Video: SweetTalk Ep.4 — Sweetbridge Cryptoeconomics and Token Design with CoinFund
Jake Brukhman and Aleksandr Bulkin of CoinFund talk with Sweetbridge CEO Scott Nelson about how economic incentives and models are baked into tokenization strategy
Does the world need another cryptocurrency or two? If they are designed responsibly to fulfill the specific needs of economies and industries, yes. This 30+minute discussion answers questions about our two-token system of Bridgecoin, the liquidity token, and Sweetcoin, the membership token.
The Sweetbridge zero-interest blockchain loan protocol is discussed, as well as how economic utility of the tokens was a critical aspect of the design process for Scott, Aleks and other crypto, economic and legal project advisors.
For more content follow the Sweetbridge YouTube channel or keep up with @sweetbridgeinc on Twitter. Full text transcript of the conversation follows.
Podcast edition of SweetTalk Ep.4:
Full transcript of the conversation:
Scott: Okay Jake, you’re on.
Jake: So Scott, you have a unique background in the supply chain management industry, do you mind telling us a little bit about your history and how you came to work on Sweetbridge?
Scott: Not at all. I have kind of three separate backgrounds; technology, finance and supply chain and then my last business which I built over a 23-year period of time. It was a business that actually did smart contracts before smart contracts were called Smart contract, before the blockchain. So there’s not very many people that have tried to automate as many commercial contracts for the supply chain as our business did. In fact I don’t know of anyone.
Jake: And Aleks can you talk a little bit about yourself and how you’re involved with the Sweetbridge project?
Aleks: So I’m an advisor to Sweetbridge. I have been studying economic systems using blockchain now for about a year and I’m helping Sweetbridge work with a number of other parties to do the necessary research and kind of to understand the way that their economics will work. I really love doing this because I love thinking about innovations in economic and social systems.
Jake: Scott, so what is the Sweetbridge vision?
Scott: Well, it’s a big vision. And it starts by providing liquidity from assets and commerce. Most people don’t recognize how big commerce is but it’s two thirds of the global economy. That’s 54 trillion of global trade. So that’s really big and the supply chain which most people don’t really know what that means. Is really just the management of commerce if something didn’t come from nature and wasn’t created where it is, then it came to us through a supply chain. So commerce has trillions and trillions and trillions of dollars tied up inside of assets. This is warehouses, factories, planes, boats, trains, inventory, receivables, other kinds of things. And when that money is tied up in those assets, it can’t be used by the business to do things like innovate, creating products, building factories.
And so you have to wait till you get paid. Until you sell your inventory or you’d have to try to optimize the use of your asset or sell your asset to get liquidity. So there’s an opportunity with the blockchain to change all that. To completely radically change all that and to create liquidity out of the $700 trillion worth of assets that exist in the world. So there’s more than that in terms of assets, but that’s how many assets are valued. So they actually have a value currency though, money we use to buy things, there’s only $60 to $70 trillion worth of currencies. So there’s not enough currency to basically have all those assets being traded or bought or sold any given time. There’s just not enough currency in the world.
And so this creates a very interesting problem which is we have to decide do we rank more currency or which will have the problem of devaluing the asset, the currency and increasing the value of the assets. Or do we restrict that and limit the amount of currency as the number of assets grow in the world. So governments have this dilemma, what do they do with that. So most of industrial nations print additional amount of currency every year about 2%. That’s enough to keep you spending money. But the problem with that is that the growth rate of the number of assets in the world is outstripping the currency supply. And so this creates periods of illiquidity where you don’t have enough liquidity to actually conduct trade.
The blockchain provides an opportunity to change that, so we can actually create liquidity from assets by doing what was done for 5,500 years and it sounds crazy but for 5,500 years, the financial institutions of the world, the precursors to banks for example, took assets in and produced scripts of some kind or stones or some kind of symbol of the asset that people had. Until to 1850s or so, there were thousands of currencies in the United States and people don’t know this.
They were called banknotes. That’s where the name comes from and people would take their farm, the title of their farm or something and exchange that for currency that they could then trade. We can do this now again on the blockchain, we can solve some of the problems that have existed there in the past by taking assets, locking them in the blockchain, allowing people to use that as collateral. And to literally lend themselves money from the asset they lock up on the blockchain, and as long as the blockchain has the right to sell that asset, if they don’t follow through with their commitment to pay themselves back. You have basically the same systems we have in banks.
