📄Whitepaper

The Basic Concept

Finance, the way it was invented by the Medici dynasty, used to be elegant and simple but has become ever more complex. It’s time to re-imagine what finance could be.

Let’s go back to the beginning. The basics aren’t so basic, if you think about it. Decentralized Finance, DeFi – that’s what we do. Roughly. We got into the topic as it opposes TradFi (Traditional Finance, that is) which used to be “the real deal” for a really long time. But not anymore. Think decentralization as a mega-trend in general. Think sharing economy. Think sustainability in terms of alternatives. In terms of the greater good.

Opportunity in our case looks like this: lending to real-world businesses, against real-world collateral – loans. It’s definitely the next frontier to be conquered.

We’re firm believers in decentralized finance, and it appears we’re not the only ones as there is a really sizable amount of capital accumulating in the space. So let’s put it to good use.

We came up with a protocol that funds those real-world loans without having to resort to the good old TradFi system and its dependence on leverage and fractional-reserve banking to carry the cost bloat, thereby greatly reducing systemic risk.

A toast to innovation!

We’ve come up with an opportunity that doesn’t only enable DeFi users to fund loans but to do so through already existing lending platforms. Right now, our main target group are small and medium-sized enterprises (SME) – the ones who find themselves at the losing end when it comes to basically any kind of real-world loans today. At least since the banking crisis in 2007 and 2008, which the system as we know it will frankly never recover from.

In short, our protocol is built to help solve the SME credit funding shortage. And at the same time, it tackles the lack of real-world lending opportunities within the crypto market. Or, let’s rephrase that – we’re providing a little something that hasn’t been there to date: DeFi users getting their hands on real-world yields. What’s more, our protocol may be used for any type of asset lending in the future even though we’re primarily focusing on SMEs for now.

The Story: Of Finding, Founding and Funding

How about a brief interlude on how our brand got its name to lighten up on the engineering talk? We’ll let you in on what (or rather: who) lead us to our noble aim of pioneering the market with something truly new.

What most people know is that during the Renaissance period, Florence was the hub of immense cultural change and great innovation in Europe. And the name that immediately pops up in that context is Medici. Over time, the Medici family actually collected so many prominent representatives that it’s not easy to tell them apart. Here’s one: Giovanni de’ Medici. He opened the first of the family’s banks more than 600 years ago.

So, we’re talking money. Handling it, saving it, lending it. Ground-breaking innovations such as double-entry bookkeeping or the issuing of letters of credit were pioneered by the Medici dynasty and are still present in our modern financial system. Lower-class-born, they first had to make their way up the social ladder, find the right friends and get married strategically in order to finally become influential beyond legendary.

Why are you reading this again?

Interestingly enough, trial and error must have been their constant companion. And we thought: who needs noble blood if you can be an esteemed pioneer? (Modesty is not our forte.) So, if we set up a team of topic experts, smart thinkers and diligent executives, we can contribute our inventiveness to a growing, truly future-forward market. There had to be some wisdom we could derive from the peculiar kind of Medici business acumen.

Did the Medici invent the banking? Of course not. But did they run the most popular bank of their time? Most definitely.

Bottom-line? The Medici pioneered in rewriting the rules. And we’re here to do the same.

SME Lending: The “Real Deal”

With brave new endeavors, it always comes down to the essentials. Drive. Leadership. Goals. And the necessary proof to know you’re on the right track.

“Italians were eating with a knife and fork when the French were still eating each other. The Medici family had to bring their Tuscan cooks up there so they could make something edible.” — Mario Batali

Just like it has always been a driving force, innovation is imperative to our business.

“Almost a decade after Lehman Brothers collapsed and the financial crisis took hold, small firms are still struggling to access credit in many industrialized countries. Business surveys repeatedly point to relatively high bank loan rejection rates for SMEs, as well as financing shortfalls for those small firms whose applications are accepted. Lending data and credit condition surveys suggest banks have treated larger corporate customers more favorably in the volumes they lend, and the terms and conditions they impose, since 2007/08. However, technology and other factors have triggered growth in a number of other providers of credit, offering small businesses an alternative to their traditional dependence on bank loans.” — Oxford Economics, 2018

The State of Things

Here come some exciting facts that will help you wrap your head around the immense potential there actually is in DeFi. Right now, it’s going through the proverbial roof.

