One of the first applications for the incentive system of blockchain: ‘cryptocurrencys’ was its use in remittances. A digital currency without borders could be used to transfer money across nations at a faster rate and lower cost than conventional methods. Crowdlending platform, EthicHub, has explored and implemented these possibilities to provide smallholder farmers in developing countries with financial services. Jana Petkanic, from the Benelux office for EthicHub, talks about the company’s innovative blockchain project in Mexico.
Almost 2 billion unbanked smallholder farmers in developing countries struggle to grow their businesses due to a lack of guarantees needed to access affordable loans. Any loans they do get (in cash), are often subject to extremely high interest rates (above 5%-10% monthly). For financial institutions, smallholder groups do not present an appealing investment opportunity; they pose great risk and request small amounts, thus outweighing the administrative costs.
EthicHub leverages the advantages of blockchain for the benefit of these unbanked or marginalised smallholders, with the aim to “democratise finances, making credit and investment opportunities available to everyone”. The company’s crowdlending platform offers lenders a portfolio of profitable projects with a below-3% default risk. The platform also enables peer-to-peer transactions, where individual investors act collectively as lenders and can connect with the producers. Investors are free to choose their own projects where they gain direct insight on the impact of their investment.
Because there are no financial intermediaries, producers (the borrowers) benefit from the platform by paying their loans back at a lower interest rate. Furthermore, these loans provide borrowers with a documented immutable credit history on the blockchain. EthicHub has since the first quarter of 2018 facilitated the release of US$40,000 to 60 farmers in three Mexican communities in Chiapas (Las Delicias, San Rafael and La Boquilla), and all of them are paying back their loans on time.
Loans are nominated in the local currency of the farmers (i.e. pesos). To convert other currencies and enable money to be transferred across borders on the blockchain, a cryptocurrency (stablecoin) is needed: it is called DAI and its value has a fixed exchange rate to the USD.
To mitigate exchange and default risks, EthicHub has developed its own token, Ethix, which will be implemented to provide a compensation pool managed by a smart contract. The Ethix token also works as an incentive to keep the users trustworthy through a loyalty and reward system. How that works is that when the governance structure isi focues on the token holders, larger investors may try to influence decicions to their own interest instead of the interest of the project. However according to the whitepaper of EthicHub; in this system, the key users; the borrowers, investors and project collectors will all gain governance when they use the platform and Ethix. They will be granted with governance rights depending on the amount and type of contribution and this balance will be part of the implementation of decentralised governance. This will ensure that the users are the real owners of the platform.
Support for the project
EthicHub’s founders (Jori Ambruster, Pablo Chang, and Raul Martinez) have backgrounds in European business management and coffee farming and trading in Mexico. One of the founders also managed a microfinance institution in Mexico and provided micro loans to 8,000 smallholder farmers with a below-3% default rate. The founders were involved in coffee farming and after learning about blockchain technology, they set-up EthicHub in 2017. A great team was built around the project, which has since been presented at blockchain forums in Asia, Europe, Mexico and New York.
Since its inception, the project has benefited from global support in, for instance, funding the development of the project’s prototype and setting up the first project collection office in Chiapas. EthicHub was awarded Best Financial Inclusion Project by Blockchain4Humanity at LaBitConf in Bogota; StartUp with Greatest Social Impact by the Spanish Fintech Awards (2018); and Design for Development by Cooperacion Española at Bienal of Iberoamerican Design. The UAM (a Spanish public university) is conducting impact measurement for the company through a collaboration with its masters’ programme on microfinances and financial inclusion.
A word of advice
Blockchain projects are all about communities – it is paramount to build a strong and solid community around common values and a shared vision. It takes time and there is no magic recipe but winning over the confidence and support from local people is necessary for success. Find a real problem to solve and then start local to grow global.
This article is one of a series of case studies on blockchain applications in agriculture undertaken by Wageningen University and Research on behalf of CTA. See the rest of the collection at https://www.cta.int/en/blockchain.