Non-Fungible tokens

One of the first major use cases for non-fungible tokens (NFTs) that grabbed the attention of the public was digital art. From the likes of digital avatars from Bored Apes or CryptoKitties selling for hundreds of thousands of dollars, to a digital painting NFT sold for over $69 million dollars [1]. It allowed art creators to tap into new markets worldwide, through the use of blockchain technology. Applications of NFTs have since evolved to include access (tickets), identification (certificates), property (conferring physical ownership) to tradeable items (e.g., weapons and skins in games) [2]. NFTs can be described as blockchain cryptographic assets with distinct metadata and identification codes that make each one of them different. This has led FinTech companies such as Request Network to investigate the implementation of invoice factoring through NFT invoices.

What are NFT invoices?

First, it is important to understand the meaning of non-fungibility. Cash is fungible, it can be divided into smaller amounts. A house is physically non-fungible. You could, however, divide the ownership of the house between multiple parties.

Invoices, by nature, are non-fungible. They contain the necessary information about products or services including identification of the payee and payer.

The ERC-721 token standard (aka ‘NFTs’) allows one to add custom metadata to NFTs. Not only may the metadata contain the invoice details such as due date, amount and token, but it may also include reputation metrics about the payer. This would allow one to see if the payer for example; pays effectively, on time or how often they pay. All this information would be available on-chain, so everyone can access and read the data.

The appeal of having NFT metadata is that the payee address could be replaced by the NFT address itself. Therefore, the customer would not need to know who owns the NFT invoice at the time of payment. They would just send the necessary funds to the NFT address, resulting in the factor receiving the funds through a smart contract.

Payer reputation

Paying invoices on time is very important for all actors in the economy. Businesses can and have gone under due to cashflow problems. By using the metadata of the NFT, we can start tracking a payers global payment reputation and also their payment reputation in relation to specific sellers – as long as the payer and/or payee don’t switch wallet addresses every time. A good reputation allows buyers to receive certain advantages, such as payment after 30 days instead of paying the invoice in advance, or faster handling of the order.

Invoice factoring

Invoice factoring is a form of alternative finance that has seen substantial use in Business to Consumer (B2C) i.e, Klarna and Business to Business (B2B) environments. Here, the seller may sell their future receivable finance (invoice to a customer, namely the payer) with a discount to the factoring entity (namely the factor i.e, a bank). This process is quite cumbersome for both the seller and buyer, especially for B2B invoicing. Often requiring several manual steps as information is dispersed among different systems and databases. The factor must trust the payer to have paid the invoice by the deadline, or a malicious seller may even try to cash an invoice with multiple factors to increase the amount of money received [3].

In Web3 invoicing a situation such as NFT invoicing would allow anyone to buy your invoice. The factor would only require a wallet and sufficient funds. Using the metadata of the NFT, they can access the payers reputation and therefore assess the risk they are taking. An NFT invoice issued to a payer with a bad reputation will carry additional risk, so the factored amount would be reduced.

Invoice factoring marketplaces

The wide accessibility of NFT invoicing could lead to the creation of an invoice marketplace. Due to the trustless nature of smart contracts, an invoice factoring marketplace will require at least some safeguarding measurements, such as:

• Know your Customer (KYC)

• Whitelisting payer addresses

• More centralised credit/reputation scoring

Without extra safety measurements, this could lead to customers not paying their invoices, as anyone can create an anonymous wallet and interact with the blockchain.

Payers could deposit collateral, similar to the AAVE liquidity protocol [4], to increase the level of trust. A lower KYC or identity standard could incur a bigger risk for the factor, thus reducing the factored amount. A larger collateral amount along with a good reputation score would allow for larger amounts to be factored along with a smaller factoring fee. A smart contract would then handle the payment transfer.

Request Finance is one of the market-leaders in Web3 invoicing, payroll and expenses, trusted by over 2000 companies and DAOs. Their software utilises the Request Network protocol [5] and are well-positioned to allow such a marketplace to flourish.

A hypothetical example of Invoice Factoring through Request Finance:

• The seller submits the invoice to the Request Finance Marketplace

• A factor attempts to reach an appropriate factoring agreement with the seller through Request Finance

• The seller registers the appropriate factoring agreement in a smart contract through Request Finance

• As the factoring decision registered in the smart contract is immutable, the factor pays the agreed amount to the seller

• When the invoice payment deadline is reached, the payer pays the invoice amount to the factor, through the NFT invoice smart contract. Should they miss the payment deadline, part of the collateral could be used to pay the invoice.

Accountability

New processes and technological advancements often incur accountability challenges. Request Finance [6] already offers a market leading solution to account for payments through different blockchains, making compliance processes a lot easier.

As NFT invoicing is a novel use case, compliance issues are an immediate concern. The key point of accounting is to prove you have paid your supplier. Therefore, it will be paramount to track the creator of the invoice using the NFT metadata. This is due to the buyer sending their payment to the NFT, rather than directly to the seller. The factor is paid via smart contract. Accordingly, it will be important to have the ability to process all metadata to ensure accounting records are correct.

NFT invoicing and invoice factoring show some of the exciting opportunities that are emerging to advance the Web3 ecosystem. Recently the Request Network Connector has created a budget of $600k to support builders [7]. It will be interesting to see how this ecosystem develops.

References

[1] https://onlineonly.christies.com/s/first-open-beeple/beeple-b-1981-1/112924

[2] Hofstetter, R., de Bellis, E., Brandes, L. et al. Crypto-marketing: how non-fungible tokens (NFTs) challenge traditional marketing. Mark Lett (2022).
https://doi.org/10.1007/s11002-022-09639-2

[3] N. Mohammadzadeh, S. D. Nogoorani and J. L. Muñoz-Tapia, "Invoice Factoring Registration Based on a Public Blockchain," in IEEE Access, vol. 9, pp. 24221-24233, 2021, doi: 10.1109/ACCESS.2021.3056626.

[4] https://docs.aave.com/faq/

[5] https://request.network/en/

[6] https://www.request.finance/

[7] https://request.network/en/2022/11/07/request-network-connector-invoice-factoring/