The amount currently locked in DeFi has grown to a 3-digit billion Dollar amount over the last few years. This amount is called TVL, total value locked. The sheer incredibility of this fact can only be displayed by drawing a comparison: in early 2020 there was “merely”one digit in its place. This rapid growth is likely attributed to the high DeFi returns on offer. Over the past year, we’ve witnessed yields ranging anywhere from less than 5% to more than 2,500%.

Such yields are of course highly dependent on positive momentum within the cryptocurrency market, intelligent yield-farming strategies and a pretty large appetite for risk.Therefore, they are unlikely to be sustained indefinitely. But that’s a different story.

A lot of the DeFi borrowing to date was geared at increasing leverage to fuel the trading in cryptocurrencies even further. At first, the value of loans actually being used to fund transactions outside of the cryptocurrency space was estimated to be relatively insignificant. That however, is “so last year” – due to the advent of stablecoins. They’ve become real game-changer as they’re being used increasingly for real-world transactions.

Currently, the market is registering a significant decrease in lending rates. Annual Percentage Yields (APYs) tend to fall, too, whenever the cryptocurrency market turns bearish.

The Protocol: Transparent by Design

How about an easier, ready-made liquidity transformation between crypto and real-world loans? Wouldn’t this be attractive to crypto holders – having real-world yields brought to them? We think it’s a viable incentive to either hold on or switch to crypto altogether. Diversifying away from crypto-specific risk and market volatility, and towards more stable yield potential.

Our protocol creates an opportunity for lenders and borrowers to engage with one another in a way that’s mutually beneficial. In terms of concerns and goals, lenders seek to earn yield on the capital they’ve invested. Borrowers, on the other hand, want to receive funding for their enterprise. So far so good. In order to get said funding from the protocol, however, a borrower needs to submit a credit proposal which includes information about the type of credit, collateralization, yield, intended purpose and other relevant information. In other words: we need to know the whys, hows and whats.

After the credit proposal is submitted, it will be evaluated and voted on by the governance of the protocol. If all goes well, the credit proposal will be turned into a loan or an entire lending pool.

But what is a lending pool?

A lending pool is essentially an on-chain manifestation of a credit agreement. The lending pool’s parameters have been derived directly from the credit agreement.

Like this, the borrower is able to mint lending-pool tokens within that pool’s particular rule set. Those tokens are actually pretty special: each lending pool has its own unique lending-pool token. Besides, with it come its specific means of exchange. The next step consists of either selling, buying or holding.

How do I get there? And what’s in it for me?

First off, here’s how the selling part works: In order to receive the desired funding, the borrower has to sell the lending-pool tokens to what would be (whitelisted) lenders. Ergo, the buying part works the other way around: A lender who wants to be part of a particular lending pool must buy the designated tokens. And here comes the result: By holding and staking pool tokens, you can build up rewards for yourself. And of course, you can go and claim those rewards from the corresponding staking pool.

Now, here’s a little extra – the Florence protocol distributes two kinds of rewards:the first kind is based on the real-world yield (yes, the amount generated by the borrower) and is paid out in USDC. The second kind is an additional option which we’ve come up with and it’s contributed by the protocol itself. Give it up for the MDC, our very own Medici token!

Did you know that the Medici arranged for people who contributed to building St. Peter’s Basilica to be absolved of their sins in exchange for money. Quite like our rewards!

The Heart of Florence

The lending-pool tokens are justifiably the centerpiece of the Florence protocol.Lending, borrowing, principal repayment and reward distribution are all taken care of through the exchange or holding of lending pool tokens.

The most important factor here is transparency: lending-pool tokens are traded against USDC in a normal “order book”. This has one major advantage: lenders and borrowers can follow and react to each other’s funding needs and capabilities transparently. To understand our approach better, the following FAQ cases have to be considered:

• If you want to enter a lending pool, you have to exchange USDC for lending-pool tokens.

• If you want to increase your existing position in a lending pool, you also exchange USDC for tokens. Decreasing your position, by the way, works exactly the same, only you exchange tokens for USDC.

• Whenever you want to opt out, you swap lending-pool tokens for USDC, too.

• If you are a borrower and want to borrow funds, however, you need to sell lending-pool tokens. In order to be able to do that, you mint them from the lending pool first – for USDC. Those USDC you can use to fund your enterprise.

• If you have received funding and want to start paying back the amount you borrowed, just buy lending-pool tokens with USDC.

To sum up, tokens are basically like a gateway between real-world and crypto entities.

Another important rule: real-world loans are illiquid, so they're not readily available. A lender can’t prematurely exit a lending pool – unless there is another lender willing to take their position and buy their lending-pool tokens from them. Of course, our concept seeks to provide as much flexibility as possible to lenders. This is where the MDC token comes into play.

