Investments - Advancing Web3 with Credit!

Name of Project / DAO / Company

SphereDAO

Application type

Product Launch

Proposal overview

SphereDAO is a peer-to-peer lending platform that allows communities to provide credit to their members. As one of the first DeFi protocols solving the unsecured lending problem, we have a great opportunity to unlock a large number of buy-now-pay-later use-cases for communities in both developed and emerging countries. We have finished the front-end and have a large portion of the smart contracts finished. SphereDAO already has a number of partners who have committed to using the platform (committed partners have a total market cap of $15M+).

We are requesting that Harmony participates in our pre-seed round with a $250K strategic investment. Harmony will join our cap table with other investors who will participate in our pre-seed round at a $10M valuation. The investment can be provided via SAFE/SAFT (or whatever other vehicle the Harmony team deems reasonable).

We plan on using the funds to accelerate development with a launch targeted in August. This also includes other operational costs such as code audits.

We are a team of two full time developers, product designers, evangelists, etc. with over twenty part time contributors that are diverse in culture, professional backgrounds, etc.

Our milestones are:

  1. April 2022: Finish smart contract development and data science work for wallet scoring model
  2. May 2022: Give beta access to Harmony community to test and give feedback
  3. June 2022: Iterate based on feedback from the community and conduct smart contract audits
  4. July 2022: Deploy to Harmony mainnet
  5. August 2022: Support 25 Web3 communities/Surpass $1M transaction volume/Achieve 1K monthly active users
  6. September 2022: Support 50 Web3 communities/Surpass $5M in transaction volume/Achieve 5K monthly active users
  7. October 2022: Support 100 Web3 communities/Surpass $20M in transaction volume/Achieve 10K monthly active users

Proposal ask

$250K pre-seed investment at a $10M dollar valuation.

Metrics for success

Within the first three months of launching we would like to hit all of the following metrics:

  1. 100+ communities
  2. $250M in total community market cap
  3. $5M in liquidity for unsecured loans
  4. $20M in transaction volume
  5. 10K in monthly active users
  6. 10K in transactions per day
  7. $1M in unsecured loans transacted in a single day

External links

Website: https://spheredao.finance/ (includes social media accounts and Discord link)
Pitch Deck: SphereDAO Pitch Deck - Google Slides
Whitepaper: Latest Sphere Investor Memo - Google Docs
Demo: Exploring the Sphere Credit Platform - YouTube

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hi team, could you let us know these items:

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Team Biographies and Commitments:
Ryan McNutt and Christopher Ries are co-founders at SphereDAO and are full-time. They have funded the business from personal savings. There are also twenty part-time project contributors.

Ryan McNutt graduated from the University of Arizona with a B.S. in Information Science. Ryan previously founded a startup (ApplyAll) that achieved 100K+ in monthly active users. He has also led global engineering teams at CBRE (leading over one hundred engineers).

Christopher Ries graduated from the University of California at Irvine with a B.S. in ICS. Christopher was the first product manager at Cylance (acquired by BlackBerry for $1.4B) and most recently managed a large portion Security Products Portfolio for Oracle Cloud Infrastructure (e.g. secrets management, data loss protection, etc.). He also holds a top secret government clearance and has experience securing and auditing government financial systems and critical infrastructure (e.g. water treatment facilities).

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Tokenomics Model:
The total token supply is capped at 100,000,000 SPH tokens. SPH tokens will be used as a rewards mechanism for borrowers and lenders, so there is the possibility that additional tokens will be created in the event that token buybacks become an untenable strategy.

The token cap table includes the following stakeholders:

  • Treasury - 52%
  • Investors - 20%
  • Founders and Team - 20%
  • Public Token Sale - 5%
  • Advisors - 2%
  • Token Distribution - 1%

The SphereDAO founders and team will be subject to a three year unlock period with tokens vesting quarterly after the first year. Terms for investor lockup schedules are yet to be determined.

