Florence Finance - RWA lending in Euro

Introduction

One of the latest protocols in the space of RWA lending is Florence Finance which serves a niche market, small and medium-sized enterprises (SME) in Europe. As “the leading Euro-denominated RWA project”, Florence Finance aims to solve the problem of European SME funding gap.

Below is the chart explaining how the protocol works.

Users provide liquidity to the protocol’s loan vaults and receive tokens which can be FLR, the native token of Florence Finance, or Loan Vault Tokens. Once these tokens are converted to EUR, they are lent to borrowers. Note that Florence Finance doesn’t directly lend to SMEs but to credit providers or lending platforms (called Delegates) with a proven track record. These lenders then distribute the funds to SMEs in euros, and receive interest from SMEs. Delegates then distribute interest to protocol’s users.

There are two active loan vaults at the time of writing: Caple and Junior. The two vaults differ in their risk/reward profile with the latter being riskier thus offering higher yield, 9.5%. The former vault is managed by a European specialist in SME growth credit, Caple. Vaults are fully (100%) collateralized by real-world loan assets.

Duke Dash

Offering points to users is a new trend across various DeFi projects. Florence combines points with another digital primitive, NFTs. Recently, they launched Duke Dash, a campaign that combines Duke NFTs with a tiered reward system. There are five tiers of Duke NFTs:

- Squire. Every participant starts from here; this is an NFT with 0 points.

- Count. If you are in the bottom half of point earners, you get a Count NFT.

- Earl. Your reward is an Earl NFT, if you manage to get to the top 50% of the leaderboard.

- Knight. Knight is a special rank reserved for those users with at least 10 badges. Badges are earned through community participation.

- Archduke. Duke Dash’s highest rank which can only be obtained by the top 20% of point holders.

There are several ways of earning points, the most effective of which is depositing $FLR into a loan vault. Number of points depend on both the amount of the deposit, and its duration, i.e., how long you have been providing liquidity to a vault. To prevent whales from earning all points, the second factor has more weight than the first one. You can also earn points by interactions on social media, e.g., sharing or liking the protocol’s content on Twitter. Challenges, competitions, and referrals to the platform are also taken into consideration in assigning points to users.

FFM and FLR tokens

Another token used in the protocol is FFM (Florence Finance Medici) which is the governance and utility token of the protocol. Part of the interest generated from loan vaults will be employed to buy back and burn FFM. This will create a buying pressure on the token. The plan is to entirely decentralize the platform by delegating all governance issues to FFM token holders. They will approve lending terms and conditions, which loan vaults will be launched on the platform etc.

FLR, on the other hand, is the token 100% backed by performing loan assets plus the accrued interest. It’s 1:1 pegged to euro. There are two ways of earning yield on Florence Finance:

- Converting stablecoins (USDC or EURS) into FLR on a decentralized exchange and providing liquidity to a loan vault. When you provide liquidity to the pool, you deposit FLR into it and receive Loan Vault Tokens (LVT). If you decide to withdraw from a Loan Vault, you will get your principal back plus earned interest in FLR.

- Staking. If you want to earn FFM instead, you can stake your FLR tokens into a staking pool.

Risks

As with all RWA lending and private credit protocols, there is always a non-negligible chance of default. But at least in this case it is quantifiable. The expected default rate in the European SME market is about 2%. This should be taken into account when investing in the protocol’s vaults.

Currency or exchange rate risk, namely fluctuations in EURUSD pair can also hurt the performance of lenders (funders) because though loans are euro-denominated, funds can be deposited into the vaults in USDC, a USD-pegged stablecoin. Liquidity for euro-pegged stablecoins will hopefully get better over time which will eliminate exchange rate risk.

Then, there is DeFi security risk. On November 30, Florence Finance lost around $1.45 million due to an attack called “address poisoning”. It is type of a hack where a scammer generates an address similar to the one where the victim had previously sent funds. So, although RWA lending protocols provide a sustainable source of yield which is uncorrelated to the volatility of crypto market, these kinds of risks cannot be overlooked.

Conclusion

RWA seems to be left in the shadow of the recent uptrend in the crypto market. Which is not surprising: why set the bar low and get “boring” 5-10% when you can make 10X or even 100X literally during the night. But lending and borrowing are two of the most important financial function without which any financial system cannot exist. This is what RWA lending protocols do in the context of DeFi. Apart from having a socially important function of supporting local businesses, these protocols offer a sustainable yield uncorrelated with the market volatility, so-called real yield. Florence Finance, a relatively newcomer in this space, lends to credit providers who then distributes the funds to small and medium-sized enterprises. You can earn by either providing liquidity to its loan vaults or staking in the protocol’s staking pool.