Introduction

Specification

Protocol overview

Problem

Today, a quarter of the world’s adult population does not have an account with a bank or another type of formal financial institution [1]. In some countries in the developing world, financial exclusion is as high as 90%. Most of the unbanked population does not have a typical “job”—they are smallholder farmers, micro-entrepreneurs or self-employed [2].

It is estimated that 487 million micro and small enterprises (MSEs) operate around the globe, with the highest concentrations in Africa and Asia. In low-income populations, they are critical to job creation and livelihoods. Out of them, about 300 million are informal. MSEs in emerging markets create an estimated US$8 trillion in credit demand per year, with US$4.9 trillion remaining unmet according to IFC – the so-called financing gap [3]. Informal sector MSEs make up 30 percent of that demand.

Traditional financial services actors are not economically incentivized to solve those problems. The distribution costs of banks to deliver their services to remote areas and informal populations have led to low adoption of their services in the developing world. Moreover, one of the main reasons for the high global financing gap is credit rationing due to information asymmetry [4].

Microfinance has emerged as a solution to the financial inclusion problem, providing the necessary financing to poor entrepreneurs in the form of microcredit. Originally operating mostly in the form of NGOs, the sector has progressively commercialized and its image as an agent of poverty alleviation has been tarnished through research [5] and public scandals due to the lack of transparency and other bad practices [6].

Local communities willing to develop their economic activities have limited access to financing beyond their savings groups. Local financing is usually available at very high rates from local informal monopolies such as moneylenders, reaching hundreds and even thousands of percent per year. Micro-enterprises that have access to formal financial institutions have their credit history locked within proprietary databases such as credit bureaus, which are often acting as blacklists. They are also at risk of discrimination or seizure of funds due to government corruption.

Bitcoin, its second-layer Lightning network and other projects are focused on democratizing access to savings, payments and remittances through the use of open-source protocols and software. They have emerged as a viable financial inclusion solution for unbanked communities [7]. At the same time, the typical decentralized finance protocols—including the ones that are part of the Bitcoin ecosystem such as Tropykus [8] or Sovryn Zero [9]—require over-collateralization, which is out of the reach of the unbanked. Due to the pseudonymous nature of the users of Bitcoin, there is currently no widely available solution to provide unsecured credit on the network or its upper layers.

Solution

Growr protocol is an open-source peer-to-peer protocol that enables access to fair financing. The protocol helps micro-entrepreneurs from local communities to receive instant productive loans based on their self-sovereign credit record without the need for over-collateralization. In contrast to traditional microfinance, the protocol creates an open and global lending marketplace that connects borrowers to both traditional and decentralized capital providers, enforcing fair competition for pricing and fully transparent deployment of capital down to each micro-loan.

The prevalence of strong social ties in the Global South enables the creation of self-sovereign digital identities without undergoing formal KYC procedures. By leveraging the web of trust or similar concepts, these identities can be uniquely linked to each individual by relying on a network of credential issuers, instead of a single authority.

Creating self-sovereign digital identities without formal KYC procedures make it possible for each person to start building their own reputation and credit record, collecting soft and hard information in the form of credentials from their community, informal financial groups, and supply chain partners. This credit record is open and global in nature, so it enables the communities to combine their identities and attract directly external financing to develop their activities, without the need to go through local financial intermediaries. For example, supply chain partners can use this infrastructure to provide financing for goods and services.

When combined with digital assets that enable long-term capital accumulation without the risks of local hyperinflationary currencies, these communities can transform into digital micro-banks that connect their members to the global financial system, breaking the limitations of traditional systems. A digital capital market leveraging this identity and credit record infrastructure makes providing financing to communities more efficient and transparent than anything available today.

Capital providers participating in this market can apply flexible fine-grained investment criteria based on the available credentials. They utilize the community’s reputation and guarantees from its supply chain partners to provide under-collateralized financing for micro-loans. As the community accumulates digital capital, it uses it as collateral to access even more financing at better rates. Liquidity providers have full visibility into how their capital is used, instead of needing to trust an intermediary.

The protocol aims to contribute to addressing the global financial inclusion problem by providing open access to basic financial services, which leads to the following benefits: