Executive Summary: Strongly Positive on Sweetbridge as a Crypto-asset Based Lender
Sweetbridge is developing a blockchain-based lending service and liquidity provisioning platform proposing, initially, to use cryptocurrency as collateral for asset-backed loans. In subsequent stages, Sweetbridge’s borrowing mechanism will evolve to incorporate a far wider range of “real world” collateral. Sweetbridge’s ultimate ambition is to collateralize virtually every asset from the traditional economy, and specifically global supply chains. Developing the knowledge and the algorithms to incorporate every asset of global supply chains—from a factory to a ship and from inventory to accounts receivable—will potentially allow borrowing against as much as $50 trillion in locked-up capital, in the process reducing costs across both supply chains and the economies they serve.
Sweetbridge’s ambitions to transform global supply chains are not limited to merely increasing liquidity. Rather, subsequent stages of the Sweetbridge project call for the inclusion of both trade and billing settlement within the system, the incorporation of an accounting layer, and eventually resource optimization facilities. As envisioned, these additional layers will reduce costs of capital as billing cycles are shortened, and increase efficiency and reduce risk within supply chains. Realistically, however, each of these stages is fraught with profound challenges. We are sceptical of timely, material advances into these subsequent stages in a manner that would be relevant to the outlook and expectations of ICO participants. As such, while we describe these latter stages, we effectively ignore them in terms of discussing the ICO and the prospects it offers Sweetbridge supporters operating on a medium-term time frame.
Despite bracketing off the latter stages of the Sweetbridge program in analyzing the Sweetbridge ICO, we nevertheless consider the project to be a strong, innovative, and highly promising one. The Sweetbridge project has numerous compelling features: the leadership of a highly experienced industry team that has assembled around it an array of competent partners and supporters, a novel token design that includes the creation of a stablecoin that promises to be highly liquid, an innovative token sale process, an ambitious long-term outlook that promises meaningful real-world impacts even if only a portion of those ambitions are realized, and a thoughtful token design that should see the Sweetbridge (SWC) token rise in value proportionally to the growth of the network. The combined effect is to make Sweetbridge, merely on the basis of the earliest stages of liquidity provisioning, a compelling project, ICO, and token, and one with a high likelihood of finding considerable success and making meaningful real-world impacts. Whatever accomplishments are ultimately achieved in subsequent stages are best thought of as long-term bonuses to the success the stand-alone lending platform should enjoy.
Sweetbridge: Cryptoasset-based Lending as a Pathway to a Supply Chain Transformation
Fundamentally, Sweetbridge is a blockchain-based lending service and liquidity provider proposing to use cryptocurrency as collateral for asset-backed loans. These loans, guided by algorithms establishing borrowing limits based upon the volatility of the specific underlying assets and governed by smart contracts, will be considerably less-expensive and provide greater liquidity than similar services offered by other lenders—to the extent lenders willing to loan against crypto holdings can even be found. Sweetbridge further argues that its blockchain-based system is more secure and poses less risk to lenders than traditional funding sources. The SWC Token, available in the upcoming token sale, allows holders to receive lower fees on loans and currency conversions within the platform.
Intriguingly, while Sweetbridge’s cryptocurrency-as-collateral liquidity provisioning project offers an affordable and highly useful application of blockchain technology that will be immediately useful to a range of investors, its long-term impacts promise to be of far greater significance. This is because Sweetbridge’s lending and liquidity services themselves represent merely the initial component of a multi-tiered vision of a wholesale transformation of global supply chains. This ambition projects the expansion from crypto lending to the development of Sweetbridge as a liquidity provider and analytical resource for the vast network of global supply chains. The intended result should lower costs and increase efficiency across the entirety of supply chains, and extend to include improvements in billing, settlement, accounting, and general resource utilization.
