Project Empower – Part 4: when DeFi meets supply chain

This is the last part (of four) covering BeefLedger’s Project Empower. In this part, the focus is on the decentralised financial (DeFi) dimensions of the project, and how these are anchored by the supply chain asset track & trace capabilities of the Proof of Authority Network, and buttressed by a suite of surrounding capabilities and technological infrastructure.

Overview

We set out to tackle supply chain finance blockages to create better and more dependable supply chains that met society’s expectations and requirements by opening up financing opportunities for the community at large.

If you don’t have time to read through the detail, the summary outcome of this journey as of today is:

1. A generic ecosystem means of payment token (BEEF  – an ERC20 token tracked on Ethereum). This can be used to purchase real products (eg., beef, wine etc.), asset identification certificates (next point #2) and collateralised Digi Units (point 3 below).
2. A system of asset identification and tracking using non-fungible tokens (ERC721) to create unique and exchangeable digital assets tied to the identities of actual assets (livestock and boxed products). We call these Digital Asset Identification Certificates (DAI-Certs).
3. A Digital Unit, is a collateralised security issued under license. This Digital Unit can be listed on our Decentralised Exchange (DEX) so that it can be acquired and sold. The Digi-Unit is issued under the umbrella of a Product Disclosure Statement, which is a requirement of financial products issued under an Australian Financial Services License. This enables investment in global supply chain projects and assets, diversifying investor risk and creating diverse revenue streams. The first series of Digi Units will be part of the REGENERATION Series of projects with token ticker of RG05.

To support these instruments of value transfer, the following infrastructure has been developed:

1. A Proof of Authority Asset Tracker Network and Transactions Tracker Network, with Escrow Contract functions (coming soon);
2. A DEX powered by MetaMorph Pro, where BEEF tokens and Digi Units can be bought and sold;
3. BEEF tokens listed on Uniswap to ease of access;
4. Integration into an offchain Wallet — the MorphChat Wallet in Telegram — that enables people to instantly transfer BEEF tokens to others at zero cost. This supports an emerging vibrant ‘direct to consumer’ product channel; and
5. A Wholesale Marketplace, where BEEF tokens can be used to purchase products listed in larger quantities. Think of this as a ‘wholesale to the community’ marketplace.

Tokenised Ecosystem

We have designed a pathway for communities to participate in these supply chain finance solutions. The pieces are the BEEF Token and the Digi Unit, which are accessible via either the DEX, Uniswap or Over the Counter via the MorphChat Wallet on Telegram. This is shown in the image below.

Setting the Scene — scale and problem/opportunity

To set the scene, it’s worth remembering some key industry realities insofar as they matter to the (Australian) beef cattle and beef industry. These are:

1. The Australian beef cattle herd is presently below 25 million head, down from a peak of about 30 million. It is expected to reach 25 million by late 2021 after rebuilding on the back of improved rain conditions.
2. The Annual slaughter numbers are around 7 million head. Between 65–70% is exported each year.
3. The gross value of Australian cattle and calf production (including live cattle exports) in 2018–19 is estimated at US$8 billion.
4. Agribusiness finance (worth about US$51.3 billion in 2012/18) has been beset by controversy and problems. This has been widely and critically canvassed in the Royal Commission on the Finance Industry in Australia.
5. The majority of finance to the agriculture sector is mainstream bank debt. This is supplemented by the emergence of a secondary non-bank finance market. Our own industry research indicates that producers are paying between 11–14% on finance for livestock, taking into account interest plus various fees and charges.
6. Conventional supply chain finance is also expensive. Factoring and associated small business finance costs range from 14.95% pa to 24.95% pa.

Cost of finance is a significant impost on players within the supply chain, especially new market entrants, independent producers, innovative brand builders etc. Lumpiness of payments (eg., trade credit terms) also creates significant inefficiencies in supply chain performance and limits opportunities for businesses to grow. It also adds costs to consumers.

Optimising supply chain finance through data-driven risk mitigation, involving finance provided through decentralised infrastructure, can transform the security of food systems and align the aspirations and expectations of communities generally and the need to stabilise supply chains in essential areas such as food production and distribution.

Risks and Solutions

The problems of supply chain finance aren’t for the lack of adequate security. Mainstream banking and non-bank financing usually demands 100% security over livestock assets, not to mention mortgages over properties. The problem isn’t that there is a level of risk that you don’t find elsewhere, justifying the significantly higher levels of interest.

The reality is, the livestock and meat industry are part and parcel of what I call the ‘utility economy’.

There is little more certain in an uncertain world than the fact that people — everywhere — must eat.

There is next to zero risk that there isn’t a demand for what the livestock and meat industry produce. In fact, informed estimates point to continued growth of global demand for meat to 2050, as a result of rising middle class wealth in developing countries.