Jake: So you’re describing a $54 trillion-opportunity, can you talk a little bit about why in the current state of the world, companies aren’t able to effectively take advantage of that opportunity and why blockchain provides an avenue to do that.
Scott: Sure, well let’s talk about rice. Most of us eat rice and so it’s a really easy thing to kind of understand. So if you take a bag of rice in someplace like Nigeria and let’s say that bag of rice costs $4.25, a big bag. About 80 cents of that bag is financing cost, it’s about 20% of the cost that that bag of rice just comes from the cost of financing the supply chain because people have to have liquidity. And then the farmer probably had to sell his crop early in order to get the money to have a living with his family. Pay for fertilizer, seed, and other things that he needed in order to bring the crop in.
So he has to sell his crop at a time which isn’t advantageous to him. And this means that people that just use money as a way of making money are basically perceiving a lot of risk in this process and so they charge a lot of interest because they think there’s a lot of risk. Well the blockchain can de-risk the transactions and remove all the counterparty risk in this chain, allowing you to reduce the cost for all the parties involved. Let’s say you take that cost down to something more reasonable like 10 cents. Well at 70 cents, so that farmer now can potentially get say 35 cents more, but originally you’ve got about 50 cents in the first place and the consumer can get another 35 cent reduction in the price of the rice.
That’s what can happen in these depressed economic and situations but if you scale that up to business, you’re talking about a corporation that spends maybe $20 billion a year on their supply chain. Their suppliers have to borrow money and that money is costly to basically allow them to build their product before they get it shipped to the customer and until the customer pays them which can easily be 60 or 90 days. And those people get their product from somebody else, who gets it from somebody else and that’s known as the supply chain. Well in that chain, if you basically can take out the financing costs for people, the further that you get down the chain, the more expensive that is by the way.
What you get, is you get an ability for that organization and each of its suppliers to save 2% on average. Or if a company is making a 5% profit margin, 2% is a pretty meaningful thing. That means you go from 5% to 7%.
Jake: So from a customer experience point of view, what is the Sweetbridge product?
Scott: So we’re going to allow you to basically take assets that were on the blockchain. This starts with cryptocurrencies, but we’ll expand to things like the mortgage on your house tied to your house. Take that, put it on an app, on your phone. And manage your assets as a whole with a single line of credit that you can basically tap into. And we have an interesting cryptoeconomic system that was partly developed between Aleks and myself, that allows you to actually do that interest free.
So imagine the implications for a person. You have your car, you have your house, you have maybe a couple of credit cards, all these have different interest rates. They’ll have different payment periods. What if you put all the assets that represented that into a single application on your phone? Kind of like a Charles Schwab account or something like that. Where at any point when you needed additional money for something, you could basically set up a new loan. And you could do it interest free. So imagine what that would mean to you.
You could say well, I want to go on vacation, so I’m going to set up a loan but I want to pay myself back over the next year. Give me $10,000, so I’m going to borrow $10,000, we’re on an advertising schedule over the next year to pay myself back and you basically borrow the money from yourself on your phone in minutes, without a credit check, without anything that you have to do except with a phone. No counterparty, there’s nobody else give you this money, it’s coming from the blockchain and you take that money and then over the next 12 months, you basically make payments to basically pay it back.
What it allows you to do is to manage your assets like they are an investment which is what they are. To have one mechanism for loan, it doesn’t matter what kind of loan you’ll need to deal with one bank that deals with financing of your house and then a leasing company that deals with your car and two or three different credit card companies that deal with you different credit cards, you can have at one place. Now imagine your business, so business has receivables, they have inventory, they have buildings, they’ve got equipment. All of these things put into one app that sits on a workstation, that their CFO and treasurer can just manage and if they need more liquidity, if they automatically can get it, they don’t need to apply for it, they don’t need to go to a bank, they don’t need to make a phone call, they don’t need to do anything. They use a user interface and in literally 30 seconds to a minute it’s done.
Jake: Aleks, can you talk a little bit about the cryptoeconomics of the system that allows customers to do these interest free loans.
Aleks: Yeah, sure. I want to preface this by saying that I worked with a number of projects in the cryptoeconomic space and I see Sweetbridge as pretty much the first example of something that can really responsibly become a functional macroeconomic force using the cryptoeconomic approach with blockchain currencies. They actually … so Scott and his team are putting together a number of connections between sort of blockchain and traditional economic systems by responsibly getting a number of licenses in the MSB space, creating the right partnerships with money exchanger businesses and designing their system in the way that allows their users to realistically participate both in the blockchain economics and also transfer value out whenever they need to spend fiat money to make purchases and transactions.
