in early then eventually someone else and if they like meme it enough and they make it popular enough they can exit to someone whether that's other VCS or to retail liquidity on centralized exchanges or what have you um and this isn't just a web 3 problem it's also a web 2 problem with wework no one knows why wework was worth whatever 4050 billion um but soft bank is the one that

kind of like took the hit on that because all the other investors kind of got to exit through the softt banks Vision fund um investing in them and so these are just some examples of the perverse incentives that only having BC funding um creates within through the crypto ecosystem and generally startups uh so now looking at Grants programs um in contrast to VCS we're going to skip ponies because they're just obviously bad um but grants like the pros is that it's free money uh you can just get the money you can build whatever you want to sometimes people don't build it that's one of the cons is that there's no real um accountability with grants programs except that maybe you won't get grants in the future but at that point you've already gotten the money so what's the point um and then usually it really aligns the community

with the values that they're trying to create um so with VCS where it's all driven by profit with grants programs they're very often funding things that both VCS wouldn't fund but also that the community just inherently wants regardless of whether or not they think it's going to make the money in the future um so let's take like ra by a um where they're funding these events that they just enjoy um and yeah Community tooling all that kind of thing and also this goes to public goods funding where a lot of projects just want things to exist within the ecos system and they don't care whether or not they make a profit off of this specific thing because they know it's going to benefit the whole and grow the whole pie um which VCS also generally aren't trying to do that if they are investing in

public goods it's usually in some way where they're trying to capture a market and you know doing a fast fast follow fork or something where they're essentially is like a public goods but they're really doing it so that they can capture market and then still earn feeds in some way and not give it away totally for free um and the other prob grants is that it expands your ecosystem where now you have more people building on top of it um and they're more collaborative because you've given them the free money and then they're also probably part of community and so you're growing the total like base of your community and who's providing value um versus gener with VCS you come become this competitive standpoint where you see people that are your competitors and you want to beat them um but with grants it's more collaborative and the main con with

grants is that they're very bureaucratic um from both the funders and the grantees side where you have to put in a ton of time to actually apply for Grants and do the um politicking to get it approved um figure out what they actually want like the impact mrics that they're looking for to get from the grant is it developers or is it users or um whatever and then it's also very bureaucratic from the grant tour side where they have to go through all these applications now and they have to spend a ton of time and a ton of resources just to give away free money again because it's free money and they know that there's no incentive alignment so they have to do a really good job of cheer rating who they actually give the money to um to make sure that it's valuable but that's also kind of um a

failure in coordination because there is no inherent coordination within the grants model itself uh and so yeah just the meme like saving the world is always s aisan where um it's always more and more work to do good things so even though you're doing grants and it seems like it's a great thing for everyone where you're giving away money to community and they're just going to build cool stuff for you it does add in a ton of work where now you have to figure out who is are actually good actors in your community and what exact value are they providing and are people outside of your community going to provide more value and are is there a good or bad thing with giving funding to outside community members if they're not um if they're going to provide more value versus your actual community members and it just adds in a lot of

work with the grants process where you have to go through this whole thing of um evaluation and a great example of this is mikow where it was intended to be a coordination mechanism itself to fund public goods um but the main issue was that they collected all this money and like millions of dollars and then there was no incentive to actually give it away no one wanted put in the work to like sit there and evaluate all these proposals and how much money should they get and who's actually building them and are these proposals aligned with the actual goal of mow and so what you actually ended up with was ironically a coordination failure where no one actually wanted to give away all the money that they had collected um of course they did give away something things like the tornado cash um but a

lot of the money is still just sitting there um and so this is kind of an example of the failures of the grant model where it does seem like it's perfect in every way but there's kind of these hidden problems um and so then that's where Revenue based debt financing comes in where we're kind of trying to figure out this Goldilocks approach where it's not completely about profitability not completely about Community or technology but somewhere in the middle where um it might not be perfect for every use case but at least it's providing a new option in the ecosystem and so the benefits of Revenue based financing are that it's Anonymous and founder friendly um so basically how it works is because you have this provable Revenue stream that's on chain through smart contracts you no longer have to trust trust the individual um

you can just look at onchain data and then because it's going through a smart contract you know that that's going to be programmed to a specific thing so once you've Stak that smart contract and you're um controlling that Revenue stream you don't really care who the person is so long as that Revenue stream keeps going um which at that point is generally out of their hands assuming their product still keeps working um for lenders it's also great because it's non- Dent borrowing the main thing for uh money markets at the moment like a and compound is that it's either people that are getting leverage on their existing assets and trying to get more and more um leverage essentially to buy more volatile tokens and then Rec collateralizing those to buy more um or they're using them as they actually want to be liquidated because it's more