The overall project stack required for this ambitious effort includes five layers—liquidity, settlement, accounting, resource-sharing, and optimization—requiring significant development, and facing a number of very substantial challenges. However, Sweetbridge has a staged implementation plan intended to allow the development and refinement of the crucial collateral ratio algorithms that govern lending operations to begin in the near-term, allowing time for their parameters and functioning to be fine-tuned in parallel with the creation and deployment of core aspects of the latter stages. Given the centrality of the lending operations to the success of the subsequent stages, allowing extra time for the lending algorithms to be refined through initial operations will likely prove to be a crucial component of the network’s sustainable long-term growth.
Mechanics of the Sweetbridge Platform: Liquidity Infrastructure as the Foundation
The core of Sweetbridge’s vision is the lending function that allows owners to borrow against their own crypto assets locked into smart contracts within personal vaults. As noted, in the initial stages these assets will be exclusively cryptocurrencies. The Sweetbridge liquidity system is built around two tokens. The first, Bridgecoin (BRC), is intended to be a stable coin, pegged to a fiat currency. Lending occurs in the form of Bridgecoin, allowing easy transfer within the network or conversion to fiat.
When borrowing against pledged assets, users set a “notice limit,” representing the level at which they would automatically be informed that they were approaching or had exceeded their borrowing capacity should the price of their underlying collateral decline. Should their collateral continue to decline they would be notified by the smart contract of an approaching liquidation level, at which point their collateral would begin to be liquidated in order to bring their borrowing ratios back into line.
What is the Token: Sweetcoin
Integral to the lending operations is Sweetbridge’s second coin, the Sweetcoin (SWC), a tradeable ERC-20 token that serves multiple functions in the platform.
- Offset interest liability from using the vault: When assets are pledged into the vault, they create liabilities (Bridgecoin) that must be repaid to unlock the pledged assets. These liabilities include interest payments. Activating SWC associated with a vault (but not pledged as part of its collateral) allows the user to offset a portion of these liabilities, potentially up to 100% of interest fees, with the exact discount a function of the global amount of SWC activated by token holders. An individual vault can potentially secure interest-free loans if it contains enough activated SWC (“interest free” being a relative term that requires one to ignore the opportunity costs and whatever carrying costs are associated with holding the SWC used to set the headline Sweetbridge interest rate to 0%). The total amount of interest liabilities that can be offset across the entire system is determined by Sweetbridge (initially set at 25% according to the liquidity protocol paper, and subsequently revised to 50%), and the process for changing that limit will likely be discussed in a forthcoming governance paper.
- Increase borrowing limits on pledged collateral: Activating SWC also allows higher lending limits against pledged collateral, though the thresholds can change over time.
- Offset fees from converting Bridgecoin to fiat: Activating SWC also allows holders to exchange crypto to fiat at a lower cost, in a similar way to how activating SWC can reduce lending fees and interest rates.
- Lower fees using Settlement Bus: Activating SWC also allows use of the settlement bus for low to no fees, again in a similar manner to which activated SWC reduce lending fees, as described.
- Prioritization for lending and exchange: The Sweetbridge economy has several built-in limits governed by Sweetbridge. These include a maximum lending rate and time-bound limits on Bridgecoin to fiat trading. Holders of activated SWC will get priority when demand exceeds these limits.
- Used as collateral: SWC can be used as collateral in the asset vaults. When deposited to serve as additional capital the effect is to increase lending limits and reduce fees, as when borrowing against other cryptoassets. This is distinct from activating SWC for the benefits mentioned above.
The token design introduces real and meaningful incentives to use Sweetcoin but doesn’t require it for using the platform. It also means the value of the token should rise as usage of the system increases: more assets pledged, more outstanding liability to offset, and more fees to potentially reduce. If there is any criticism of the token design, it is only that it might be too complex for the average user to understand in aggregate, and introduces a system that is unwieldy for the team to balance over time. Sweetbridge intends to simplify the user experience through an interface that boils down the backend calculations into how much SWC will offset how much interest at any point in time. While useful in allowing users to understand what ultimate loan rates will be, this will only minimally improve a user’s understanding of the system’s functioning, and risks alienating potential users uninterested in acquiring exposure to opaque black-box systems.