Now from the perspective of cryptoeconomics as Scott has suggested together we’ve developed … together with a number of other people including traditional economists and other advisors, we’ve created a model that has a really good chance of creating a stable cryptocurrency. Cryptocurrency stability is a difficult problem to achieve; there’s been a number of attempts in the blockchain space to do that. Unfortunately, because of the complexity and the need to have relationships between traditional and in a bit of economic structures, there’s very few projects that can actually do this.
Jake: So can I just ask you? Can you can you talk a little bit about the difference between a pure volatile currency like Bitcoin and a stable currency?
Aleks: Correct. So in the pure a volatile case with Bitcoin and Ethereum, the force that drives the price of the cryptocurrency on the market is sentiment. It could be speculative sentiment, it could be sentiment based on some more fundamental measures, but in all cases, it is sentiment that comes from the market as a social force. Stability becomes achievable when there are negative feedback loops in the economic model that allow people to arbitrage price differences between when the cryptocurrency is above or below its stable par value.
In the case of Sweetbridge, the assets in the vault that generates the loan, that Scott was just talking about, is constructed in such a way that when the stable cryptocurrency is undervalued or overvalued in the market, that creates either an outflow of … it creates incentives for either an outflow of assets from the vault or an inflow of assets into the vault, effectively negating the price move. Additionally, Sweetbridge project is going to create redemption mechanisms that are going to allow certain users of the system to participate in the guaranteed purchase or redemption of the stable cryptocurrency at its par value with a certain guarantee.
And so together, these economic drivers are expected to ensure that the transaction currency within Sweetbridge stays within 1 or 2% of its stable value which is a lot better in terms of predictability of value than ETH or Bitcoin. And at the same time, the rest of the ecosystem will drive the creation of this money supply by incentivizing people to put up these loans incentivizing people. To use the system for a number of important use cases that Scott has just described.
Jake: Okay, so if I get a loan against some asset that I’m putting forward as collateral, how is it possible that I don’t have to pay an interest rate on that?
Aleks: So blockchain is a unique innovative system where the economic value can be associated with a programmable asset. And so the cryptocurrency in the case of Sweetbridge and technological backbone that drives the issuance and redemption of the cryptocurrency are structured in such a way that from the perspective of the user, currency simply gets created and destroyed. It gets created when the deposit is made, it gets destroyed when the deposit is repaid organically inflating and deflating the supply of the cryptocurrency based on the amount of deposits within the system.
At the same time, even though there seems to be a minting process that’s going on, because it’s the process driven by the automated world computer that Ethereum blockchain is right now, it cannot be used by an individual or even by a Sweetbridge, the creators of the system, for their own purposes. It is guaranteed to stay within the defined parameters. That’s why minting of crypt the currency on demand becomes possible. It is because it’s not actually done by a person who can then corrupt the system and mint cryptocurrency into their own pockets.
Scott: And because you’re creating the currency and not renting it from somebody else, you don’t need to pay interest on it. So today, I need to pay you interest if you give me a loan, because you could do something else with the money that you gave me. And I need to give you enough incentive to give it to me so that you wouldn’t want to go do something else with it, go on vacation or invest it somewhere where you could make more money than by giving it to me, when you can create the currency on demand based on the value of the assets that are being deposited on the blockchain.
That basically just a few watts of power that’s being used to basically do this and it doesn’t really have any relationship to the value. So it really doesn’t cost any more to do it for something which is $100 as it does for hundred billion. And so, you get a situation where you don’t really need to run for money, therefore you don’t need to charge any interest rate for borrowing the money.
Jake: So Scott, so Sweetbridge, my understanding is that Sweetbridge has two cryptocurrencies; these are Bridgecoin and Sweetcoin. Can you talk a little bit about the difference between those?
Scott: Sure, so Bridgecoin will exist in many denominations, one for each major fiat currency in the market today, as well as one for key commodities; coal or oil or rice. It is a token that is designed specifically to use for liquidity, so to give you the ability to extract the value of this cup. You know, I have this cup, I don’t want to sell it, but I want to get the value out of it. So I can put this cup into the blockchain, lock it up. blockchain has the right to sell it if I don’t pay it back, and I can get some Bridgecoin for that, then I can go do something with that. I can use it to buy other cryptocurrencies or exchange for other cryptocurrencies, or can exchange it for fiat or I could use it in some trade transaction where I buy something with it, or use it to pay somebody for services or something.
