A DeFi Bridge to Green Infrastructure and Climate Impact — Investing in Silta Finance

A DeFi Bridge to Green Infrastructure and Climate Impact — Investing in Silta Finance

Date
Jul 16, 2022 8:26 PM
Posted by
Jahed Momand & Matthew Stotts

We’re in a climate emergency, and we need to move as fast as possible to ensure a habitable planet in this century. While the global institutional response stresses a warming planet with temperature targets, carbon removal, maintenance of biodiversity, and other large-scale cross-national strategies, it is unlikely that they alone will help us achieve the targets set by agreements such as the Paris Accord and Kyoto Protocol.

Meanwhile, new, green infrastructure can and will play a major role in this movement. Infrastructure is responsible for 79% of all greenhouse emissions, as well as 88% of all adaptation costs, so the potential impact made possible by adopting ESG-friendly standards in infrastructure can be massive.

However, infrastructure transactions are complex and costly, taking anywhere from one to three years or more in due diligence, and several million dollars in diligence costs. Total transaction fees for project finance deals can run into millions of dollars before a single shovel hits the dirt. Because of the high cost and risk, project finance is typically carried out through public private partnerships (PPP), where public entities put out calls for proposals, and private entities with access to capital submit proposals and deliver pursuant to the requirements. Due to the high transaction costs inherent to the multiple parties involved, project finance is not a good fit for infrastructural projects looking to make a climate impact in the cost regime of a few million to $100 million.

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There remains significant investment demand for project finance across Africa, Asia, Europe, and the Americas — the total projected investment through 2040 is about $94 trillion, roughly $4 trillion per year. There is no way that this demand can be met with the PPP model, which requires multiple years and millions of dollars of diligence to kickstart. The public wants green infrastructure and a safer future, but there is no way to exert public agency on this complex financial and social problem.

Enter Silta Finance.

What is Silta Finance?

Silta Finance is a DeFi protocol on the Avalanche blockchain built to address the coordination problems inherent to project finance.

Silta aims to address the core inefficiencies of project finance by targeting blockchain and DAO-specific features that will make smaller projects more viable, accelerating the underwriting and credit rating with the Silta Score methodology, building cross-chain loan pools to broaden access to capital for approved applicants, and manage the approval, collateralization, and liquidity of projets with the Silta DAO. We will deep dive into each in turn:

  • A transaction pipeline of financing applications submitted by borrowers, with a focus on project sizes that can’t be addressed by existing methodologies.
  • The Silta Score, a credit rating methodology built on the Silta teams’ decades of experience in project finance in Southeast Asia and the EU, which can be used to issue debt for the project. The Silta Score is a summary of an infrastructure project’s structural, financial, and environmental standing. In the assessment of project viability, both project-specific factors and external drivers are considered. On project impact, sustainable development goals provide a natural benchmark for borrowers to demonstrate their contribution to sustainability. While the Silta Score is initially derived from Silta as well as their advisors, once they have provided a score it is then presented to the Silta Scoring Committee, a DAO elected committee of professionals representing their best interests. The Silta Scoring Committee will then review and scrutinize the score provided. Once they have confirmed a suitable score, the committee makes the final decision on the application's Silta Score.
  • Loan pools for each infrastructure project, where lenders can contribute liquidity, will be established once a project has passed scoring. Collateral, provided as Silta tokens, will come from the Silta treasury.
  • The Silta DAO, which will control whether a funding application is approved, loan pools made available, and collateral added to pools.

What does project finance on Silta look like in practice?

First, the Silta team already has the connections necessary to ensure a healthy transaction pipeline for the lower end of the market. The team monitors industry databases in target markets for upcoming projects and engages with local developers across e.g. the Philippines, to determine information about the project and borrowers, the size of the required investment, and the data necessary for due diligence and risk scoring. Nearly 50% of the project finance deals in the last 20 years have come from infrastructure projects in the regime that Silta is focusing on, so there will be plenty to pick from, rate, and deliver.

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Next the team uses the Silta Score, developed internally, to score the risk and the ESG impact of the project. A number of metrics come in to play here, including financial metrics, debt service coverage ratio (DSCR), and the UN’s Sustainable Development Goals (SDGs) which will be adopted to assess the ESG impact of the project.