The structure of the fee offsetting–as well as the other core parameters that govern the system as outlined in the appendix of the Sweetbridge Liquidity Protocol paper–gives Sweetbridge influence over core mechanics of the system, reflecting the complex and unpredictable dynamics that could feasibly unfold as the network grows. Sweetbridge does retain the authority to set things like global fee-offsetting limits, which directly influences the utility value of the SWC. This might be compared to the interest rate setting done by a central bank in the name of stabilizing the economy.
Factors to adjust for include speculation that brings the secondary market value of SWC above its underlying fee-offsetting value. While such an occurrence might make fee offsetting awkwardly expensive, potentially even undermining SWC as a usable token, this would also dictate that a smaller amount of tokens are activated to offset lending fees (as those tokens would by definition be held by speculators) in turn increasing the loan offset value of the activated tokens. This example illustrates the complex dynamics that will shape the fate of the SWC token, and even the larger Sweetbridge projet to some extent. How any changes to loan offset rates would interact with such dynamics will be worth observing carefully, The process for updating these key parameters will be very important and will likely be explained in a forthcoming governance paper.
The Token Sale Process: Thoughtful Emission that Spurs Liquidity
Sweetbridge’s total token supply consists of 100,000,000 tokens, of which 65 million will be available directly to the public through a series of crowd sale rounds extending over the life of the project. Initial public rounds, ranging from 700,000 SWC tokens available to project contributors and a further 3.9 million tokens priced between $2.40 and $2.80 available in several tiers, are projected to raise around $11 million. 15.7 million additional tokens will be sold in public rounds through June 2018 and are projected to raise a further $54 million to support the project. Finally, 44.7 million SWC will be sold at 10% below the market price over the project’s lifetime, in tiers, based upon milestones including network expansion. This mechanism for later sale rounds to be carried out only if network growth is satisfactory is a thoughtful attempt to ensure the market is not swamped with tokens from an initial state. The proceeds of these last rounds, when they occur, will fund the establishment of additional Bridgecoin-fiat pairs, bolster Bridgecoin liquidity, and support project investment, marketing, and ecosystem development.
The balance of the token supply includes 10 million SWC tokens reserved for donations to non-profits promoting sustainable economic activity, and a further 5 million reserved for Sweetbridge alliance partners, all of which will be released on a graduated basis in proportion to the growth of the SWC network. 9 million tokens will be held by Sweetbridge as a reserve, with 11 million granted to the team and advisors, of which 4.7 million will be immediately liquid with the balance distributed over time.
Also of note is that beginning with the first public sale tier, Sweetbridge will employ a novel sale mechanism intended to jumpstart and reinforce the liquidity provisioning aspect of the network. Specifically, prospective token sale contributors will initially need to use fiat to purchase Bridgecoin, at which point they can stake the Bridgecoin to reserve their place in the queue to purchase SWC, with increasing amounts of Bridgecoin required to purchase individual SWC as the rounds progress.
Valuing the SWC Token
As a token with both a fixed supply and a substantial role in acquiring discounts in the Sweetbridge ecosystem, the basic model is that the token value will increase with the growth of the network. Specifically, as a larger amount of capital looks to offset an increasing range of system fees, the use value of the token will increase. Further, as additional features of the platform expand, both the utility and an additional speculative value attached to the tokens should grow. Given that we expect the lending facility to find an enthusiastic reception, there is good reason to be optimistic on the token’s fate. That said, given a lack of specificity regarding SWC amounts required to reduce or offset different fees at different points in time, a valuation model that yielded anything other than upper and lower bounds under a variety of feature, adoption, emission, and fee scenarios would be difficult.
