Unlocking the Potential of Tokenized Real-World Assets with Centrifuge: The Bridge between Traditional Finance and DeFi
Decentralized finance (DeFi) has been around for a few years and operates alongside the traditional financial system. One particular use-case is lending where cryptocurrencies such as ETH or MKR act as collateral (as seen in protocols like Aave). However, DeFi resources are mainly used for speculative purposes, such as buying other cryptocurrencies. Additionally, DeFi has been limited to cryptocurrency participants as only cryptocurrencies could be used as collateral.
Centrifuge addresses this by creating a connection between physical asset holders and cryptocurrency lenders, enabling the growth of a decentralized economy and the potential for businesses to thrive. This is done without the need for the involvement of banks and other traditional financial intermediaries.
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What is Centrifuge?
Many companies have liabilities in the form of invoices with long due dates but they also need liquidity (cash) to cover their expenses which forces them to seek funding from other sources. Traditional methods such as taking out short-term loans from banks come with high-interest rates, making them unaffordable for most companies. Large corporations, on the other hand, have access to low-interest loans, creating an uneven playing field in the market.
Centrifuge addresses this issue of liquidity by allowing businesses and individuals to tokenize their assets, such as invoices, mortgages, loans, and other financial instruments on Ethereum and soon on the Centrifuge Chain. These assets are then used as collateral for loans and other financial transactions.
The platform uses smart contracts (to be replaced with the upcoming Centrifuge Chain launch) to automate the process of financing real-world assets. This allows for a more efficient, transparent, and secure way for businesses and individuals to access the global financial system.
How does it work?
Centrifuge is a platform that allows companies to bridge the gap between real assets, such as invoices, mortgages, and loans, and the decentralized finance (DeFi) world. While many banks and businesses provide short-term liquidity, they have yet to connect with the DeFi ecosystem.
Centrifuge uses an open-source toolkit, Tinlake, Centrifuge Chain, and P2P Protocol, to provide access to the liquidity of DeFi. This allows companies to tokenize their assets into non-fungible tokens (NFTs), which represent real-world assets to draw financing.
Centrifuge Chain
The Centrifuge Chain utilizes Substrate as its foundation and has secured a parachain slot on the Polkadot network to benefit from the built-in, robust security provided by the Polkadot Relay Chain.
P2P node provides off-chain asset data to Ethereum. Centrifuge Chain itself will soon provide all aspects of RWA asset financing — pools, tokenization, etc.
These capabilities enable a new form of financial documents, known as Business NFTs, which combines NFT standards with private off-chain trading data to create unique, marketable assets.
Centrifuge is utilizing the Ethereum network to connect with native users, but in 2023 they also plan to expand their reach by adding the capability for users on Moonbeam and Avalanche to invest in pools on the Centrifuge Chain without having to leave their respective GLRM/AVAX chains.
Tinlake
Tinlake is the first decentralized application (DApp) built on Ethereum. It functions as a decentralized lending protocol where real-world assets, such as invoices, can be tokenized and used as collateral to access liquid crypto assets.
The Tinlake protocol allows both investors and liquidity applicants to benefit.
Borrowers can quickly obtain the resources they need at a decentralized level, without the need for intermediaries, and at relatively low-interest rates. Repayment terms are usually flexible and suitable for the borrower.
Investors, on the other hand, have two options for investment, high yield and high risk (TIN) and low yield and low risk (DROP), and can directly monitor their assets and invest in different asset classes.
Centrifuge Protocol Tokens
The Centrifuge Protocol utilizes its native token, $CFG, to power its chain. As a Substrate-based token connected to Ethereum in the wrapped version $wCFG, it connects Centrifuge to the largest DeFi ecosystems in the world. The CFT token is used to provide rewards to collators who connect the Centrifuge Chain with the Relay Chain. CFG also serves as a governance mechanism for network management, allowing for participation in referendums and voting to upgrade the network.
In addition to the CFG token, Centrifuge utilizes two types of investment tokens, TIN and DROP, to run its system. Investors can choose between these tokens based on their risk profile. TIN is a high-return but high-risk digital investment asset, while DROP has lower returns but is less risky. TIN and DROP tokens are minted to represent liquidity (positions) in an RWA pool.
Liquidity pools
From an investor’s perspective, it is possible to lend tokens to one of the liquidity pools offered on Centrifuge. Each pool is associated with an Originator, which is a company that needs financial resources and offers its assets as collateral in exchange for DAI (and potentially other stablecoins in the future) stored in the liquidity pool.
Investors can select the Originator that best aligns with their preferences, whether it be in terms of return, risk, or type of business, and invest in that pool.
It’s worth noting that several companies already have adopted the Centrifuge protocol and are obtaining financing by using DAI from these pools, demonstrating that this is not just a theoretical concept, but a functional project that is being implemented in the real world.
RWA market built on Centrifuge & Aave
The RWA (real-world asset) market was launched in 2021, it is built on Centrifuge and the Aave Protocol and its purpose is to connect real-world assets to the Aave DeFi protocol, allowing Aave users to earn yield from seven different pools provided by Centrifuge. The real-world asset markets can be provided with liquidity brought in by Aave protocol users for a single fixed interest rate based on DROP investments.
For businesses that provide these markets, it is beneficial to have access to more liquidity by tokenizing aspects of their operations such as invoices or trade receivables, which can then be used as collateral to borrow USDC stablecoin.
Before this collaboration, Aave was limited to borrowing and lending cryptocurrencies, so the addition of real-world assets to Aave is beneficial for both protocols.
The RWA Market connects the regulated traditional finance sector to the decentralized and trustless world of DeFi.
The actual total market size of the RWA market is $7,55M.
Canary network Altair
Altair, also known as the Canary network, is an experimental network that utilizes the Substrate codebase and is in a similar relationship to Centrifuge Chain as Kusama is to Polkadot.
It serves as a testing ground for asset financing, including the financing of real-world assets such as art NFTs and tokenized experimental assets.
The native token of Altair is AIR, with a total supply of 505 million, which has various utilities such as gas for transactions, security of the chain, governance, and reward adoption.
Partnerships
Centrifuge has assembled a team of leading organizations from traditional and crypto finance, united in their vision to provide economic opportunities for all.
The project has also gained significant interest from investors, partnering with notable firms such as IOSG, Fenbushi, Blueyard, BlockTower, Aave, MakerDAO, Coinbase Ventures, L1 Digital, Galaxy, Fintech Collective, Mosaic, Rockaway, Moonwhale, TRGC, HashCIB, Crane Venture Partners, Fabric Ventures, Atlantic, Inflection, Semantic, etc.
Summary
Centrifuge aims to solve the problem of access to borrowing in the traditional financial sector by enabling businesses and individuals to use their assets as collateral to borrow funds within the cryptocurrency sector. In traditional finance, intermediaries such as banks and investment funds are used to borrow money. Still, in the crypto sector, it can be difficult for entrepreneurs and individuals to use their assets as collateral.
Centrifuge’s system allows for the tokenization of real-world assets as non-fungible tokens (NFTs) which can then be used as collateral. This differs from traditional lending services such as MakerDAO, which use interchangeable cryptocurrencies such as Ethereum, Bitcoin, and Litecoin as collateral.
Centrifuge connects the DeFi world to real-world financial assets, such as invoices and real estate, allowing them to be used for solving everyday problems in the real world. Connecting the physical world of finances to the crypto space, particularly DeFi and NFTs, has great potential and Centrifuge aims to make the economy more decentralized and open.
