A Practical Use of NFTs in Africa
JPEG art is cool, but real value in NFTs will be found in supply chains.
I continue to think that the best and most high volume uses of crypto and Bitcoin will be found in emerging markets, especially Africa. We have real inefficiencies and blockers that can be overcome by these new technologies.
Over the last few years I’ve enjoyed reading, listening, buying, selling and trying to understand what is going on in crypto. It has been a particularly frothy time which created just about the best learning atmosphere that I could have hoped for. When smart engineers and fully-loaded investors are all in the game together, you get a lot of great articles, podcasts, and platforms to discover.
For this post I want to narrow down the crypto focus to non-fungible tokens (NFTs). I enjoy good design, so some of the art efforts going into NFTs has been fun to just see and watch, plus discuss with others in Africa working in the space. My natural bent is towards building, and while the JPEG art side of NFTs is fun and interesting, I don’t think that’s where we’ll find the real use cases of it in Africa. So if I was to build something, what would it be?
Bitange Ndemo and I have been friends for well over a decade, and he’s been talking to me about agriculture, supply chains, and distribution of physical goods to everyday Africans for years. I’m not into agriculture, supply chains, or distribution, so I decided to get over my mental block of “this is boring” and started talking to farmers and businessmen about in order to figure out what was going on and what could be done. At first I was thinking “blockchain for supply chains” stuff, and while that’s not technically wrong, I now think it’s more “NFTs for supply chains” (thanks to my business partner Philip Walton and his creating what you’ll read below as TDIs).
One of the largest SME challenges in East Africa is the cash flow needs of smallholder farmers. Farmers often have to supply their goods into cooperatives, aggregators, or processors and may experience long delays between product delivery and receipt of funds. In particular, industries like tea and coffee can sometimes take months between harvest and eventual international markets which puts an undue burden on the small farmer to effectively finance their products. While different solutions to the cash flow challenges exist (e.g. middlemen), the farmers generally lose a substantial amount of value in order to meet short term cash flow needs. Because these are well defined supply chains and relationships, it is easy to track and process the flow of goods and money. This makes it an ideal situation to leverage modern technological solutions to solve an age-old challenge.
The Tea Fields of Kenya
Tea in many places in Kenya operates like this:
A farmer picks 12kg of green tea leaves.
Tea is taken to a collection site where it is registered and a digital receipt is sent to the farmer via SMS.
Farmer is paid a portion of the tea value (say 25 KSH/kg).
Farmer waits up to 6 months for the remaining value to be paid out (say another 50 KSH/kg).
[Note: the tea company has to sell the tea on the global market to get the rest of the money to pay the farmers, that’s why there is a delay and the system works this way. ]
You quickly realize that the farmer is stuck in a bit of a cash-flow bind. They get large lump sums at the end of a 6-month window, but in the times between if there is a medical emergency, school fees to be paid, land to be bought, or something similar then they have a real problem. Currently they go to a bank for a loan, not always understanding what they’re signing up for, and are generally signing up for quite unfavorable terms.
Using NFTs as Tokenized Debt Instruments
In its most simplistic form, a Tokenized Debt Instrument (TDI) is a lending/borrowing smart contract that is codified into an NFT and transparently maintained on the blockchain. The terms of the obligation are encoded including the currency, maturity, interest rate, conditions of settlement, and AI-computed risk score. The NFT is issued by the borrower and held by the originating lender. The NFT is transferable so it can be traded on the marketplace either on its own or in a bundled debt offering. As the settlement of the loan is completed (in stages or all at once), the holder of the token at the time of settlement will receive the payout of principal and interest. The NFT would remain active until the debt obligation is perfected or until the debt is written off. Either result would remain encoded in the blockchain as data for future risk analysis for all parties associated with the transaction.
As an example, a farmer would deliver 1,000kg of agricultural produce to a processor and the processor would issue and transfer a TDI to the farmer for the 1,000kg of produce at an agreed price (estimate or actual) and with agreed settlement terms. Each TDI would be a unique NFT that is recorded onto the blockchain and held in a wallet. The farmer would have the option of selling the TDI on the market (presumably at a discount) and the holder of the TDI would be paid according to the terms of the smart contract.
Making it Work on the Ground
Step 1: NFT the receipt
If the receipt generated at the tea collection station is made into an NFT, then we have a digital receipt on an openly viewable blockchain-based backend that allows for transparency. The farmer can then choose to sell his future earnings 6-months from now in exchange for money today at a discounted rate in the form of this “NFT receipt”. If that receipt changes hands, then it is tracked and the beneficiary’s information is changed so that the tea company now pays out the new owner of the NFT receipt when that time comes.
Step 2: Create a marketplace
An open auction platform for buying and selling of these NFTs is needed, this is a marketplace where any farmer can choose to list their NFTs and set a price that they are willing to not go below. It also allows for local and international buyers to take part, so those with excess cash and time are able to make good returns on tea that has already been picked.
The buyers risk is not in future-tea-picked, since it has already been picked and delivered to the collection center. Instead, their risk is in the final payout/kg by the tea company, which has a history of decades and is taking part in the global commodities market to do their deal.
NFTs Open Up Markets
What we see in this one example, though this could be any of the cash-flow constrained cash crops (tea, coffee, avocados, etc), is a way that new technology opens up markets.
You could make the argument that new technology isn’t needed, that this could be done with just a simple corporate database by the tea company or larger body. I’d argue that trust is low throughout Africa, so you would need to have something that all parties would trust to store the records. As this marketplace is made better by having more tea/coffee/avacado companies use it, a blockchain marketplace also helps with company churn. As Nic Carter says, “Blockchains aren’t great at many things, but retaining immutable, highly available data for long periods of time is one of their undisputed strengths… NFTs give you digital persistence, and they exist on an open infrastructure that anyone can build on, query, and refer to.”
Final Thoughts
The use case of a tea farmer and the tea company is just a small microcosm of a larger opportunity. It’s also the full stack of the supply chain, going from farmer and processor, to distribution, retail, and final customer. It can, and probably should be, applied to everyone in that supply chain.
NFTs and the creation of Tokenized Debt Instruments will begin to enable a more transparent and secure means of ensuring cash flow between supply chain participants. By giving all parties both an increase in confidence that their obligations will be settled and a cheaper source of borrowing would transform the nature of this segment of the marketplace.
The concepts implemented within agricultural supply chains could also be scaled to align with retailers and suppliers in both the formal and informal commercial sectors. While all forms of credit bear the risk of being abused, the transparency of the Risk Scoring and the ability to automate settlements ensures that TDI can be used as an accelerant for broader economic growth. Finally, the creation of a free marketplace for TDI opens the possibility of banks, insurance companies, and other holders of capital to access a new kind of investment market for buying debt. The more capital that can be attracted to this market the cheaper that all participants can access the credit necessary to build and grow business.