However, the core logic of the token value is clear: the underlying utility value for any vault rises when more assets are pledged across the system and when other SWC are deactivated. The former occurs when the platform grows. The latter should occur when the price of SWC increase and token holders decide to sell rather than activate. In addition, given Sweetbridge’s novel token sale mechanism, with additional tokens released only as a function of network growth–serving to limit circulating supply and ensuring supply growth remains proportional to the broader growth of the network, thereby supporting the token price–strong token price gains would not surprise us. Interestingly, and as Sweetbridge’s discount token white paper also illustrates, the token has been expressly designed for its use value to platform users to exceed the speculative value it might have for non-platform users. The implication is that token prices will be subject to an additional dynamic where users of the network are theoretically willing to purchase tokens at higher prices than speculators. However, the actual result could also yield unintended consequences, such as a potential scenario where speculators make more complex speculative bets not simply about correlations with crypto market growth or decline, but also on specific off-chain actions or decisions that might reverberate back upon the fundamental value actual platform users assign to the network.
Protocol Governance: Enforcing Sweetbridge Around the Globe
The governance model of Sweetbridge has yet to be released. It should reflect the global nature of Sweetbridge’s ambitions regarding crypto-based lending infrastructure, its eventual supply chain services, and its role in stabilizing the Sweetcoin economy as it grows.
The State of the Project: Timelines and Challenges
Sweetbridge’s project is an ambitious one and, unsurprisingly, has considerable work and a number of very substantial challenges ahead of it. Sweetbridge’s leadership, to their credit, is quite clear in regards to their progress and the challenges before them. Reassuringly, the initial rollout of the liquidity platform will begin shortly after the token sale, backed by a substantial Bridgecoin pool of liquidity that will emerge during the sale process as ICO contributors purchase Bridgecoin with fiat before pledging it to purchase SWC tokens. One major point of concern is tuning the algorithms governing loan reserve ratios for individual assets, as these are absolutely essential for the functioning of the network. If too high a reserve is held back—meaning Sweetbridge elects to loan against, for instance, no more than 30% of the value of an Ethereum token, or only 40% of the nominal accounts payable of an established corporation, then the actual loaned amounts and liquidity unlocked will not represent substantial improvements from existing lending structures. The opposite problem, that of too little collateral being held back could potentially expose the network itself—and in terms of a potential cascading collapse, all companies working within the system—to existential risk should assets decline synchronously and substantially in a manner that undermines the system’s integrity.
An additional difficulty is that numerous competitors offering to lend against Crypto holdings are emerging, compounding the challenge for Sweetbridge of tuning its lending algorithms and finding the sweet spot between safety and profitability. While Sweetbridge could be expected to have competitive rates against a project such as SALT, which sources its own lending collateral from outside investors who will themselves be expecting competitive returns, if SALT chooses to maintain higher lending limits against pledged assets they could end up with net lending rates that are competitive or even preferable to Sweetbridge’s cautious approach. Other crypto lending projects emerging as competitors to Sweetbridge include ETHLend, and while that appears to be a fundamentally sound project, Sweetbridge can reasonably be expected to be competitive on rates and likely superior on the basis of liquidity given its unique token structure.
Moving beyond the initial lending phase, another core challenge facing Sweetbridge is how the lending platform will interact with off-chain assets to be incorporated into the liquidity provisioning network. While this issue will not arise until Sweetbridge begins to expand beyond the initial crypto-lending phase, its centrality to subsequent steps makes it impossible to overlook as a major challenge. Considering SweetBridge’s cautious approach to lending likely offers insight into Sweetbridge’s approach to the challenge of off-chain assets as collateral. For example, Sweetbridge has a staged plan of introducing its liquidity provisioning with higher loan fees—beginning around 6% even when the company states it has modelled the system functioning with loan fees as low as 2%. This will allow Sweetbridge to tune and adjust its models, and to gradually decrease its fees as it establishes a better understanding of the market and its own systems. Likewise, while the company has stated it would like to ultimately loan as much as 60% against Ethereum holdings pledged into its vaults, the actual starting ratio will be lower, having originally been announced as 20% but since increased to 50%, providing a buffer of security while its models and algorithms develop a larger history with existing trading markets.