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Product Demo:

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Technical Roadmap:

Q1 2022:

  • Community building on Discord, Twitter, and Telegram
  • Launch of CryptoSphere podcast on Spotify, Youtube, and Apple Music
  • Release of Genesis NFT Collection
  • Smart contracts development work

Q2 2022:

  • Strategic partnerships with DAOs and Web3 communities
  • Build data science model for wallet scoring and/or partner
  • Beta program for SphereDAO unsecured lending platform (hosted on ETH testnet)
  • Smart contract audit with third party vendors

Q3 2022:

  • Public launch of SphereDAO unsecured lending platform on Harmony/ETH mainnet
  • Credit score sharing protocol with other TradFi/DeFi platforms
  • Continued engineering efforts to minimize fraudulent usage
  • Multi-chain support with EVM compatible blockchains: Avalanche, Polygon, Binance Smart Chain, etc.

Q4 2022:

  • Decentralization of SphereDAO with off chain governance
  • Roll-out of SphereDAO credit membership program
  • Partnership with consumer debt asset buyers (Blackrock, Vanguard, etc.)
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Competition

When it comes to unsecured loans in decentralized finance (i.e. DeFi), it is largely uncontested. Nonetheless it is important to note potential competitors that operate in adjacent markets. This section will focus on three specific markets: secured lending, unsecured lending for businesses, and traditional unsecured lending.

Secured Lending

Secured lending is a core tenet in decentralized finance (i.e. DeFi). It provides the basis for smart contracts that provide the functionality to lend and borrow. Secured lending has many use-cases, but more often than not is used to leverage existing cryptocurrency assets to generate additional liquidity. By highly leveraging themselves, DeFi users can earn compounding interest with high yields. There are risks associated with secured loans. Specifically, when the cryptocurrency asset dips below the loan-to-value ratio the secured lender will liquidate the borrower’s collateral to protect themselves from losses. The value of cryptocurrencies are highly variable, so there is the potential for a secured loan to be liquidated. That being said, let’s look at one of the most prominent secured lending protocols.

Aave

Aave is perhaps the most notable secured lending platform in DeFi with over $18B in liquidity. Aave is multi-chain and supports different use-cases such as flash loans. Flash loans allow skilled decentralized finance users to make an arbitrage trade without collateral, so long as it guarantees a positive yield. The average person using Aave is a DeFi power user who leverages the secured lending protocol to make investment decisions. Aave is great for these types of users, but provides limited value for consumers using credit to fund purchasing decisions.

Unsecured Lending for Businesses

Much of the subject matter in this whitepaper discusses unsecured lending, so this section will be brief. There exists a couple unsecured lending platforms, both of which focus on providing liquidity to businesses. Let’s take a closer look at Maple and Goldfinch.

Maple

Maple provides the largest liquidity pool in DeFi (e.g. $900M) for businesses or institutions seeking capital via undercollateralized loans. Lenders can contribute assets to a variety of funds that are managed by delegates from large financial institutions. Borrowers must submit a funding request for their business or institution. Funding requests are assessed by delegates who may require off-chain or know-your-customer (i.e. KYC) information before the request is approved. Once approved, the delegate will determine the terms and conditions of the loan. While it is possible to receive a unsecured loan from funds that operate on the Maple marketplace, undercollateralized loans are the preference for most delegates as it provides some liquidity in the event the borrower defaults. Lenders can earn anywhere from 4% to 19% depending on which funds they contribute to.

Goldfinch

Goldfinch focuses on providing unsecured loans to businesses or institutions located in developing countries.Goldfinch has the concept of senior and junior pools where the senior pool is an aggregation of most liquidity on the platform and the junior pools represent individual funds with their own set of lenders. The senior pool will allocate assets into the different junior pools based on the number of lenders staking in a given junior pool. Borrowers that are approved after completing the identity verification process can create a borrower pool (i.e. junior pool). The borrower pool is funded by lenders at a fixed interest rate ranging from 12% to 21%. Goldfinch has doubled down on using unsecured loans as a way to fund businesses in emerging markets that are tapping into large amounts of uncontested capital.

Traditional Unsecured Lending

It is worth mentioning that lending platforms in traditional finance own the entirety of the market share for consumer-based unsecured loans, but shouldn’t be considered direct competitors as their existing credit models are not transferable due to the strong preference for non-KYC solutions in DeFi. The markets are entirely different, so it’s not fair to evaluate them as such. As more individuals adopt cryptocurrency over-time, Sphere will gain its own market share as a part of the cryptocurrency ecosystem (potentially from previous traditional finance users).

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Total Addressable Market:

Looking at the current credit system we can draw some parallels to a determining a total addressable market for a crypto-based lending platform.

