How to price the yield of a event financing bond when the amount of tickets that will be sold for that event is unknown? That was one of the more interesting areas of improvement we identified following the first event financing pilot. Lets get into it.
By Kasper Keunen developer at the GET Protocol Foundation.
STRUCTURE: Instead of attempting to explain the nuts and bolts of this subject for all types of readers (resulting in biblical text-walls) I am trying a new approach. I will start with a dense jargon/diagram explanation geared to people that already know a lot about DeFi, financialization and tokenisation. Then I will conclude with a shorter synopsis that should be more accessible for the less autistic reader. The purpose of this approach is to cut down on the overall length of my contributions. Lets see if it works out (i am quite bearish but you gotta try).
In the original initial design of the Event Financing Module(EFM) the bondIssuer(the borrower) had to set a single interest rate for the inventoryBond, that would be due to the owner of the bond at the time of expiry. The amount due would be the same no matter the outcome of the events ticket sale. While this mechanism is simple and works fine, we did find the approach has some shortcomings.
To understand these and how it could be improved we unfortunately first need to discuss how risk is priced and passed on in event organisation and financing.
Financing unlocks ticket sales
In most event financing cases the funding of the event by a ticketing company has the financing being provided as a requirement closing the deal. Without the financing the event won’t take place (or at least not with the GET ticketing company). The initial idea building the event financing module is to unlock the ticket sale volume that is now not accessible due to these financing requirements.
One rate, for all the risk
In the old version of the EFM the bondIssuer (a GET ticketing company) had to set a single interest rate for the inventoryBond. How much interest the bondIssuer would be willing to offer to potential bond buyers would depend on several calculations about the event. First, how much interest the event organizer has agreed to pay in interest for the financing. Secondly and more importantly (in size), how many tickets are expected to be sold for the event. Since ticketeers make their money by fees charged per ticket sold (a fee they can and generally do increase if they finance the event).
Pricing the unknown
With the amount of tickets sold in the future being unknowable, the bondIssuer needs to make a prediction on the expected sales. Having this prediction wrong can be costly and this outcome will cause friction and mis-pricing. In the worst case this friction in pricing will lead to no financing to take place at all.
Other types of risk in event financing (like the event being cancelled) can be covered by insurance or by exit clauses in the loan agreement between the EO and the bondIssuer(ticketeer). Such clauses are standard; for example the ticketing company will then get the loaned amount back from the agent/EO — without interest. Even though this is a rare edge case, it can happen.
Note that in most cases event financing is required to pay booking fees for artists. These booking fees are held in escrow by the artists agent. This means that if an event is cancelled these booking fees are returned (since that is defined as such in the contracts with the agents, EO and the ticketeer).
Cancellation consequences with the old risk pricing
If a cancellation happens with the old risk pricing mechanism the bondIssuer would still be on the hook to pay the inventoryBond owner the interest that was planned to have been funded by the collected ticketing fees. In other words, the bond issuer loses money, even though the bond has been repaid early.
While this of course isn’t a travisty, as it was the agreement, it is far from optimal. If we want this product to be better as the terms in the market right now we need to offer improvements to all actors.
Increasing risk definition by tokenisation
This principle of ‘forcing’ the bond issuer to take on interest risk isn’t necessarily unusual in the business. However it is always better if risk can be expressed in more detail. It is even better if this risk can be tokenized, so that it can be offset and/or distributed. This is what we set out to do over the course of the last couple of months after the previous pilot.
Reminder: like in a lot of RWA protocols the bondIssuer in the EFM is legally bound to respect the bond terms (so the base yield). Regardless if the ‘real world loan’ (in our case their loan to the EO) is repaid to them. This is reasonable since the bondIssuer can protect itself legally towards the EO.
Capitulating on the on-chain value flows
Every ticket sold on GET V2 results in an immediate NFT mint and a GET fuel deduction from the Economics.sol contract. With the complete value flow now being on-chain we have now unlocked the ability to trustlessly (and without legal/administrative overhead) create two sources of yield for the inventoryBonds; the base yield and the inventory performance yield.
The new risk pricing model
- The base bond yield: Similar to before, we have a static base yield (in USDC) that will be paid by the bondIssuer no matter the outcome of the event. This part of the yield covers the cost of capital and risk the ticketeer not being able to cover its obligations (which is legally enforced by the foundation, similar to how TrueFi and Maple enforce collection legally to its borrowers).
