Dygnify aims to bridge SME credit gap, solve volatility for crypto investors

Very few investment avenues protect crypto investors from high volatility. SME lending, on the other hand, is far less volatile but has challenges in raising liquidity. Dygnify wants to solve both.

Dygnify aims to bridge SME credit gap, solve volatility for crypto investors

Monday January 09, 2023,

5 min Read

In early 2022, Nishant Nigam and Surabhi C began a credit fintech project to finance Small and Medium Enterprises (SMEs).

But soon, they stumbled upon major challenges.

Not only did fintechs, non-banking finance companies (NBFCs), and alternative lenders struggle to raise liquidity, they also faced inefficiencies and opaqueness in lending to a largely unorganised SME market.

When Nishant and Surabhi came across blockchain tech, they realised it could potentially solve the liquidity crunch and lack of transparency in SME markets in one go. Thus, the duo launched Dygnify.

“Instead of being a lender ourselves, we could leverage Web3 to solve for other lenders. With blockchain, we could channelise crypto liquidity into the SME 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 users, as well as from institutional digital asset investors.

How it works

In simple terms, Dygnify is building a credit infrastructure for capital to flow from crypto and digital asset investors to small business lenders (and consequently, to SMEs).

There are very few investment avenues that protect crypto investors from high volatility. On the other hand, SME lending is far less volatile but has trouble when it comes to raising 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 the platform can be accessed by all run-time environments and projects built on the Ethereum network.

The crypto capital can come from two sources. Surabhi explains, “Through our protocol, we can tap into aggregators that have already pooled crypto liquidity and are looking for stable investment avenues. We can also work with retail and institutional investors for the same.”

Many industry experts consider connecting crypto capital to SME markets a useful application of blockchain tech.

In 2021, serial crypto investor and former Coinbase CTO Balaji Srinivasan wrote in a blog that India should encourage foreign crypto investors to finance Indian businesses.

By connecting Indian MSMEs to crypto lenders, a small business owner should theoretically be able to receive funds from around the world as easily as they can make digital payments and exchange information domestically, he argued.

Tech think tank iSpirt in a 2021 policy paper wrote:

“India has a unique opportunity to close the SME financing gap by attracting the new class of global crypto investors, by using everything the IndiaStack team has helped build over the last decade—particularly UPI, Aadhaar, GST, and the informational collateral they generate—to help connect the trillion-dollar crypto economy to capital-hungry Indian entrepreneurs.”

Building the tech to enable this could still be years away, but the early steps taken and innovations created by startups like Dygnify could accelerate the journey.


Bringing real-world assets to DeFi

At the moment, Dygnify is exploring SME markets outside India in Southeast Asia since it takes time to ensure the startup is in compliance with all crypto regulations in the country.

“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,” Surabhi explains, referring to India’s policy that considers 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 is following international standards for Know Your Customer (KYC) and Anti-Money Laundering (AML) practices.

In fact, its protocol will be a permissioned one, where every party on it will be put through these checks.

Nishant adds, “We will have liquidity pools where investors can add their capital, and several borrowers can make use of the pools. This way, investors don’t have to constantly pick and choose where to invest. They can sit back and earn passive yields from the pool, while we use our credit underwriting algorithms to diversify risk.”

Like Dygnify, some innovators are looking to solve credit gaps across sectors by bringing real-world assets to the Decentralised Finance (DeFi) segment.

Goldfinch Protocol, which allows investors to diversify investments across borrower pools, and Centrifuge, which is bringing structured credit onto the blockchain, are two global examples.

However, the founders say others do not focus primarily on the SME market—at least not the same way Dygnify does.

In the coming months, Dygnify will continue working on its MVP and collaborate with interested borrowers and lenders.

Presently, India doesn’t hold a positive stance on crypto for bridging the SME credit gap.

However, ensuring that only KYC-ed institutions participate through approved exchanges and channels might alleviate some of the local regulators’ concerns, and pave the way for more startups like Dygnify to address the Indian SME credit gap.

(This story has been updated to correct a typo)

Edited by Saheli Sen Gupta