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.
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 chain-agnostic protocol built to address the coordination problems inherent to project finance.
Silta aims to address the core inefficiencies of project finance in three ways: Firstly, by producing a due diligence report on both the lender and borrower, with additional impact scoring on the borrower. This is the Silta Score. Secondly, by providing a financing marketplace for both borrowers and lenders to access and find other protocols they could work with to fund infrastructure development, utilizing the Silta Score as the key metric. And finally, by monitoring the development's progression from start to finish utilizing a Project Monitoring Officers model.
Let’s take a deep dive into each in turn.
The Silta Score is 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 by lenders to decide whether 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 the Silta team and itsas well as advisors, once Silta has provided a score, it is then presented to the Silta Scoring Committee of token holders, which 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.
The Silta Impact Marketplace is a financing marketplace that will display a transaction pipeline of financing applications submitted by borrowers, with a focus on project sizes that can’t be addressed by existing methodologies. The marketplace will bring together borrowers and financiers from TradFi and DeFi. TradFi lenders, DeFi protocols and sustainable financiers can all pre-qualify and access a borrower pipeline that has already undergone a thorough due diligence process and is supported by Silta’s optional standard loan agreement.
Silta itself does not create loan pools or issue loans. Instead, Silta is partnering with third-party DeFi protocols that create and operate such pools, as well as TradFi lenders.
Project Monitoring takes place once financing has been secured. Silta continues to track the progress of the project as the real-world asset is built, tested, and starts operations. If the project delivers its sustainable development goals, the borrower is eligible for Silta token rewards.
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.
The team uses the Silta Score, developed internally, to score the risk and the ESG impact of the project. A number of metrics come into 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.
In practice, a borrower applies to Silta for inclusion in the marketplace 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 Impact Marketplace.
The Silta team will provide a suggested Silta Score to the Silta Scoring Committee, a group of Silta token holders with a professional background in project finance. The Silta Scoring committee will then critique the score and have the final say in the score. Once the Silta Scoring committee agree on a final score, it will then be minted onto the utility NFT.
Delegates will consist of industry professionals such as the predefined SSC, PMO & DDA. These parties can choose to become Delegates and speak on behalf of the community, by allowing SILTA token holders to stake their tokens with the Delegates, they are effectively providing the Delegates their votes. By representing community members, Delegates have a higher chance of being selected to participate in governance proposals subsequently having a higher participation rate than other participants.
Financing is then arranged through third party loan pools where borrowers can get access to capital for building infrastructure assets or through other types of lenders. The Silta Score is made accessible to each partnering lender through a subscription to the NFT. In a typical partnership with a DeFi protocol, the partner community votes and decides whether to create a new loan pool for a particular project. There are various ways to collateralize the loan pools, including government or parent company guarantees, stablecoin collateral, and algorithmic token collateral.
Once approved, a loan pool is opened for contributions from lenders. Investors wishing to help fund the project add liquidity in stablecoins and receive loan pool tokens (and possibly token rewards) in return. When there are sufficient funds in the pool, the loan is released to the borrower against the proper documentation. Silta continues to track the progress of the project, and the NFT is updated as new information comes in during project monitoring. If the project delivers its sustainable development goals, the borrower is eligible for rewards paid in Silta tokens.
Why Did We Invest?
For us, Silta represents the apogee of what coordination technologies, distributed communities, and inter-blockchain 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 has an expansive blockchain-agnostic vision that addresses business and environmental problems first. They’re focused on building an inter-blockchain standard for project finance. In addition, it will be building cross-chain to access and interact with decentralized finance protocols on Ethereum such as AAVE, and will be working with Centrifuge, built on Polkadot, to bridge real world assets to DeFi.
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.