Capital efficient to get liquidated through this thing versus actually selling the tokens firsthand um and so Revenue based financing has these non degenerate borrowing incent uh use cases where you're using them to like Finance your business um pay contributors pay for security audits improve your product things like that and then with Revenue based financing because the lenders only get paid when you make money and you're earning revenue from fees and whatnot they now a symbiotic relationship where um the lenders want to benefit your business whether that's giving you product feedback um giving you clients giving you just uh General support and help because they only get repaid when you earn fees there's no kind of like liquidation process based on assets or there's nothing to really collateralize except unless they improve so it creates this really nice incentive mechanism

where the lenders are working in your benefit even after they've already lent you the money and then uh lending gives you uncorrelated returns to the crypto market so instead of being exposed to asset prices um you can still stay within the crypto ecosystem um but then earn a real yield from these lending operations which are two generally better Dows that have uh sustainable operations and profit models and um you don't have to be exposed to the Token price while still benefiting from their success and then it also just gives you operational liquidity um versus uh VCS and grants where it's very ad hoc and you don't necessarily know how much money you're going to get or when um with the L of credit and revenue based financing you know that you can sustainably um and reliably get the money that you need to do your

day-to-day operations and then the cons of R based financing are mainly that you need to already be successful to some extent you need to have product waret fit so where grants and BCS are very useful is that where you don't need necessarily need to have success yet in order to get their money um and then that's good because you can then prove your success and do higher rounds or get more money later on um but then they have all the issues that we just discussed and with Revenue based financing you get all these benefits but the other side is that you need to already have some success metrics that you can show to people um and then the cons versus grants is that you also have that debt obligation now that you have to repay um same with like the kind of the VC obligation except I

feel like it's it's less personal like when you have debt it just feels like you have to pay the Thing versus BC's uh it feels like you have this personal obligation because you're the founder and then uh Revenue based financing takes a lot more accounting work because you have to prove your finances and that you are profitable and that you're a business that should be lent to and then it also takes more work from the actual financial reporting of accounting for that debt and the interest that you're paying and all those things to your existing investors and then you still have to do the whole fundraising process of figuring out who's going to lend you money and go through that whole thing um so examples of some um Revenue based financing that we've done so far so we partnered with medic cartel to help them Finance their events

organization that they're running so mcon that's in Denver medicamp that's in Costa Rica medifest that was just last month in um in Croatia they were all financed through a line of credit that they used on debt Dow and they repay their loans from the ticket sales and sponsorship sales that they had and so this is really great for event organizers because a lot of times the personal um event organizers are putting up their credit cards or their uh own obligations because they don't have the money up front from sponsors and so the line of credit is very useful because it allows them to have the financing that they need to put down money on the venue or um pay for vendors and things like that up front and kind of secure their event and then they can more easily um go to sponsors and speakers and kind of

organize the rest of it and so we found a very good model with uh Community back credit and and letting uh Dow's members lend to the Dow itself and then they also get these kind of like Mutual beneficial um rewards where because I've lent to the Dow I'm now this kind of more premium member because I'm also like have some risk in the game of the success of the Dow and I can get special perks because of that or just show that I'm like this extra supporter versus other people and then we're looking at how lending and revenue based financing can fit into the grant stack um with gatecoin and funding the Commons and all these other public goods organizations so kind of right now the problem with gitcoin is that you can get grants money but eventually they cut you off after a

certain amount and then that means that the only way that you can get financing is then just going to VCS um which has a very perverse incentive where the community is putting in all the work and taking all the risk to make your product like usable and actually testing it and also giving you the grant money to sustain yourself but then you just turn around you go to VCS and VCS get all the upside um because there's no way for the community to do that and so doing this whole um changing like the model from grants to lending and then uh the funders can then regant based off of the interest that they earn from loans and then the founders can also then just exit to community because they don't have any Equity obligations and so they can actually give away the public goods or whatever that they're making back to