However, similar to the way other crypto-lenders will put pressure on Sweetbridge’s models, a competitive challenge for off-chain assets comes from existing balance sheet lenders who already offer liquidity to companies. As these lenders loan against the ensemble of assets on a balance sheets, rather than the starting point of individual forklifts and factories proposed by Sweetbridge, they will limit Sweetbridge’s ability to maintain high lending reserves against individual assets. If Sweetbridge intends to cautiously loan only 5% against any of the assets cited above–a ratio which seems potentially realistic given the low lending thresholds suggested for some of Sweetbridge’s other lending rates–potential customers may not see an advantage to moving from existing arrangements. How Sweetbridge balances a clear desire to move cautiously with a competitive marketplace will surely be fundamental to its growth. One option may be for Sweetbridge to implement a broad balance sheet lending program that fundamentally resembles existing industry arrangements, where Sweetbridge would be merely trying instead to compete on the basis of having a considerably lower cost of capital, even if such a move would be different from how the project is described an intended to function within the whitepapers.
A somewhat reassuring factor is that even if the system is ultimately unable to meaningfully advance towards the broader Sweetbridge vision of fully transforming global supply chains, we consider that the crypto-lending liquidity network has substantial value in its own rights that would adequately support the token.
A Sizable and Experienced Team
Sweetbridge is led by a sizeable and experienced team with strong backgrounds in logistics and supply chain. CEO Scott Nelson founded what became a large freight audit and payment firm, while President Mac McGary has led several supply chain startups in addition to serving as Chief Revenue Officer for a leading supply chain and visibility company. COO Glenn Jones served as CTO for several supply chain visibility companies. Micha Roon, senior smart contracts developer has trained corporate groups in the creation of Ethereum smart contracts in addition to having founded and served as CTO for data management and distributed systems startups. Finally, co-founder and CFO David Henderson has extensive supply chain experience, including having served as European controller for supply chain logistics for a leading technology company. In addition, the strong support of the Sweetbridge foundation and an extensive list of logistics, business, and blockchain advisors, suggests the company will be able to access whatever expertise will be most suitable to the inevitable challenges that will arrive.
Conclusion: Much to Like, and Considerable Potential for the Sweetbridge Ecosystem
While there a number of questions and concerns regarding Sweetbridge’s obviously ambitious project, there is much to like, whether from the standpoint of supporters of interesting and innovative blockchain-based projects or from an investment standpoint. For investors, the most obvious appeal is that even if the Sweetbridge network struggles to fulfill its range of ambitions towards the entirety of global supply chains, the obvious appeal of the basic liquidity provisioning layer of its services should strongly support the value of the Sweetcoin. If, or as, the project makes inroads into its broader and more ambitious goals for increasing liquidity and improving efficiency and resource allocation, the results should be even more significant for the network.
Although it is not difficult to be strongly supportive of Sweetbridge’s projects, the substantial challenges facing the group are not easily dismissed. One is whether the system’s collateralized lending structures will function as intended in a variety of market conditions. Another concern is whether efforts to guide against excessive risk exposure force the company to establish overly stringent lending limits that ultimately undermine efforts to increase liquidity across supply chains, ultimately limiting progress towards Sweetbridge’s largest goals. The question of how smart contracts can effectively collateralize off-chain assets such as ships or trucks that can suffer a range of fates including being sunk, damaged, stolen or lost is one that has already presented challenges to a host of different parties. Despite these concerns, however, we feel comfortable that the strong team behind Sweetbridge, including the diverse foundation looking to advance the project’s broader objectives, will manage to find workable solutions to a substantial portions of the challenges Sweetbridge faces. But even if only a portion of the project’s ambitions are fulfilled, we expect the impact upon supply chains and the companies working within them, and token holders, will be substantial. Most reassuring is that from an investor’s standpoint the appeal of the lending services, and the thresholds of network expansion governing the release of the later rounds of token are strongly reassuring that even in a scenario of relatively modest growth and expansion—and our base case scenario anticipates a much faster growth rate assuming no major technology challenges emerge—the token price should be well supported.