Bringing trillion-dollar assets into crypto finance, Centrifuge builds a bridge between DeFi and the real world
Author: Qin Xiaofeng
Editor: Hao Fangzhou, Planet Daily
Crypto finance has always yearned to embrace mainstream society, linking with traditional finance to introduce incremental capital.
However, this vision is too grand, requiring numerous elements and facing many difficulties, so that today, there are only a handful of projects truly working in this direction. MakerDAO, known as the "crypto central bank," is one of them and also a leader in this field. MakerDAO has repeatedly attempted to bring real-world assets into the crypto market, providing financing for real assets such as real estate and music copyrights, and even Société Générale has shown favor towards it.
Yet, a company that provides technical and service support behind MakerDAO—Centrifuge—remains relatively unknown. This project aims to bridge real assets such as invoices, real estate, and royalties to DeFi, providing businesses with convenient and low-cost financing channels, reducing the barriers posed by financial intermediaries; while also offering investors high-quality investment categories to achieve stable returns.
In the four years since its establishment, Centrifuge has integrated with multiple DeFi protocols such as MakerDAO and Aave, and will launch in the Polkadot ecosystem, truly realizing the seamless flow of DeFi and real assets.
The road is long and arduous; how far can Centrifuge go?
1. Real Assets Expand the Boundaries of DeFi
In the past two years, DeFi (Decentralized Finance) has experienced a rapid growth phase. Whether in terms of the number of projects or the amount of locked funds on-chain, the increase has reached hundreds of times.
The prosperity of DeFi is not a coincidence; it genuinely addresses the pain points of traditional finance and meets market demand. Taking the traditional lending market as an example, the entry threshold is very high, and the asset review and loan processes are complex and cumbersome; in contrast, decentralized lending allows entry without permission, with 24/7 trading and faster loan disbursement. Especially after tokenizing real assets, their liquidity has also increased.
It is precisely because of these advantages that DeFi has exploded in the past two years. On-chain data shows that the total locked value in the entire DeFi ecosystem is approximately $250 billion. However, data from the past few months indicates a significant slowdown in growth. A fundamental reason is that DeFi is currently mainly in a competition for existing market share.
Taking lending as an example, although a number of leading projects such as Aave, Curve, and Compound have emerged and shone in ecosystems like BSC, Polygon, and Solana, these products are essentially engaged in homogeneous competition based on crypto-native assets. While the data looks impressive, it has not made a significant impact on the traditional world. Moreover, the current $250 billion may seem astronomical, but there is also a lot of fluff; many projects involve duplicate collateralization, so the actual demand for crypto collateral may need to be discounted.
Now, DeFi has reached a bottleneck period; expanding outward and embracing real-world assets is the right path. From a development perspective, the global real estate financing market alone is worth trillions of dollars, not to mention other credit and financing needs.
"In our view, DeFi is a major trend in the future transformation of the financial sector, and its essence is to solve all trust issues. The future of DeFi should also be linked with the traditional financial industry, bringing trillions of dollars of real-world assets into the crypto market; the prospects for this track are very bright," the Centrifuge team stated.
Bringing real assets on-chain is a direction that many projects have tried hard to pursue in recent years, but ultimately failed one after another. The main reasons are as follows: First, the timing was not mature. Such projects flourished around 2017, when industry education was not yet complete, and the mainstream world had a low level of recognition of crypto assets. Additionally, the bear market in 2018 led many projects to fail prematurely. Second, the solutions were not mature. Previous projects often issued ERC20 tokens for financing, but either lacked real assets for collateral or had overvalued assets, essentially cashing out through speculation on project tokens without real financing needs.
Now, with market education completed and NFTs becoming a more widely accepted asset carrier, the connection to the real world is tighter, and bringing real assets on-chain is back on the agenda. However, due to the "failures" of previous pseudo-demand projects, the crypto market now views long-term projects that genuinely promote the on-chain of real assets with skepticism.
But in the long run, the future of crypto finance, especially DeFi, should be linked with traditional finance, bringing real assets into the crypto market to achieve industry growth.