That’s Bridgecoin. Sweetcoin is a membership token that allows … It’s really what you get to become a citizen of our economic environment. So if you become a member in Sweetbridge, you buy Sweetcoin and depending on how much Sweetcoin you buy, you then get things for free that foreigners don’t. It’s kind of like if you are a citizen of a particular country, you get certain benefits by being that citizen. But people that don’t belong to that country don’t get those same benefits. And the way you demonstrate how vested you are in our ecosystem is by the quantity of Sweetcoin that you have. And if you use that, not just own it, but actually use it by putting it into vaults with other assets, in a proper ratio which incentivizes people to do this, then you get interest free loans. But you don’t only get interest free loans using these commodity bridges that the Aleks talked about, you get to actually move that cryptocurrency into the fiat world or into the real commodities world in a way that has no cost attached to it. It’s completely cost free.
We have other protocols that we’ll be announcing in the near future, such as a settlement process that places the need for credit card networks or banking settlement networks, and you’ll be able to use that for free. And ultimately, you’ll be able to do a lot of things in our economy for free based on the amount of Sweetcoin you own. So Sweetcoin’s value is unlike that of say Bitcoin or Ether in that it’s not … its value isn’t based on just a social kind of understanding of value, it’s value is intrinsic. It allows you to actually get a certain amount of free stuff that you would otherwise have to pay for if you don’t own it.
And that means that it has a demonstrable value because if I don’t own it, then I am going to have these costs, if I do own it, I don’t have these costs. There’s a very demonstrable value there. And that makes it something that as the ecosystem grows, the amount of value it generates for the total membership grows and the amount of Sweetcoin this is the really cool thing, that I need to own to get the same economic benefit decreases.
And this means that you can allow, initially a small number of people may be end up owning Sweetcoin, but as the network grows, it becomes economic for people to have a larger and larger and larger number of people that are owning it, because it has a greater and greater and greater value to a larger populace. Itself becomes more expensive, so each individual some Sweetcoin becomes more costly as the network grows because it’s offloading that much more expense so eliminating it, cancelling it out.
But the amount you need for any one person to say get a $100,000 loan, and do it interest free, diminishes.
Jake: So Scott, so Bridgecoin seems to be stable because it’s collateralized by real world assets, and you mentioned putting in currencies as a backing collateral. You even talked about locking a cup on the blockchain.
Scott: That’s a bit absurd but-
Jake: I think I think it will happen in the future eventually, but can you talk about the gamut of assets that one might be able to produce as collateral in the system?
Scott: So again, our target is not just consumer but the entire area of commerce, for which the consumer is the critical driver of commerce, they’re the commerce chain, so it starts with them. But we want to handle all of the business-to-business trade in that process. So that means there’s a bunch of really important asset classes. An example would be inventory. Inventory is really important. So when you go to buy stuff from a local retailer or maybe from somebody online, the money they have tied up in the inventory that they have to own in order to fulfill your order is expensive for them. Being able to free that up, being able to make that liquid, very valuable.
Another are invoices and most don’t think of the invoice as an asset, but an invoice is actually an asset, because it’s something which I have done for let’s say you; I’ve delivered something to you or provided you some service, I invoice you, send you an invoice that says, you now owe me this because I gave you this. I did this for you. At some future date you’re going to pay me. Well it’s a massive business. There’s about $27 trillion tied up in commerce in invoices at any given time, incredible number, absolutely incredible number.
Then you have things like factories, equipment, trucks, planes, peoples’ homes, the intellectual property; patterns and other forms of intellectual property. Take an artist who creates a song. Being able to take that song and based on the number of people that are downloading the song and paying for the song, you can basically use that as a collateral or maybe you’re the backup musician that basically participated in the band, you know that supported the singer. If they get a share of the proceeds from the song, you can collateralize this.
Business, you yourself, you have a skill. You have an income stream, you have something that you can demonstrate. That’s what banks do today when they give you credit cards as they’re basically … it’s an unsecured debt. They’re banking on your income stream, your ability to pay this back. You can actually collateralize your income.
But where it gets really, really exciting isn’t in the first world countries, it’s in the places where you have depressed economic environments. Whether they’re in a first world country or in some developing nation, in these environments interest rates tend to be very high and loans tend to be very difficult and yet these are the roots of the supply chains of the world. This is where the food’s grown. This is where the minerals come from. These are the roots of the supply chain.
So if you can, in areas where it’s really tough to get financing of any kind, and if you do it’s very expensive. 12%, 20%, not unknown of. If you can go into situations like these and do something very low interest or interest-free if they’re a member of Sweetbridge and have Sweetcoin and you can do this without having to do a credit check, because you can lock up assets on the blockchain, that’s revolutionary. That can make a massive difference in not just global trade but in the peoples’ lives for which that basically occurs.
Jake: Bridgecoin and Sweetcoin are going to be Ethereum assets. Is that correct?
Scott: Yes, they’ll be Ethereum assets.
Jake: So what led to the decision to use Ethereum as the platform to issue these currencies?
Scott: Well, first can I step back and say that my personal belief is that the internet has an analogy to blockchains as a bad analogy in many ways and that over time, there’s going to be many blockchains. Each blockchain having a different use, specific use case or specific adaption within a certain community and so that the long term, we are as a project poly chain and if you’re going to do anything in scale, you’re going to need to do poly-chain type stuff.
Aleks: Multi-chaining.
Scott: Yes, you’re going to have to be multi-chain. Assets, we can’t control what assets are where. So some assets are in the Bitcoin blockchain. Some are going to be in Hyperledger. Some we’ll be in Corda or other blockchains. So you have to go where the assets are. The choice of Ethereum though for our token is because it has such a rich ecosystem, because that rich eco system makes it very easy to work with ourselves and other projects. Sweetbridge is really alliance of many projects. We’re a project of projects. There is no credible way a company starting out can take any meaningful crack at a trillion dollar number by itself, that’s absurd.
So you have to bring together a bunch of projects and for that we need to have a common environment where we can have a common set of protocols. So the Ethereum blockchain is the best opportunity to basically get that started. Does it stay there? Well, it depends on what Ethereum does. If Ethereum can address some of the things that it’s facing long run as challenges, well maybe some pieces stay there. If it doesn’t, then things will move to other blockchains over time.
Jake: So Scott, you mentioned that Sweetbridge is not just building a private company, but it’s building an alliance of companies, ecosystem. Can you tell us what are the benefits for a company who’s joining this ecosystem?
Scott: We’ve had a tremendous amount of expense. A lot of legal costs, setting up money services businesses, via bridges, other kinds of things that we’ve had to go through. In that process, we’ve seen that if you really want to do these stuff right, if you want to have good control, you will want to over hype, you want to create the right kinds of protections for customers. You really need to spend a lot of money.
So we want to take all the things that we’ve invested in, all the things that we had to build to make our project successful and share them with our ecosystem. Allowing them to take advantage of this, so that they can launch their projects without having to repeat all the work that we had to go through because frankly, most projects wouldn’t have the ability to spend the kind of money we had to spend to get to where we are.
Aleks: Just to add to that, looking at the state of the blockchain project space right now, we see a lot of people coming from the technical background with great ideas, great insight and trying to deliver something of real value. The problem unfortunately is that the kind of expense that Scott just mentioned is really expensive, requires expertise and networking and having the right relationships in the space, and putting in a lot of money in research into things like compliance and monitory systems and so on and so forth.
So I see Sweetbridge by basically taking on that work has a really great opportunity to take the good projects from the space and simplify the process of them going to market through the kinds of models that Sweetbridge is creating for themselves. So to give you an example, Sweetbridge spent hundreds of legal hours, maybe thousands to understand the compliance of the crowdfunding models, and is now creating a system that will allow a project to easily on board with the crowdfunding using some parts of this Sweetbridge economics, notably the Bridgecoin stable currency, for example that would eliminate the market risk that crowd sale participants currently experience.
Also make sure that they’re compliant and make sure that they have a partner that is a money services business that has a KYC process. Basically, creating a new stage of legitimizing and placing these innovative ideas into the main stream mind by enlisting the right relationships with regulators, creating the right relationships with the banking structures. That is what I see as a really important contribution that the Sweetbridge ecosystem will bring to the blockchain economic space. It cannot be overvalued. It’s huge.
Jake: Thanks.
Aleks/Scott: Okay. Thank you. Done.
About Sweetbridge
Sweetbridge sponsors the development of blockchain-based economic protocols and applications to transform high-friction global supply chains into Liquid Value Networks. The Swiss-based non-profit foundation is gathering interested industry technologists, blockchain projects and open-source contributors from around the world to form a blockchain alliance. The shared goal is to transform brittle, industrial-era commerce through decentralized industry ecosystems that create a faster, fairer value exchange, unleash working capital, better utilize resources and optimize talent for the benefit of all participants. Follow us on Twitter at @sweetbridgeinc.