- The performance inventory yield: Based on the amount of NFTs minted by the eventNFT contract, and the ‘performance yield’ configuration as set at when the bond was configured at its offering. This yield is settled in GET/xGET after the event is completed. The settlement of this debt is completely handled and assured by the EFMs smart contracts.
A good fit
This way of pricing risk fits event financing particularly well because, since events are a high margin business — after a certain point. Meaning that after the static organisational costs are covered -every ticket sold after that will be almost pure profit. This upside after a certain ticket sale count can now be expressed in a bondOffering and the upside sold.
The diagram below shows how the bondIssuer/ticketeer is both a debtor as well as a creditor since they tokenize a loan they have provided to the event organiser. The improvement we are discussing in this blog concerns how the ticketeer prices the tokenized loan on-chain.
In conclusion; better pricing for all
The bottom line benefit is that bond issuers can now set the base yield(USDC) in a way that completely encapsulates the risk of the loan given to the EO. Meaning that when the EO pays them 12% on the loan, the ticketeer can decide to only pass 8% to the bond owners. This 4% difference will then encapsulate the risk for the bond issuer that the EO doesn’t repay them — since when that happens the bond issuer will still need to pay the 8% + the principal back (ticketeers have lots of ways to legally protect themselves for this).
The performance yield contracts allow the bond issuer to forward the upside of a ticket sale to bond buyers easily. This separation of risk pricing greatly reduces friction in pricing risk. A bond owner can even decide to separate the base and performance yield. Since the performance yield part of the bond is a token that is only worth anything if the inventoryTranche it represents is sold.
Summary, in normal english
This redesign in how risk is priced for inventoryBonds comes down to the fact that it will now be possible for bondIssuers (the borrowers in the EFM) to set two types of returns for a bond offering.
- The base interest rate for the bond — which is paid in USDC and has to be paid by the bondIssuer no matter what (so irregardless of the outcome of the event).
- A performance inventory yield — a yield paid in GET/xGET and is dependent on how much tickets where sold for the event in question. You can think of it as a ticket sale ‘kickback’ for those that bought the bond.
The benefits, in english
This change will make it easier for bondIssuers(GET ticketing companies) to price their bonds. It not only derisks the bondIssuers but also the bond buyers, since now their yield is more directly tied to the events performance.
Having a ‘return’ that is dependent on the result of some business venture (an event in this case) isn’t necessarily something new. However, what is new is that we can do this for a fraction of the cost, with complete on-chain settlement — since in V2 all value flows are on-chain.
Unlocked potential for other actors
In the organisation of large events a lot of actors are active. Promotors, venues, agents, the list goes on. All these actors have a stake in the that an event gets on the rails. For all these actors to be in business, the initial financing needs to go through.
At the moment these actors aren’t able to influence a event loan between the EO directly. This is because these loans are settled in meatspace and with strict legal entities, that need to commit. Since the Event Financing Module operates on a public blockchain, we are not limited by legal red-tape and lawyer transaction costs.
In a future version of this inventory performance yield module it would be possible for a venue to add a performance yield for an inventoryBond taking place in their venue. This economically makes sense for the venue since they know that every visitor spends at least $X at their venue.
This new approach of the EFM fits in our long term vision of aligning actors in the entertainment sector. We hope you are as excited as we are!
What does it mean for the token sir?
As always every function added to the protocol that has the ability to increase ticket sales is a boost for the tokens utility. As noted, financing is very often a requirement for the ticket sale to be serviced by a particular ticketing company, hence for that reason alone it is an obvious utility add for GET. In addition with the risk pricing change the performance inventory yield is settled in GET/xGET — creating an extra supply sink when fully rolled out.
So when will we see this in the wild?
Over the last 2 months I have rewritten the EFM contracts. At the moment I am finishing up the testing suite for the dynamic inventory yield. We are actively looking for a suitable event financing candidate that can put this mechanism to the test. As explained in the previous blog, we will use the Teller contracts and front-end to handle the base yield settlement.
Until the next one frens,
If in the meantime you are interested in our ticketing infrastructure or services, please get in touch through our website. If you are interested in other components of the protocol such as the token, feel free to join our active Discord community.