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Financing is then arranged through third party loan pools where borrowers can get access to capital for building infrastructure assets. The Silta team will put the score and documents gathered from the applicants up for approval for the Silta DAO. If it’s approved, Silta tokens from the DAO treasury are provided as collateral for the third party loan pool.

In practice, a borrower applies to Silta for financing and uploads the required documentation. This can include a feasibility study, a business plan, a financial model, and more. Silta checks that the eligibility criteria are met (funding requirements, geography, sustainability, etc). If the application passes screening, then it is scored per the Silta Score methodology, and the data is added to the blockchain. Silta proposes an interest rate for the project in line with comparable projects (typically anywhere from 3-15%) and the project is added to the transaction pipeline in the Silta dApp.

At this point the DAO votes on whether to approve the loan application. If the application is approved by the DAO, the required amount of collateral is minted and transferred from the DAO treasury to an escrow account.

In the background, a loan pool is created by a third-party DeFi protocol (e.g. Rari or AAVE). The loan pool is opened for potential lenders when the contribution period begins. Contributors receive LP tokens as a record of their share in the pool. Once a sufficient amount of funds has been contributed to the pool or the contribution period ends — whichever takes place first — the pool is closed. If the funds in the pool fail to reach the target, contributors can reclaim their funds via LP tokens and the collateral tokens are returned to the DAO treasury

If the pool is successfully filled, the loan documentation between the borrower and a security agent is executed. The documentation includes a collateral agreement which specifies the

number of tokens in collateral, the interest rate, the tenor of the loan, and any covenants,

government guarantees and step-in-rights.

The collateral tokens (denominated in $SILTA) are moved from the escrow account to the loan pool contract, and the funds (stablecoins) contributed by the lenders are released and transferred to the project company’s cryptocurrency wallet. Depending on the size and nature of the project, the release may be done in tranches over the construction period. In most cases, the borrower will convert the funding to fiat currency via a third-party financial institution. Loan service will commence after the construction phase ends and the asset becomes operational. Repayment of the loan with interest will be made periodically over time as defined in the loan contract. Repayment by the borrower will be made in the same stablecoin in which the loan was issued. Once the project has been completed successfully and the loan has been repaid in full, the obligations of the borrower and the security agent end. The collateral tokens are returned to the Silta DAO’s treasury and burned.

Why Did We Invest?

For us, Silta represents the apogee of what coordination technologies, distributed communities, and interblockchain communication can achieve.

Existing institutions have proven that they are not capable of addressing infrastructure development in the cost regime where Silta is focused. This is not an insult or criticism, it’s just a plain fact of the efficiencies of the public-private partnership as it stands today, and derives from the transaction costs inherent to the parties involved.

This reality of transaction costs in the PPP and their limits opens up an opportunity for us to experiment with new coordination technologies such as DAOs built on a suite of smart contracts to bring efficiencies to this process.

The Silta team has built up immense experience in this vertical, across the world over the past 25 years. They are subject matter experts in project finance and PPP, having developed projects from end-to-end in Vietnam and across Southeast Asia. They aren’t necessarily looking to “move fast and break things”—Silta is not destruction of an existing process, or a revolution—it’s merely augmentation of human experts with new technologies, to help them (read: underwriters, lawyers, auditors) do what they already do, in a more efficient manner.

Furthermore, the Silta team have an expansive blockchain-agnostic vision that addresses business and enviromental problems first. They’re focused on building an interblockchain standard for project finance, using the benefits of the Avalanche blockchain for fast finality and security. In addition, it will be building cross-chain to access and interact with decentralized finance protocols on Ethereum such as AAVE and Rari, and will be working with Centrifuge, built on Polkadot, to bridge real world assets financed by the DAO.

This is a truly chain agnostic approach where the focus is first on the users, the use-case, and the business and impact outcomes that the team wants to achieve, supported secondarily by the technologies that will enable them to do so.

Combining all of these opportunity areas with the team, the immense market need, and the fact that we think real world assets on-chain are a market poised to explode, Silta was a slam dunk for us.

Stay up to date on Silta Finance over at their blog, join the community on telegram, and check their website if you want to get involved.

Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This article contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. Cerulean Ventures does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.