the community after it's been built and so this is all to say that Revenue base financing is regenerative financing um both from like a human perspective of the relationships that it creates and then also from the financial model and how it fits into the defi stack and how we fund protocols um it's really looking at how we create more sustainable relationships and financing models and business models and everything like that um where we're doing more slow growth and long growth and not just doing like 0 to 100 and trying to like exit as soon as we can and this is generally just how we're looking at the solutions that we're creating uh we want to do D5 Primitives so we've invented the spigot um contract that I'll get into where focused on ungovern and uh Revenue as a first class citizen so we're not looking at assets

at all um we're looking purely at who is paying paying you fees um from a user perspective and not sending out loans against some volatile crypto and making everything as trustless and automated as possible and anti fragile um I'll just SK ahead because I'm a little bit out of time so uh this is the spigot contract that we use it's a paraphrase of it but basically this allows us to actually do the revenue based financing on chain fully trustless um and we do that by allowing you to stake a smart contract to the spigot um which then controls the whole cash flow for you and so you can set a split between how much you get and how much your lender gets and then either of you can claim the revenue and that automatically goes to repaying your debt and this is what makes it trustless is

because it's all smart contract based and we know that the fees are flowing from your smart contract so we don't need to trust you as an individual to repay your loan we know that the smart contract will do it for us and then this is just kind of like a systems overview of how um all our contracts work together so you have your smart contracts you've stti them into our spigot and then the spigot repays our line of credit um which the lender and the borrower are interacting between cool Question Time Q&A yeah thank you so much Kaa who has questions after this talk hi thank you for your presentation

so I have a couple of question the first one is about I've SE that you brought some use cases of native web 3 companies that get a line of credit by you and um are you planning to implement any sort of um on boarding some company which are not web3 native or that might not have part of all all of the revenues on the Chain so that basically you won't be able to see them or and the second question is about regulatory so what do you planning uh because for a regulator this can be seen like a bank right yeah thanks um so with the first question like offchain entities uh we have been talking to some offchain entities because they actually find it useful that we are doing this everything on chain um so we've talked to some um kind of like taxi companies in Pakistan to

some Diamond sellers in New York like a lot of people that are unbanked essentially that still find Value in this model um because they don't have access to normal Financial Services essentially um and it's important to note that our line of credit contract is modular so you can do fully unsecured loans if you wanted to or you can do Revenue based or you could also do asset based theoretically um so it's very mix and match and you can Define the terms that you want to borrow lend against and then in terms of regulatory stuff so we are not actually doing the lending at DEA we just build the infrastructure and we have a credit Marketplace so anyone can propose lending terms to you so you define what you want like I want to borrow for 60 days or 90 days or whatever and then other people will

offer you the amounts and the interest rates that they're willing to give you okay so you're like offering a peer-to-peer Marketplace rather than uh the actual financing yeah we're just the infrastructure we're not the bank yeah cool thanks all right we still have a Time time for one or two short questions yeah so thanks for talk um quick question because you mentioned a little bit right the project has to be somewhat late in the stage to be able to to do it right um should have some Revenue Etc what what kind of you know levels are you you looking for in terms of Revenue and its relationship to the loan size are there like any metrics

that you defined yeah so again we're a Marketplace so we don't neily Define those it's up to the lenders if they're comfortable um the main thing would just be history and consistency so if you just have one month of whatever a million dollars of Revenue but you didn't make any money before that and we don't know if you're going to make that amount again afterwards that's obviously consideration versus if you have like a very small amount of Revenue but it's consistent over many months that obviously changes the equation um and then because people can offer you terms um multiple lenders can offer you different amounts at different interest rates so someone might say that uh you want to borrow for like 90 days let's say and someone would say okay I'll lend you $100,000 but it's going to be 20% interest and then someone else might say

I'll only lend you 20 uh $10,000 let's say but it'll be at 5% interest and then you as a borrower get to decide which one you want to take so it could be a larger amount with higher interest or a lower amount with lower interest got it got it so it's still up to the up to the lender basically to decide right cuz I can come onto the platform saying okay I earn like $1 every month yeah and then maybe there is someone who is willing to give me a million bucks right okay okay thanks so much this is all the time we had questions in this session so thank you kba once more