In the United States each credit account generates $5K in debt (yearly).
Source: https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf

There are over 50M non-custodial wallets between Coinbase and MetaMask. If each wallet generates $5k in debt yearly the total addressable market for our platform is $250B.

Sources:

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User Reviews and Analytics:

While we are pre-launch and don’t have any user reviews, we have secured four different partners who are good references and committed to deploying community funds to our platform. These partners include: Arena Masters, HerHouse, Panvala, and 40AcresDAO. This accounts for over $20M in market capitalization in total.

Additionally we have identified the target user most likely to use our platform. We have achieve this through user surveys and test marketing campaigns (looking at click through rates as a basis to determine user interest). Our target user is ages 18-45 (primarily male) with the most interest in North America and Europe followed by Southeast Asia and South America.

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Go-To-Market Strategy:

Much of the go-to-market strategy for our lending platform focuses on cross marketing. Each and every Web3 community that we onboard brings N number of users. So our growth from a user standpoint is exponential due to the hundreds or thousands of members that we have access to with each and every partnership that we secure. A more practical example of this is when we announced our partnership with Arena Masters. Our Twitter experienced a 60% growth in followers in a 48-hour time period. In our partnership with Harmony, we hope to provide exposure to numerous other EVM-compatible projects and their respective users.

Other go-to-market deliverables include:

  • Documentation (Whitepaper, Technical Documentation, Knowledgebase Articles, etc.)
  • Weekly episodes of CryptoSphere. Check out our latest episode: CryptoSphere Episode 05: Paul Sebastien - YouTube)
  • PR with crypto-focused publications (e.g. CoinTelegraph)
  • Targeted advertising on Youtube, Google, Sandbox, Decentraland
  • Community outreach and growth with local DAOs in Austin, Denver, Miami
  • Participation in major DeFi events ETH Denver/Austin, SXSW, ConsenSys
  • Token distribution bounties
  • NFT launch
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Financials and Token Distribution:
We plan on using the Harmony investment to accelerate development. With the 250K we plan on allocating the funds in the following way.

  • 75% to accelerate smart contract development between three solidity developers (we plan on hiring one additional person to help Ryan and I)
  • 10% for contract work in other key areas (e.g. community manager and/or support)
  • 10% for operations costs (smart contract audits, legal and/or regulatory consults, etc.)
  • 5% in marketing costs (e.g. advertising campaigns and participating in key conferences)

The token distribution is discussed in detail in the tokenomics section.

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Technical review including audits:
Since we are only partially complete with the smart contract development we have not yet completed a smart contract audit. As per Harmony guidance, we will the multiple smart contract auditors recommended.

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@lij Please let me know if you have any other questions or concerns about this investment grant application and I will be sure to respond with an answer asap.

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@lij we have done a document overhaul to simplify the messaging for people with little to no crypto experience. You can those documents here:
Updated Slide Deck: SphereDAO Pitch Deck - Google Slides
Updated Litepaper: https://docs.google.com/document/d/1arHyiXM9I09AWXBk8B4TyF24M_P7YdUiqrh1IahIA9M/edit?usp=sharing

hi team, we just approved your launch grant, on the other thread.

who is your lead investor in this round? our guidelines is we don’t lead round so “you must have an outside, lead investor”.

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@lij we have only been fundraising for a couple weeks, but are awaiting the final decision from a number of venture firms. Some of the more prominent firms we are talking to include: Multicoin, Coral Capital, Propel, Basecamp (Alumni Ventures), Floodgate, Watertower Ventures, etc. Would be happy to get on a call with you to discuss why your follow-on investment is important to us and how it would benefit Harmony.

I wanted to follow up on this. We’re still awaiting a decision from a couple funds that will potentially be our lead investor. If you could help provide us with a decision about participating in our pre-seed round it would help accelerate that process and help us close some of the venture funds in consideration. Harmony would be receiving the great terms on our cap table (other investors would participate at a $15M valuation whereas Harmony would be getting a $10M valuation). So Harmony’s equity value would go up just by participating. SphereDAO would also be inclined to provide you a significant discount when we go and raise our seed round next year. We also may have a situation where we will be oversubscribed to our round, so that’s something to keep in mind. I understand that you will only invest as a follow on investor, but your commitment as a conditional investor greatly helps our ability to close our pre-seed round and would greatly benefit Harmony for the reasons above. Could you provide us an ETA on when you can reach such a decision?