This is a cause that must be pursued long-term; the "crypto central bank" MakerDAO continues to move forward, and behind MakerDAO's ideals is Centrifuge's silent hard work, building a bridge to DeFi for real assets. For example, in April of this year, MakerDAO announced a credit line of up to $5 million for the real estate company New Silver, and this loan was made possible through Centrifuge's lending platform, Tinlake.
"Centrifuge's mission is to connect asset originators and investors, making financing activities transparent and efficient, creating new opportunities for borrowers who have so far been unable to access DeFi liquidity, freeing them from intermediaries, inefficiencies, and high costs in traditional finance. We provide DeFi investors with a stable source of returns, allowing them to obtain safer and more stable yields." the Centrifuge team told Odaily Planet Daily.
2. How to Conduct Crypto Financing for Real Assets?
Since its establishment in 2017, Centrifuge has walked through four years. Currently, the Centrifuge ecosystem mainly consists of the following parts:
Centrifuge Chain, a POS blockchain built on Substrate, which is also the home of on-chain real-world assets (RWA). Centrifuge Chain has already bridged to Ethereum but uses its own native token—Centrifuge (CFG) token, and will bridge to the Polkadot network in the future.
Tinlake, a decentralized lending protocol built on Centrifuge Chain, serving as an open market for real-world asset pools and is Centrifuge's main product aimed at the C-end.
P2P Network Protocol, which provides a secure way to create, exchange, and verify asset data among collaborators and tokenize assets into NFTs. Asset originators can selectively share asset details with service providers, who can assess the data and provide information for the minted NFTs. Cryptographic signatures can be used to verify data sources.
CFG Token, Centrifuge's native token, which incentivizes the secure operation of the network, and token holders can also guide project development through on-chain governance. More importantly, users providing liquidity to Tinlake can also earn CFG rewards.
So, how does Centrifuge convert real-world assets into crypto assets for financing?
(1) Process Explanation
Here, we take the music streaming platform Paperchain as an example to explain the operational logic of Tinlake.
First, music creators register on Paperchain and upload their music integration data from various platforms (currently mainly Merlin, Spotify, Apple, and YouTube); Paperchain uses its own data model to price and predict its future streaming revenue every 24 hours (let's call it "accounts receivable").
(Tinlake Operation Process)
Then, Paperchain packages this accounts receivable and sends it to the Tinlake platform, generating a legally effective non-fungible token (NFT); the NFT is then converted into interest-bearing ERC20 tokens, and Paperchain can set the yield and issuance quantity of these tokens. Investors use the stablecoin DAI to purchase these interest-bearing ERC20 tokens for investment; these stablecoins are sent to Paperchain and converted into fiat currency.
At this point, although the accounts receivable has not yet been received, the music creator can directly advance their copyright income from Paperchain. When the accounts receivable is received, Paperchain obtains the income from the music creator, redeems the ERC20 tokens purchased by investors, and destroys them, thus forming a complete closed loop.
In summary, the Centrifuge financing process is as follows: asset originators package and upload assets, generating a legally effective NFT; the NFT is collateralized, and a price is estimated through a model, generating interest-bearing ERC20 tokens; investors purchase these interest-bearing ERC20 tokens with DAI; the originator obtains financing, redeems it upon maturity, and investors receive returns.
In addition to accounts receivable, invoices, auto loans, royalties, and various other real-world assets can also be converted into tokenized loans through the Tinlake platform; by simplifying the financing process, costs are reduced, thereby increasing the liquidity of real assets and the transparency of investments.
(2) Tinlake Asset Pool Analysis
The interest-bearing ERC20 tokens mentioned earlier are also known as Tinlake asset pools, currently mainly consisting of two types: Tin and Drop.
Drop tokens are similar to senior bonds in traditional financial portfolios, with lower yields, generally fixed, and lower risk; Tin tokens are akin to junior bonds, with higher yields but first bearing the risk of default, and Tin tokens can only receive investment returns when all Drop tokens are redeemed, posing greater risk and potential loss of principal.
(Fortunafi Series 1 Financing Pool)
The above image shows a funding pool on Tinlake named Fortunafi Series 1, with a total asset value of 1,440,952 DAI, comprising 7 assets, with an average maturity of 24.1 months. The price of DROP tokens is 1.06 DAI, with an expected annual interest rate of 5.26%; the price of TIN tokens is 1.48 DAI, with an expected annual interest rate of 70.35%.
Furthermore, if the asset originator does not want to issue two tokens to set up an investment portfolio, they can issue only one token, but it must be Tin; if both TIN and Drop are issued, the issuance ratio of TIN set for different types of assets may vary, but the vast majority require that the TIN issuance ratio be at least 10%—this means that losses will only occur for Drop token holders when losses exceed 10% of the portfolio value.
Additionally, asset originators can create separate Tinlake pools (asset pools) for each type of asset, for example, one Tinlake pool for invoices and another for mortgages; all Tinlake pools are independent of each other, with interest rates configured separately. Therefore, each group of Tin and Drop is unique and not interchangeable. For investors, risks and returns are limited to the respective Tinlake pool and cannot be shared across Tinlake pools.
Finally, according to Centrifuge's vision, stablecoins are not limited to DAI; currently, its funding pools accept both DAI and cUSD (Celo USD), and in the future, it may accept any stable token, such as Acala, DAI, or Celo. The team is also working on establishing money markets on Compound and Aave. Moreover, the entities setting the interest-bearing ERC20 tokens can be centralized entities, a set of smart contracts that automatically price assets, or a DAO managing the Tinlake deployment.
3. Is the Centrifuge Model Worth Promoting?
Theoretically, the Centrifuge model is entirely feasible, but how effective is its actual operation, and is it worth promoting? Let's let the data speak.
From a real-world perspective, Centrifuge's Tinlake has indeed enhanced the liquidity of real assets.
Taking Paperchain as an example, the traditional music copyright payment cycle is generally 90 days. Through Tinlake, Paperchain successfully completed a pilot transaction on September 11, 2019, prepaying $60,035 of Spotify revenue to customers at an annualized interest rate of 7%. The initiation time for the entire pilot transaction prepayment was less than 30 minutes, with an initiation cost of less than $3 (Ethereum Gas fees), greatly accelerating the payment cycle, allowing creators to focus more on music creation and produce better works. For the freight company ConsolFreight, its freight invoice payment cycle is generally 30 to 45 days, which has also been shortened to within a day; the reduction in payment cycles helps improve capital utilization and assists ConsolFreight in scaling up.
Currently, Centrifuge has locked up 48.6 million DAI, with 11 asset pools in the financing phase, cumulatively creating pools for over 70 enterprises/asset originators for collateralized loans. In addition, Centrifuge has established long-term partnerships with several financial companies, such as New Silver (a tech-based non-bank lender), ConsolFreight (a trade finance and factoring provider), and Harbor (supply chain finance).
From the results, the Centrifuge model is worth learning from, but we believe there are still several issues worth exploring.
First, how to ensure that asset originators have ownership of the assets. Centrifuge requires originators to provide documents proving ownership of financial assets, and this asset information will be shared in Centrifuge's secure network with third parties, including asset valuation companies, auditing firms, underlying asset borrowers, and service providers. Originators can selectively share asset details with these third parties, who can assess the data and provide feedback for the minted NFTs. In this way, anyone can become an asset originator.
"In the traditional financial system, small businesses cannot efficiently obtain low-cost funding. Centrifuge hopes that these small and medium-sized enterprise borrowers can become asset originators, gaining DeFi liquidity through the Centrifuge platform," the Centrifuge team explained.
Second, the valuation issue of non-standard assets. In some cases, real assets may not be standard assets like cars or houses, but rather non-standard assets like copyright royalties.
