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DESCRIPTION OF BUSINESS

EXECUTIVE SUMMARY

It is believed that there is significant unmet trade financing demand affecting mainly Small and Medium Scale Enterprises (SMEs). At the same time, in the Decentralized Finance (DeFi) sphere, liquidity providers demand stable yield opportunities. Defactor is a gateway to bridge these two ends and introduce Real-World Assets (RWA) to DeFi.

As the name suggests, Defactor stands for Decentralized Factoring. The Defactor Platform offers an opportunity for Real-World Asset Originators (RWAOs) to obtain collateralized funding via DeFi liquidity pools. Its solution reduces barriers to entry for RWAOs by providing the required funding infrastructure and provides investors with transparency and governance over the assets being traded. The platform is supported by an ecosystem of partners providing various value-added services.

At present, the Project is onboarding RWAOs to its experimental gateway to DeFi, the Springpad.

The platform’s native ERC-20 token, $FACTR provides several utilities: governance, incentivization, staking, and network access. The FACTR token will be repurchased in the future using platform revenue and redistributed to incentivize positive actions (buyback-and-make).

The team has vast experience in international trade, supply chains and technology. Specifically, the team has already gained experience in RWA financing on DeFi via Centrifuge’s Tinlake platform. A wider group of ecosystem participants facilitates the team.

The Project aims to achieve decentralization or majority community governance in Phase 3 of its roadmap, planned for 2023 and beyond.

Our researchers gave Defactor a final rating of 51.00%. The breakdown of this rating is available at the end of this report.

 

PRODUCT & COMPANY DESCRIPTION

Defactor is a platform that allows traditional businesses (Real World Asset Originators – RWAOs) to access financing in DeFi liquidity pools. RWAOs are businesses, asset managers and any legal entity with real-world assets they want to use as collateral to obtain funding. The platform consists of different modules for asset onboarding, risk scoring and governance, compliance, collateral, and fund management. A host of ecosystem services will be available to facilitate and offer value to participants of the Defactor platform. The project will conduct pilot funding projects via its Springpad. RWAOs will be subject to Know Your Customer (KYC), Anti-Money Laundering (AML), and due diligence processes similar to Traditional Finance (TradFi). Only the users that pass the verification process could participate in the platform, and the verification documentation will be available to the network as zero-knowledge proofs.

Defactor connects to DeFi Liquidity Pools (LPs) via Centrifuge, another RWA digitalization service. The native token of Defactor, $FACTR, is native to Ethereum. Assets provided as collateral by RWAOs will be tokenized on the Defactor platform as Non-Fungible Tokens (NFTs) on Ethereum or Centrifuge’s Altair chain for NFTs to be funded via Centrifuge.

Defactor Platform

Defactor Platform. Source: Defactor Whitepaper

 

The platform’s asset rollout strategy consists of four stages:

Defactor assets rollout strategies

 

The Defactor platform tries to improve a particular area in the Decentralized Finance (DeFi) ecosystem. It aims to bridge the gap between traditional finance (TradFi) and DeFi. Firstly, it offers TradFi players (especially SMEs) an alternative source of funding on the back of tokenized Real-World Assets (RWAs). In simple terms, it aims to provide crypto access to non-crypto players. 

Secondly, the platform opens up an entirely new market segment for DeFi participants to deploy capital in a tokenized RWA yield market.

Other efforts in the market are also aimed at delivering similar benefits to the ecosystem.

Defactor addresses a market demand in the real world where businesses have faced difficulties sourcing funding in the traditional finance industry. SMEs are specifically looking for alternatives since they are most of the time relatively unable to access banking solutions when compared to their larger counterparts. On the other hand, the DeFi market has also shown early interest in tapping the RWA market. Bringing real-world assets to DeFi has its hurdles, and so far, we have not seen rapid growth in this regard. Interestingly, there seems to be a lack of infrastructure and expertise available to real-world businesses to access DeFi. Hence, Defactor’s solution offers a value proposition to businesses as well as DeFi.

The Defactor team has great specific knowledge and experience in the areas of focus of the project—another critical contributor to success.

