Centrifuge is the gateway between real-world finance assets and NFTs
Centrifuge is an open blockchain PoS protocol built on the Substrate that focuses on real-world assets such as invoices or real estate that are converted into NFTs (non-fungible tokens).
Centrifuge: how does it work?
Centrifuge solves the problem that arises for companies having liquidity issues. Simply put — the ability to convert corporate assets like invoices into money.
There are many companies that, for example, issue extended-maturity invoices that last several months, but at the same time they need to have the cash to pay for their own liabilities. So, they need to draw liquidity from other sources.
The common solution is to go to the bank and take a short-term loan — however, this loan usually comes with a 15% interest which is not really affordable for most companies. On the other hand, huge corporations can take loans for almost zero rates, distorting the free market and creating inequality between businesses.
Solution
Although there are many banks and businesses providing short-term liquidity, but none of them have managed to link real assets (such as invoices, mortgages, or loans) and the cryptocurrency world of DeFi. Until Centrifuge came into play.
Centrifuge is a gateway for accessing the liquidity of decentralized finances using an open-source toolkit: Tinlake, Centrifuge Chain, and P2P Protocol. As you know, DeFi is focused on streamlining the financial sector in a decentralized form.
Centrifuge allows companies to exchange their assets for NFTs (non-fungible tokens) which can then be traded on the decentralized finance markets. This opens up a variety of ways for participants to use their tokens — turn them into stablecoins (and for example provide liquidity), invest within DeFi, lend them at higher interest through MakerDAO, run yield farming, and many others. This will not only increase the liquidity of these financial market participants but also give them access to everything DeFi has to offer today. In other words, their assets are tokenized. Centrifuge achieves this by creating NFT tokens worth the assets which can then be used throughout the Polkadot ecosystem.
Centrifuge Chain — Technology
Centrifuge Chain is based on Substrate and enables sharing its off-chain asset data with the initial bridge to Ethereum, giving it access to existing DeFi projects.
Through the Polkadot ecosystem after securing a parachain slot, Centrifuge will provide users with digital identity, immutable and controllable data ownership, the ability to create and transmit standard business documents, and connections to the DeFi world.
Together, these features will enable a new type of financial trading document: a combination of non-fungible token (NFT) standards with private off-chain trading data to create unique marketable assets which we call Business NFTs.
How does Centrifuge solve the problem of the traditional financial sector?
In the traditional financial sector where intermediaries exist (e.g. banks, investment funds) borrowers use their assets as a principal. From the beginning, however, it is difficult for entrepreneurs and individuals to borrow money in the crypto sector because using such a principle is difficult.
And that’s why there’s a Centrifuge to solve the situation. Their system enables businesses and individuals to provide their assets to borrow funds within the cryptocurrency sector. Unlike classic “lending services” such as MakerDAO it is not the principal in the interchangeable cryptocurrency (Ethereum, Bitcoin, Litecon) but rather real products/things from the real world, only tokenized to the form of non-transferable NFTs.
DeFi, as we know it now, has existed here for several years. It works in parallel to the traditional financial system where cryptocurrencies such as Ethereum act as principal (see MakerDAO). However, DeFi resources are mostly used only for speculative purposes of buying other cryptocurrencies. At the same time, DeFi has so far been here only for cryptocurrency participants because only cryptocurrencies could be used as principal but no assets from the physical world.
Centrifuge, therefore, creates a bridge between physical asset holders and cryptocurrency lenders, opening up the potential to promote a decentralized economy and business viability. All this takes place without the involvement of banks and other traditional financial institutions that play the role of intermediaries.
Centrifuge Protocol Tokens
The Centrifuge chain will be powered by its native Centrifuge token $CFG. As a substrate-based token bridged to Ethereum, it links Centrifuge with the biggest DeFi ecosystems in the world. Learn more about it in the token summary.
CFG is providing rewards for Validators (for creating and validating blocks) and payouts to Nominators for staking. Tokens will also serve as a governance mechanism for network management — for participating in referendums, voting to upgrade the network, and the like.
In addition to the CFG token, Centrifuge uses two types of investment tokens — Tin and Drop — to run its system. Investors can initially decide whether to invest for their finance into one of those tokens due to their risk profile.
Tin is a highly profitable digital investment asset but of course with higher risk. On the other hand, the profit at Drop is lower but not so risky. It is the creation and subsequent sale of these tokens that creates liquidity in the Centrifuge ecosystem.
Imagine that you can get a stable return on your investment. Or you take a risk, and sometimes your yield will be lower than in the case of a stable one, but sometimes several times higher. Which investment do you decide on? I think the answer will be different for each of you.
For a sample, see how much income there was in the past from these two investment tokens. Drop had a stable yield of 10%, with Tin hovering around 32%.