No hands-on liquidity, no working system. That’s a fact. Hence, in order to keep the show on the road, our protocol incentivizes the provision of USDC liquidity – the incentive being the MDC token. But how do we avoid excess liquidity? Here comes a part of the system that’s as vital as it’s clever: the amount of USDC liquidity is limited. In other words, the value of MDC is directly coupled to the protocol’s success and growth. Our idea comes down to one specific mechanism: the more value is being lent through the protocol, the more buy pressure there will be for MDC on the open market. The supply of MDC is capped from the get-go – the growth of our protocol is not. Bottom line: The limit is set by our ambition only.

The Future

The way it is set up right now, our protocol is merely the first step and can virtually be expanded in any direction. Possible changes depend on factors such as the regulatory climate in the EU, the overall adoption of blockchain technology or a fluctuation of our available resources. In terms of expansion, we’ve been thinking about the following possible future scenarios. We’re listing the points considered according to their feasibility from medium- to long-term approaches.

Governance

First off, MDC token holders will be able to vote on governance proposals and also make their own. But what does governance mean in a DeFi context? As any and all transactions are recorded on the blockchain, they’re shared with all of the participants. Decentralization is key here because each user is allowed to vote on the proposed change and can read about or discuss its benefits and drawbacks. The governance is decentralized because it always relies on the community for collective decision-making and an extraordinarily quick turnaround time (compared to TradFi or any operations in the “traditional” sense) when changes are supposed to happen.

Our seamless protocol integration

We think that in the way we want to work and succeed, it’s key to maximize the transparency between lenders and borrowers. So, in order to do so, the protocol needs to be extended in a way that allows borrowers to automatically publish information that concerns their collateral.

Our legal structure

Sounds like a major step. But what is a DAO anyway? It may sound like a term from 1992’s Mortal Kombat, but it’s actually just short for “Decentralized Autonomous Organization”, which basically means a software that runs on-chain and offers its users a built-in model for the collective management of its code. It mainly differs from TradFi structures in that it isn’t managed by boards, committees or executives.

With our protocol, we want to straddle DeFi and real-world asset financing – that’s a given. Therefore, it is not entirely clear today that a metamorphosis from our current LLC structure to a DAO will serve our purpose in the best way. Our main argument regarding the decentralization and democratization of finance is to make it less fragile. So, being able to structure the entity as a DAO in the future would be a logical step. While we’re still in the process of growing and establishing the company, The LLC structure is the more pragmatic legal structure for regulatory and other purposes and over time we will re-asses the merits of transforming towards a DAO.

Our international expansion

We started in north-western Europe as it’s the established play area of most founding-team members. We’re also most comfortable with the regulatory framework there. However, we see no inherent reason to limit ourselves to the European Union going forward: our geographic expansion into international regions and jurisdictions may well be an important driver of growth in the future.

Our own EUR-denominated stablecoin

USD stablecoins have been really successful over the past years. Be that as it may, their European counterparts – various EUR-denominated stablecoins – have neither been as prevalent nor as successful regarding the markets. We believe that there’s a number of factors to the why. The prevailing negative-interest-rate environment seems to be the most dominant argument while there are regulatory and jurisdictional hurdles, too.

In order to tackle the issue of negative sovereign rates, we would have to build a lending business to issue a EUR-denominated stablecoin. And this is exactly what we’re aiming at: issuing a Florence Finance stablecoin through becoming a lending business ourselves and/or contributing to a succesful EUR stablecoin ecosystem with our lending business. While there’s plenty of competition, there’s also plenty of room in the European market for new players.

Our DeFi ecosystem integration

Innovation-driven intentions and future-forward theories should always have their place. And so, composability is an approach we strongly believe in at Florence Finance. After its launch, our protocol is open to integration into existing spheres. We’re exploring potential alliances with established projects such as MakerDAO, Compound or AAVE.

Cutting up the pie would be even more fun, wouldn’t it?

Besides, it also leads to an increase in diversity, so here’s what we’re going for:

• Lending-pool tokens: We’d like to see them available on secondary markets or with aggregators.

• Other protocols: If fellow protocols started accepting our lending-pool tokens as collateral, it would mean the proverbial giant leap for us. If other protocols integrated access to our lending pools in order to network efficiently, we’d grow much faster. In turn, Florence Finance could start setting up the necessary facilities to accept currencies from other protocols.