However, the Defactor gateway/platform (the core product) is currently at a conceptual level and under development. Recently completing the FACTR token offering, the team now aims to move on to creating the platform and its ecosystem. At this stage, its Springpad, a test gateway, is live and companies can register through the website to be assessed to be included in the program. The project is an early experimental participant in ConsolFreight, a specialist in providing liquidity to the logistics industry and to international commerce.

The project has not published any scientific papers or had any patents assigned to them.

 

SUCCESS FACTORS

Based on our understanding, there are several possible success factors for the project. These factors are:

  • Large addressable market.
  • An experienced team in the market segment they are catering to. The project has also appointed an advisory board with diverse experience and qualifications.
  • Backed by a group of investors and a variety of partners.

 

MARKET CONDITIONS AND COMPETITION

Market Conditions

The financial industry is large and growing. The COVID-19 pandemic has had a significant impact on it, however. A forum discussion in MakerDAO provides an in-depth analysis of these market dynamics and recent trends. A link to it can be found here.

The overall DeFi market has simultaneously also been growing. Across all networks, the Total Value Locked (TVL)in these protocols has reached $275.96 billion (as of 03 December 2021). The total outstanding debt on the Ethereum network is currently $24.46 billion (03 December 2021). MakerDAO dominates the protocols with $9.2 billion in debt outstanding.

Interestingly, MakerDAO has already supported adding new vault types that allow RWAOs to tap into DeFi liquidity. AAVE also introduced AAVE Arc, an isolated Aave market and a sandbox environment for institutions to experience the power of DeFi. Centrifuge’s RWA market is currently live on the Kovan Testnet and will be launched soon on AAVE. More about this here.

Maple Finance launched an on-chain vehicle for Alameda Research to syndicate loans directly from accredited investors in another recent development.

Compared to the overall DeFi market and lending segment, the RWA is a small segment, as depicted in the statistics in Centrifuge Tinlake, the DeFi protocol and marketplace for real-world asset pools. The total value locked in Tinlake is ~$45.65 million (as of 03 December 2021). The table below shows MakerDAO statistics about Real-World Assets (RWAs).

Defactor Real world Assets

However, a potential market trend reversion could slow down these growth trends.

 

Competition

There aren’t many competitors offering to bridge traditional finance to DeFi. We note that Maple Finance is considered an institutional capital marketplace powered by blockchain technology. A salient feature of Maple Finance is that the platform lends to crypto native firms (does not involve RWAs). The TVL on Maple Finance is $442 million (03 December 2021).

Other competitors are mainly Centrifuge and AllianceBlock. LABS Group is in real estate tokenization to provide access to DeFi (Defactor will also venture into real estate later in its roadmap).

There are also larger lending businesses or CeFi like BlockFi, Genesis, and Celsius.

There have been several efforts in the enterprise blockchain space to facilitate real-world assets via blockchains. TradeIX is building the Marcopolo Network, a distributed trade finance platform utilizing the enterprise DLT platform Corda. We Trade is also an enterprise-grade blockchain-enabled trade finance platform.

 

How is the project different from its competitors?

The project does not have significant differentiating factors in comparison to other offers in the market.

TECHNOLOGY REVIEW

Product

Defactor is a platform to bring real-world assets to DeFi. These real-world assets could range from invoices (factoring), real estate, digital assets, NFTs, luxury goods, and even loans. Defactor plans to bring these assets over four different phases.

How does Defactor work?

How Defactor Works. Source: Defactor Deck

 

Presently, there is no publicly available open-source code for the Project. However, on Telegram, the tech lead of Defactor confirmed that the team plans on opening up the platform to a broader community as they want additional partners/service providers to build on top of what they deliver.

It is believed that the Project will have many centralized points in the ecosystem. This is a requisite since institutions might be required to meet certain regulatory and operational aspects.

At present, there is no functioning minimum viable product for Defactor. As per the project roadmap, one of the early products to go live is the Springpad, the SME platform developed by Defactor. At present, the project is onboarding early Asset Originators for Springpad.

The Springpad offers a test venue for SMEs to test DeFi. The Springpad could also serve as a sandbox to test new asset classes to obtain liquidity. We understand that the project tech team is currently developing the Defactor platform, the core product.

 

Blockchain

The Defactor platform is a suite of connectors to both on-chain and off-chain resources.

There are two ways in which the platform relies on the blockchain: Firstly, the platform’s ecosystem token is an Ethereum based ERC-20 token. Secondly, assets in platform pools will be tokenized as NFTs. Initially, such NFTs will be minted on Ethereum as well. Certain assets that are funded via Centrifuge will be minted on the Centrifuge Altair chain.

At early stages for the project, Ethereum is appropriate as a blockchain solution. However, Ethereum is known for its higher transaction costs and its scalability issues. Defactor is utilizing Ethereum’s blockchain and Centrifuge at this stage. Although these selections are considered sufficient for the time being, there could be bottlenecks at scale.

Other non-blockchain elements in the platform could be scalable since they involve a “traditional” tech stack. Such modules do not need a blockchain and may not involve blockchain technology at all.

 

Security Audits

So far, the project hasn’t been audited. However, its whitepaper discusses that, to ensure the security and safety of its platform users, the Defactor team will hire an external independent team to perform a comprehensive security audit before launch. We also did not find any audit for Blockwell, a partner to Defactor that created the FACTR token, governance system, provides crypto APIs, dApp experiences and powers its wallet page.

 

ROADMAP

The project has listed a detailed roadmap (grouped in phases with yearly timelines). The roadmap details planned milestones under three phases; the first in 2021, the second phase in 2022, and the third in 2023 and beyond.

Defactor Product Roadmap

Defactor Product Roadmap. Source: Defactor Deck

TEAM

The Defactor team consists of entrepreneurs and professionals who have gathered vast experience in international trade, supply chains, and logistics. The Commercial Lead and Operations Lead at Defactor are also the Founder and Chief Strategy Officer at Consol Freight. Both of them had previously conducted RWA financing via Centrifuge.

Ernesto Vila, Co-founder and Commercial Lead, is an experienced founder with a demonstrated history of working in the Global Logistics industry. He led Double Ace Cargo, Inc. for close to 20 years. Ernesto founded Xmovo Group, Inc and Consol Freight. In addition, he has served as a board member for several entities.

Bhairav Patel functions as the Technology Lead at Defactor. He has worked in IT for over 20 years, starting as a consultant at one of the big four auditing firms. Bhairav acted as the CTO for PayMe and Chilindo.com and was the Information Technology Advisor for several firms. He obtained his Laws degree from the London School of Economics.

Alejandro Gutierrez, Operations Lead, has extensive experience in Supply Chain Management and Finance. Alejandro is also the Chief Strategy Officer at Consol Freight. He holds a Master’s in Logistics and Transport Management from the University of Sydney.

 

Advisors

Interestingly, the project has listed eight advisors representing several different vital aspects of the business. The advisors have relevant experience in their respective areas of expertise. Three outstanding advisors for the team are:

Brian Elders, Finance Advisor, is the founder of SORS Digital Assets and a partner at Black Manta Capital Partners. Brian has advised many blockchain projects, e.g., Modex Tech, KYC-Chain, SelfKey Foundation.

Martin Quensel advises Defactor on Blockchain and DeFi aspects. Martin has co-founded several startups after spending time in the corporate world. Currently, he is the Co-founder and MD at Centrifuge.

Adam Bouktila, Blockchain/NFT Advisor, works for Europechain as Enterprise Sales Lead. Adam co-founded dMerch, a business accessing the NFT market. He is also the CMO at Defina.Finance and Sales Director/NFT Lead at EOS Dublin. He graduated from Maynooth University.

 

 

 

General Comments on the Team & Advisors

During our review period, we did not find evidence of team members having taken part in any previous or current illegal projects or projects that were controversial. We did not find evidence of the Advisors’ involvement in any controversial projects either.

 

LEGAL AND COMPLIANCE SPECIFICS

Jurisdiction

The project has not explicitly disclosed its corporate legal structure. The Defactor LinkedIn profile lists it as a partnership.

According to ‘the Terms and Conditions For Use of Defactor Website,’ the legal notice is issued by Lanzo Ops Services, an Irish company with its registered office at Dogpatch Labs, CHQ Building, Dublin 1, Dublin, Ireland.

The Defactor launch team plans to transfer control of the Defactor platform to a DAO Association governed by token holders.