Liquidity pools
From the investor’s point of view, it is then possible to lend tokens to one of the liquidity pools. Each pool belongs to one Originator (a company that demands financial resources) that makes its assets available in exchange for DAI (and for some another stablecoin in the future as well) stored in the liquidity pool.
An investor can choose which originator best suits him (whether in terms of return, risk, or type of business) and invest in that pool. Here I would point out that several companies have already entered into contracts with Centrifuge and are drawing their finances using DAI from these pools — so not just promises, but already a functioning project!
Tinlake
Tinlake is the first DApp that was built on the Centrifuge chain with the purpose to access liquidity on Ethereum because $CFG has its own bridge to the Ethereum network.
Tinlake serves as a decentralized lending protocol, where real-world assets such as invoices serve as collateral that can be tokenized into liquid crypto assets.
Both investors and liquidity applicants got their benefit, which can immediately receive the required resources at a decentralized level. By not entering the game by any intermediary, these funds are treated immediately and at relatively low-interest rates. Repayment terms are usually flexible and comfortable for borrowers.
Investors, in turn, have two types of investment opportunities at their disposal as we mentioned early on. The one with high yield and high risk (Tin) and low yield and risk (Drop). Investors can also directly monitor their assets and invest in different asset classes.
RWA market built on Centrifuge & Aave
In December 2021 the RWA (real-world asset) market was launched. RWA market is built on Centrifuge and the Aave Protocol and its purpose is bridging real-world assets to Aave DeFi protocol, so Aave users can earn yield from seven different pools provided by Centrifuge.
Those real-world asset markets can be provided with liquidity brought from Aave protocol and its users while the interest rates vary depending on the utilization of the market.
For the businesses behind those markets, it's beneficial to access more liquidity for providing tokenized aspects of their operations such as invoices or trade receivables, which are then used as collateral to borrow USDC stablecoin.
“The RWA Market bridges the regulated world of TradFi to the trustless world of DeFi,” stated the CEO and co-founder of Centrifuge, Lucas Vogelsang.
Before this collaboration, Aave served just for borrowing and lending cryptocurrencies, so the adding of real-world assets to Aave is beneficial for both protocols.
Canary network: Altair
Altair is based on Substrate and it has nearly the same codebase as Centrifuge Chain, similarly as its with Kusama and Polkadot.
Altair serves as an experimental network for testing the bounds of asset financing. The real-world assets, like in Centrifuge, but imagine it as a wilder and more experimental chain.
On Altair, there will be possibilities to finance assets such as art NFTs or tokenized experimental assets, before they can even go live into the Centrifuge Chain.
Because interoperability is the most precious value for increasing liquidity in DeFi, Altair will bridge across various ecosystems such as Kusama, Polkadot, Ethereum, and even more in the future. Assets on those blockchains could be financed on Altair.
The AIR token is the native token of Altair. With basic functionality delegated to Kusama, the AIR token has no limits — it can become more than a traditional network token.
Altair has its own native token called AIR with those utilities:
- gas for transactions,
- security of the chain,
- governance,
- reward adoption.
The total supply of $AIR tokens is 505 mil.
Polkadot crowdloan: A way to the Centrifuge parachain auction
Centrifuge is competing in the second batch of Polkadot parachain auctions, which will end up on 10th March. Right now it seems, that Centrifuge can secure auction no 8, which would lead to the launch on Polkadot somewhere on the edge of March and April, depending on the speed of the deployment.
Parachain auction details:
Centrifuge aims to secure a parachain slot on Polkadot for 96 weeks. For the crowdloan, Centrifuge set aside 65.7m CFG tokens, which is 15,28% of the total supply. The rewards for your crowdloan contribution will be released in two waves:
- 20% of CFG rewards will be available to transfer immediately after allowing transfers
- 80% of CFG rewards will be vested linearly over a 96 week period
There are also a few nice bonuses for your contribution to the crowdloan:
- 5% bonus if you contributed to Altair crowdloan,
- 5% bonus if you contribute more than 5 000 DOT,
- 10% bonus if you contribute DOT in the first 72 hours,
- 10% ref bonus (split 5% to referrer & 5% to referred).
Here is our referral link to the crowdloan for which you can get the ref bonus.
Just for clarification, canary network Altair secured Kusama parachain slot in the 9th auction.
Final word
Centrifuge built a gateway between the DeFi world and the real physical world of financial assets. Those such as trading invoices, license invoices, or real estate, when connected directly to the crypto world, finally are used to solve the everyday problems of companies and individuals in the real world.
It's also important that Centrifuge has its own canary infrastructure platform called Altair, where are tested new approaches for bridging RWA (real-world assets) into DeFi, but without sacrificing the security aspect.
There is enormous potential for projects such as Centrifuge because there is a desperate need to connect the physical world of finances together with cryptocurrency space, especially DeFi (decentralized finances) and NFTs (non-fungible tokens). By doing so, Centrifuge will fulfill the mission of turning the world economy into a more decentralized and open market!
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