Paper: arXiv 2302.09009

Authors: Peplluis R. Esteva, Alberto Ballesteros Rodríguez

Abstract

There is a persistent lack of funding, especially for SMEs, that cyclically worsens. The factoring and invoice discounting market appears to address delays in paying commercial invoices: sellers bring still-to-be-paid invoices to financial organizations, intermediaries, typically banks that provide an advance payment. This article contains research on novel decentralized approaches to said lending services without intermediaries by using liquidity pools and its associated heuristics, creating an Automated Market Maker. In our approach, the contributed collateral and the invoice trades with risk is measured with a formula: The Kelly criterion is used to calculate the optimal premium to be contributed to a liquidity pool in the funding of the said invoices. The behavior of the algorithm is studied in several scenarios of streams of invoices with representative amounts, collaterals, payment delays, and nonpayments rates or mora. We completed the study with hack scenarios with bogus, nonpayable invoices. As a result, we have created a resilient solution that performs the best with partially collateralized invoices. The outcome is decentralized market developed with the Kelly criterion that is reasonably resilient to a wide variety of the invoicing cases that provides sound profit to liquidity providers, and several premium distribution policies were checked that contributed with extra resilience to the performance of the algorithm.

Complexity vs Empirical Score

  • Math Complexity: 4.5/10
  • Empirical Rigor: 5.0/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper presents an innovative application of the Kelly Criterion and Automated Market Makers (AMMs) to decentralized invoice discounting and SME factoring. While mathematically accessible, its simulation of default rates, payment delays, and adversarial scenarios offers practical insights for DeFi lending protocols.

Research Flowchart

  flowchart TD
    A["Research Goal: Decentralize Invoice Discounting<br/>via AMM Liquidity Pools"] --> B["Inputs: Invoice Streams<br/>(Amounts, Delays, Collateral, Mora Rates)"]
    B --> C["Algorithmic Pricing: Apply Kelly Criterion<br/>to Calculate Optimal Pool Premiums"]
    C --> D["Simulation & Stress Testing:<br/>Evaluate Scenarios & Hack Attacks (Bogus Invoices)"]
    D --> E["Outcomes: Resilient Decentralized Market<br/>& Premium Policies Maximize LP Profits"]