We consider the jurisdiction of the Defactor project to be Ireland. Ireland is regarded as an investment and blockchain-friendly country.

Defactor is a grant recipient of the Graph Foundation under its Wave 3 grants. The FACTR token is launched on the Blockwell blockchain platform under its smart license agreements. The project has also obtained services from staking service providers (e.g., XPanel and MantraDAO).

 

Partnerships

Defactor has established different types of partnerships with a range of entities. Some of them include ConsoleFreight, Centrifuge, Hex Trust, Blockwell, Black Manta Capital Partners, Accelerated Payments, iHuddle, and Lendwise.

ConsoleFreight, a SaaS freight and financial technology provider, was the first strategic partner and will be one of the earliest adopters of the platform. The project will leverage its partnerships with ConsoleFreight and Accelerated Payments to finance invoices.

During the scaling phase, Defactor plans to bring real-world loans onto the platform through Lendwise and iHuddle. Centrifuge, which bridges real-world assets like invoices, real estate, and royalties to DeFi, will provide access to its technology to help connect the gap between traditional and decentralized finance. Hex Trust, Asia’s leading digital asset custodian, will be the Defactor platform’s digital custodian provider. Brian Elder, a partner at Black Manta Capital Partners, is a financial advisor to the project.

 

Legal Advisors

The project does not have any publicly appointed legal advisors. It is understood that the project’s strategic advisor, Yuen Wong, is suited to provide feedback on the project on legal and regulatory aspects, especially with his involvement with LABS Group.

 

KYC & AML

The project has issued legal notices, such as the terms of its website use and privacy policy/data protection. As per the privacy policy/data protection notice, the project complies with the obligations under the Irish Data Protection Act and EU Data Protection Directive 95/46/EC.

The Real World Asset Originators (RWAOs) will only be onboarded to the Defactor platform after completing the required traditional AML/KYC procedures. (The AML/KYC checks cover the Company, its directors, and Ultimate Beneficial Owners (UBOs). RWAOs will also be subject to Operational Due Diligence. For this purpose, the team will engage third-party providers. Once an asset pool is set up, the platform will formulate contractual terms to make terms clear to investors.

However, the Defactor Platform itself has not obtained any finance licenses or other permits. Given the nature of the services offered by the Platform, there may be regulatory requirements to register the business.

The token sales of FACTR were conducted via a Balancer Liquidity Bootstrapping Pool (BLBP) and CopperLaunch. There were no specific KYC requirements applicable in such offerings. However, under Important Disclaimers in Defactor’s Medium channel, the project advises that specific investor categories were prohibited from participation in the token offering. Prior to Balancer LBP, FACTR launched three Initial Dex Offerings (IDOs) on PolkaBridge, MantraDAO, and TrustPad.

 

Token Classification

$FACTR, an ERC-20 token, is the native token of Defactor. $FACTR is not registered with any regulatory body.

$FACTR is required to get access to the Defactor platform. Token holders will use $FACTR to coordinate the DeFi ecosystem and incentivize positive action for all ecosystem participants. The whitepaper identifies four principal utilities for the FACTR token:

  • i) Incentivize positive action
  • ii) Network access
  • iii) Staking and
  • iv) Governance.

Defactor FACTR Token principal utilities

FACTR token principal utilities. Source: Defactor

 

Revenue generated from the platform will be used to buy back FACTR tokens from exchanges & distribute them to positive actions (staking, nodes).

Defactor Token Model

FACTR Token Model. Source: Defactor Medium

Legal/Compliance Risks

Other comparable RWA offerings on MakerDAO (via Centrifuge) were available to non-US individual investors. For this purpose, investors were subject to standard legal documentation. For instance, readers may find a link to such a document here. These offerings will be made available to accredited US investors and international investors through Reg D and Reg S for private placement of the investment company act of 1933.

Defactor likely follows the same path. However, below risk may persist.

  • Defactor may face regulatory pressure if any regulator recognizes them as offering credit products that are considered securities. Recently, CeFi players BlockFi and Celcius were under pressure.

TOKEN OFFERING

The total supply of FACTR tokens is 300 million. The current circulating supply of FACTR is 17.00 million. Link to live data here.