To address this, Centrifuge adopts a fair value valuation based on financial models. This valuation method assesses the future expected cash flows of the collateralized assets and discounts the cash flows to reflect their present value—the so-called discounted cash flow (DCF) method. "Of course, we also adjust the expected cash flows for risk to reflect the riskiness of the asset pool and the likelihood of investment recovery. We are continuously optimizing our products and pricing systems, and we are very willing to listen to community feedback on this."
Third, the liquidity issue of assets. Even if some asset originators pass the review, the crypto market may not recognize certain real assets highly, leading to insufficient liquidity and difficulties in completing financing. To address this, Centrifuge collaborates with MakerDAO and Aave to create instant liquidity for Tinlake mining pools, which expands the sources of stablecoins and ensures that collateral can be liquidated more quickly; in the future, Tinlake will also launch in the Polkadot ecosystem, thus achieving DeFi across Polkadot and Ethereum to form an infinite market. "The cooperation between Centrifuge and Aave has pioneered DeFi financing and will significantly change the game for financing millions of enterprises, providing instant, bankless liquidity for real-world assets."
Fourth, the risk of liquidation. For defaults, the liquidation of real assets may not be as straightforward as on-chain assets, especially for non-standard real assets like copyrights, which may have poor liquidity, making it difficult to find counterparties for liquidation.
To address this, Centrifuge has adopted a two-step strategy: on one hand, it requires borrowers to provide sufficient collateral when taking out loans, using an over-collateralization mechanism to reduce risk for investors; on the other hand, if a default occurs, investors still retain recourse rights against the borrower.
"In the absence of bankruptcy, the borrower is responsible for liquidating the assets and repaying the investors. If the liquidation value of the assets is insufficient to repay the investors' investment amount, the borrower is responsible for compensating the shortfall," the Centrifuge team added.
4. The Road is Long and Arduous
In today's traditional financial system, only top enterprises are qualified to enter the liquid capital market, while most individuals and small businesses can only meet capital needs through banks. The lack of an open and transparent market prevents this group from obtaining competitive interest rates.
DeFi is a major trend in the future transformation of the financial sector, especially for institutions like Centrifuge, which focus on building a bridge between real assets and the DeFi market, creating new opportunities for borrowers who have so far been unable to access DeFi liquidity.
Although Centrifuge has achieved some results, it has not stopped progressing, as there are still obstacles to bringing real assets into the crypto ecosystem, which is a long-term endeavor. Since its establishment, Centrifuge has been quietly cultivating in this niche field and will continue to do so.
"When connecting the regulated TradFi world to the trustless DeFi world, we have encountered challenges that only a few have faced in DeFi so far. We have done a lot of work during the product launch process to comply with AML regulations and U.S. securities standards. This is an emerging industry, and the Centrifuge team is also eager to explore this new field with the industry," the Centrifuge team reflected on the hardships of entrepreneurship with deep emotion.
This path is not easy, but Centrifuge is unwavering in its mission to bridge real assets to DeFi. Founder Martin Quensel is a serial entrepreneur in fintech, crypto technology, and financial supply chain automation, and was a co-founder of Taulia; co-founder Lucas Vogelsang was the CTO of Swiss e-commerce startup DeinDeal and has worked at the intersection of technology and business, where he met Martin at Taulia and later co-founded Centrifuge; software engineer Alina Sinelnikova graduated from MIT and has years of development experience; other core members possess strong capabilities in traditional finance and technology development.
In terms of financing, Centrifuge has raised nearly $20 million since its establishment, with investment institutions including BlueYard Capital, Mosaic, Crane Venture Partners, Galaxy Digital, IOSG, Rockaway, Fintech Collective, Moonwhale, Distributed Capital, TRGC, and HashCIB among dozens of others.
Centrifuge has now opened the second round of crowdfunding on Polkadot, having raised over 1.58 million DOT, ranking first in the second round. In the future, Centrifuge will launch an on-chain real-world asset market—RWA Market—in collaboration with AAVE, allowing anyone to provide liquidity to real asset tokens issued by Centrifuge. Users can invest in multiple asset pools instead of just one, thereby diversifying risk without additional costs.
The road is long and arduous, and we will continue to monitor Centrifuge's progress.