Risks sit in climate (as it impacts productivity and yield), as well as issues of mortality or degradation, and loss through theft. Loss of value also arises due to high levels of product counterfeiting, undermining brand value of legitimate authentic bands. Here’s how these issues can be better addressed through decentralised technologies and systems:

1. Climate risk is best addressed through diversified portfolios with exposure to production systems in different parts of the world. A liquid marketplace for digital securities makes this transparent and possible. Better data will inform investors of changing risk profiles of the portfolio. (Part of our ongoing roadmap is expanding integration with data feeds, such as those for climate and weather conditions.)
2. Mortality — having visibility to the asset is critical for operations managers and portfolio managers alike. New generation ear tags are emerging as critical to our ability to enhance real-time transparency on livestock whereabouts and conditions. We work with a number of innovative players in this space, such as the team from Smart Paddock.
3. Degradation — meat is a perishable. It degrades if it is not stored under proper conditions. The key measures here are temperature and oxygen exposure. We ingest temperature data from a range of sensor devices provided by a number of players in the marketplace. We are working with Australia’s national science and technology development group — Data61 — on evaluating new long-life sensor devices. We try to remain sensor agnostic, however. (Part of the ongoing roadmap is improving how data on temperature conditions is integrated into live markets, where product value can be transparently interpreted by on real-time temperature data and associated analytics.)
4. Theft / loss. Knowing where something is and who is meant to be in charge of it is key to reducing the probability of theft or loss. Livestock assets are tracked, as discussed above. Product assets are also tracked via the POA Asset Tracker network, so that the community at large has visibility on assets as they proceed through event data state updates eg. movement or transfer of custody / ownership. The Multisig or Community Attestation data validation protocols of the POA underpin information integrity. We also introduce the role of the DAI-Cert (non-fungible ERC721 token) that is minted when assets are first registered and which are transferable from one actor to another as custody moves. If a buyer is presented with goods but the seller cannot present the corresponding DAI-Cert, buyers have cause to doubt either or both the authenticity of the goods or the legitimacy of the seller.
5. Counterfeiting. Asset tracking and responsible agent tracking via the POA reduces the risk of counterfeiting behaviour. Actors optimise their immediate reward as well as grow their network reputation status by ‘doing the right thing’ and reporting those that do the ‘wrong thing’.

The last risk from a supply chain financing point of view is whether or not the product will be sold or paid for (at an appropriate price). The Escrow contract function goes towards mitigating this risk of ‘hidden information’ by ensuring transparency of payment intent. Opportunities for direct B2B and B2C sales (either via the Wholesale Marketplace or MorphChat enabled retail channels) also go towards reducing the risk of products not being sold.

Collateralisation and DeFi

On the back of this data and market infrastructure, we are able to develop financial products that reflect an improved risk profile.

The finance products in essence involve a variation on either of the following two main design themes:

1. A performance-based profit share finance product to producers / brand owners. In effect, the investor side and the producer share risk and reward. Our present finance offer (via the RG05 Digi Unit Offer) supports this kind of finance product. Draw down finance governed by Escrow smart contracts will be part of future iterations.
2. A hybrid profit share + interest offer.

Both of these are 100% secured by livestock, feed and other assets. The benefits are (a) lower costs to borrowers with (b) secure and robust returns to investors targeted. Capital growth opportunities over time (through the ‘power of compounding’) are also a focus.

Liquidity

A key part of enabling management of risks and opportunity is to provide as liquid an environment as possible. This takes two core forms:

1. Digital Asset markets (DEX). Enabling buying and selling of Digi Units is one of the main ways by which investors can participate in the marketplace, with access to an ability to enter and exit the investment on a 24/7 basis. The BeefLedger Marketplace also enables individual or groups of assets to be purchased and sold (by way of a corresponding ERC721 token).
2. Actual asset markets. The livestock market is a mature and liquid marketplace. In Australia alone, there are numerous live cattle market trading cattle of all ages and specifications on just about every working day of the week. Opportunities to trade livestock are extensive, enabling the portfolio manager to make decisions on both a short-term and longer-term perspective.

Footprint

Our project now reaches production and distribution systems on four continents:

1. Australia;
2. South Africa;
3. China; and
4. South America.

This opens us up to a potential audience of hundreds of millions of animal assets each year.

Next Steps: Fractionalisation

We are working now on designing the technical implementation for full fractionalisation of individual assets, in particular livestock, so that investors can participate directly in ownership of cattle. Regulatory issues are also being considered in this context.

The infrastructure that has been built — which we would call Version 1 ‘with room for continual improvement’ — provides a functional platform for people anywhere in the world to get involved securing food systems security and improvement. Decentralised technologies enable ordinary people to have access to solid asset classes, anchored in the foundational requirements of human societies.

Empower

People must eat. Demand for meat will increase.

At the same time, communities around the world are wanting improved ecological outcomes in how we produce food and feed the world.

We want to back those committed to systemic improvements; those that are passionate about food production systems that provide strong social outcomes, efficient resource utilisation and ecological regeneration.

DeFi tools enable us to drive these outcomes, and empower communities to get behind the changes they want to see; to support the producers they like, and fund the products that they wish to consume.

We can transform food production systems through democratised finance, replacing centralised banking cartels with supply chain financial innovations backed by decentralised data systems. That’s good for communities. Good for producers. Good for the global environment.

END