Defactor Token Allocation

Token Allocation. Source: Defactor Medium channel

 

The project has disclosed the names of investors who took part in the private round. However, there was a lack of transparency on the token issue prices for seed and private investors.

The vesting period for the team and advisors is 36 months.

Defactor is available on Uniswap (v3) and Pancake Swap on Binance Smart Chain (BSC).

TOKENOMICS

The total token supply of $FACTR is finite. There are tokens released into circulation in the form of staking rewards. Furthermore, the allocation for ecosystem and partnerships of 14% could come to circulation in the future.

However, the management discusses a token buy-back mechanism that is expected to deflate the circulating supply.

The project has allocated 14% of the total token supply for its ecosystem and partnerships. The team plans to incentivize positive action via the token. Such actions are referrals, completing deals, and an incentive for asset originators and other ecosystem participants. The token buy-back option is also aimed at continued issuance (for the above incentive mechanisms).

FACTR tokens are not subject to any burn mechanisms. The seed and private round investors had a 12-month vesting schedule. There were concerns that specific token holder categories caused a price drop for the token.

Supply and Demand Dynamics

Token Supply

Rewards: Staking rewards consist of 25% of the total token supply. These rewards will come into circulation over time, creating inflationary pressure.

 

Token Demand

Network access fee: $FACTR will be demanded by RWAs to access the platform.

Staking: Higher staking rewards rates could attract more participants to stake more FACTR tokens. At present, ~3.8 million FACTR tokens are staked. This demand is deflationary since it could absorb tokens in circulation.

Token buy-back: Defactor is proposed to buy back FACTR tokens in the market using platform revenue. Such tokens will be clawed back into the ecosystem via continued issuance.

SOCIAL MEDIA AND VIRALITY

Defactor is active on its Twitter channel. It is followed by 16k followers.

The public Telegram channel is the most effective venue to get answers to queries regarding the project. The official Telegram channel and the announcement channels have 11.1k followers and 10.9k subscribers. The team regularly conducts Ask Me Anything (AMA) sessions with other Telegrams groups to update them on the relevance of their product.

As per a project Medium announcement, Defactor also created a token gated community called “the Factory.” This token gated community gives several privileges to the members, such as:

  • i) close access to the core team
  • ii) access to exclusive initiatives and
  • iii) an open forum.

Defactor had 51 followers on LinkedIn. The account is relatively active and has good quality and a variety of items publicly posted. We note that some of the team members and advisors have notable followings on social media, specially on LinkedIn.

Defactor’s YouTube channel is relatively early, and therefore we notice a limited number of videos and viewership.

There was no specific referral program at present. The project’s Telegram channel shows that referrals are always welcome and incentivized with tokens.

There is no ongoing bug bounty program at present.

RISKS TO THE PROJECT

  • Attractiveness to participants: DeFi market yields are very high at the moment. These high rates might discourage RWAOs. Furthermore, they may be discouraged by additional costs involved (gas costs, NFT minting costs). Similarly, DeFi investors might be reluctant to participate in this segment due to low yields. DeFi investors might not prefer centralized points in the process.
  • Regulatory hurdles: Defactor may be subject to specific regulations due to its intermediation of collateralized debt (similar to other finance businesses).
  • Token concentration with RWAOs: At full decentralization, if there is higher voting power in the hands of RWAOs, there is a possibility that they vote for favorable decisions.
  • Business risks to the platform: The Defactor business likely faces similar risks to traditional finance businesses. For example, liquidity mismatches and operational/administrative risks. The project is faced with novel risks due to its reliance on third-party blockchains like Ethereum and platforms like Centrifuge.
  • Economic model: The proposed economic model involves inflationary as well as deflationary parameters. How the project handles both inflationary and deflationary events in an effective way is important. However, achieving a right balance could be challenging.

RATINGS

Everything you see in this report is the aggregate result of an extensive research process carried out by a distributed team of researchers and crypto enthusiasts around the world. The process consists of 60 questions divided into three phases. Researchers are called to answer these questions about a project, while providing links or screenshots as evidence to support their answers. For every answer, they also provide a rating from zero to ten. The average of their ratings is detailed below. 

Our researchers gave Defactor a final rating of 51.00%.

ARS Defactor Final Ratings

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