In early 2022, Nishant Nigam and Surabhi C started a credit fintech project to finance small and medium-sized enterprises (SMEs).
But they soon encountered major challenges.
Not only have fintechs, non-bank financial firms (NBFCs) and alternative lenders struggled to raise liquidity, they have also faced inefficiencies and opacity in lending to a largely disorganized SME market.
When Nishant and Surabhi stumbled upon blockchain technology, they realized that it could potentially solve the liquidity crisis and lack of transparency in SME markets in one fell swoop. That’s how the duo started Appreciate.
“Rather than being a lender ourselves, we could use Web3 to find solutions for other lenders. With blockchain, we could channel crypto liquidity into the SMB market while ensuring the process is transparent, immutable and operationally efficient,” Nishant tells The Decrypting Story.
So far, Dygnify has received interest from over 20 institutional borrowers willing to be early adopters, as well as institutional digital asset investors.
How it works
Simply put, Dygnify is building a lending infrastructure to allow capital to flow from crypto and digital asset investors to small business (and consequently SME) lenders.
There are very few investment options that protect crypto investors from high volatility. On the other hand, lending to SMEs is far less volatile but struggles to raise liquidity.
Dygnify’s solution aims to solve both. Its Minimum Viable Product (MVP) is live on the Polygon testnet, which is Ethereum Virtual Machine (EVM) compliant. This means that all runtimes and projects built on top of the Ethereum network can access the platform.
The crypto capital can come from two sources. Surabhi explains, “Through our protocol, we can tap into aggregators who have already pooled crypto liquidity and are looking for stable investment opportunities. We can also work with private investors and institutional investors to do this.”
Many industry experts see connecting crypto capital to SME markets as a useful application of blockchain technology.
In 2021 crypto investor and former CTO of Coinbase Balaji Srinivasan wrote in a blog that India should encourage foreign crypto investors to fund Indian companies.
By connecting Indian MSMEs with crypto lenders, a small business owner should, in theory, be able to receive funds from around the world as easily as making digital payments and exchanging information domestically, he argued.
tech think tank Spirit wrote in a 2021 strategy paper:
“India has a unique opportunity to bridge the SME funding gap by attracting the new class of global crypto investors by leveraging everything that the IndiaStack team has helped build over the last decade – notably UPI, Aadhaar, GST and the information securities they generate – to help connect the trillion-dollar crypto economy to capital-hungry Indian entrepreneurs.”
Building the technology to make this possible may be years away, but the early steps and innovation created by startups like Dygnify could accelerate the journey.
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Bring real assets to DeFi
Dygnify is currently exploring SME markets outside of India in Southeast Asia as it takes time to ensure the startup is compliant with all of the country’s crypto regulations.
“India is certainly a target segment for us. It’s just that we have to take care of all the regulatory requirements here like we do in all other jurisdictions,” explains Surabhi, referring to the Indian policy that treats crypto as virtual digital assets and taxes them at 30 percent.
While current Indian regulations may not be conducive to a business model like Dygnify’s, the startup follows international standards for know-your-customer (KYC) and anti-money laundering (AML) practices.
In fact, its protocol will be an approved protocol with each party in it being subjected to these tests.
Nishant adds, “We will have liquidity pools where investors can add their capital and multiple borrowers can use the pools. That way, investors don’t have to constantly choose where to invest. You can sit back and earn passive returns from the pool while we use our lending algorithms to diversify risk.”
Like Dignify, some innovators are trying to bridge credit gaps in various sectors by bringing real assets into the decentralized finance (DeFi) segment.
Goldfinch Protocol, which allows investors to diversify investments across borrower pools, and Centrifuge, which brings structured lending to the blockchain, are two global examples.
However, the founders say others aren’t primarily focused on the SMB market — at least not in the way Dygnify does.
In the coming months, Dygnify will continue to work on its MVP and engage with interested borrowers and lenders.
Currently, India does not have a positive stance towards crypto to bridge the SME lending gap.
However, ensuring that only KYC-enabled institutions participate through approved exchanges and channels could allay some of the concerns of local regulators and pave the way for more startups like Dygnify to bridge India’s SME lending gap.
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