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Arboreum is a social-enterprise using decentralized-AI and blockchain to create completely decentralized credit systems; what they call a banking swarm. Nodes in the swarm can assess risk, receive loans, and earn interest on savings without banks or other financial intermediaries. Arboreum is striving to create a future with not only 100% financial inclusion, but also minimal barriers to capital, empowering individuals to take their future in their own hands and seeding sustainable cycles of opportunity.
Arboreum operates as a DeFi platform for financing MSME trade receivables through which they mint CLOs. It was founded in 2020 off a grant by Consensys for their whitepaper on self-regulating credit networks which lays out a low-cost, robust protocol using decentralized AI + blockchains to provision short-term , unsecured, credit to people and businesses over a completely decentralized network. They launched in private beta in 2021 financing agri-inputs for farmers and invoices for last-mile pharmaceutical distributors.
Arboreum's receivable financing application is in live (private) beta where receivables are either (a) MSME invoices with 30-90 day repayment terms or (b) agri-outputs to be sold by a farmer to a farmer-cooperative. The stochastic nature of the receivables is the first of two unifying themes of Arboreum's tech stack; all future cash flows are treated as probabilistic random variables and tokenized. The second key element is tranching cash-flows. Financing is always performed through an anchor-entity who is bringing MSMEs on to the platform along with historical data and either capital or some form of guarantee to capitalize the junior tranche of any loan. Arboreum refers to this arrangement as a credit-union.
Credit Unions & Networks
In the credit union the repayment actions of any one actor in the union affect everyone else's terms including the anchor. Arboreum's technology allows the credit-union to be generalized to any network where a trust relationship exists between any two parties as is common in supply-chains where goods are usually sold on consignment. By doing so, the aim is to use the small-world network nature of supply chains to not only derisk borrowers but also bring the network's idle capital implicitly into the equation to profitably solve supply-chain frictions.
Underwriting is performed on the premise of correlated cash-flows on a network. The protocol relies on Bayesian updates of predictions by various nodes in the network of how probable a future cash flow given the previous history of the borrower, other similar borrowers on the network, and time, letting the network arrive to a consensus in a matter similar to the EigenTrust algorithm. Initial seed values are generated using historical and off-chain data and broadcast by trusted nodes.
Portfolio Optimization & CLOs
Collateralized Loan Obligations are minted using a Anti-Fragile portfolio optimization, a proprietary method developed specifically for the exigencies of short-term, small-ticket size loans. The premise of the algorithm is to achieve maximum independence between assets in the event of a downside loss in the portfolio.
Recursive Negotiation Protocol & Decentralized AI
Currently not implemented as of yet, but in the future, Arboreum's whitepaper lays out a message passing protocol of mathematical functions by reinforcement-learning AIs through which a self-regulating credit network emerges. The result of this automated, recursive negotiation-protocol is twofold: (1) borrowers get their money from many different sources (2) risk is optimally distributed over the network to achieve robustness.
- April 2021: Arboreum wins Algorand Grant for $75K
- May 2021: Semi-Finalist (top 25/800 teams) in Cisco's Agri-Challenge Program for ground-breaking solutions in Indian Agriculture
- June 2021: Admitted into Creative Destruction Labs 2021 Blockchain Cohort
- July 2021: Scale up of invoice financing operations $100K in Assets Under Management
Other entrants in the under-collateralized DeFi lending space include
And for trade-finance the biggest competitor is
However there are a few key elements that set Arboreum apart:
- The focus is on working-capital finance for real-world economic transactions that by-and-large are occurring off-chain.
- Therefore, for the end borrowers on the Arboreum platform, they receive and repay in fiat. There is minimal disruption to the business operations of the MSMEs on the platform.
- The fiat requirement, necessitates adherence to a high-degree of off-chain integration from banking networks, licensing, and reporting to credit-bureaus.
- Other competitors rely on fairly sophisticated token-nomics and people/token-holders to be the market-makers because assessing the risk of underlying debt is not something that can easily be automated. This solution is "inelegant" perhaps even untenable because the amount of debt being issued by an MSME as an example would almost by definition be too thinly traded to enable price discovery. Arboreum has thought through and created technology that enables a "banking swarm" to solve this problem.
Arboreum's aim is to merge the on-chain and off-chain worlds and already be in an incumbent position when digital currencies (digital Euros, Dollars, and Rupees) begin to be issued by central banks.
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