What is Centrifuge（CFG）?

Background

RWA stands for “Real World Asset” and is generally used on-chain to denote crypto assets linked to real-world assets. At present, real-world assets typically include government bonds, real estate (houses and rental income), loans, contracts, and guarantees. With the slowing of DeFi innovation and market development, the yields of established DeFi projects no longer satisfy market demand. RWAs can provide a stable rate of return supported by off-chain assets, thereby continuously expanding the boundaries of DeFi. Centrifuge, by migrating small and medium-sized enterprise loans from the real world to the blockchain, has become a bridge connecting traditional finance and DeFi.

Introduction

Centrifuge is a decentralized asset financing protocol, dedicated to unlocking the liquidity of real-world assets. Borrowers can finance their real-world assets without the need for banks or other intermediary institutions. Centrifuge connects real-world assets to DeFi, reducing the capital costs for small and medium-sized enterprises, and providing DeFi investors with a stable source of returns independent of the volatility of crypto assets. According to RWA.xyz data, it holds the top position in its category with $226 million in loans and has partnerships with blue-chip DeFi companies like Maker DAO and AAVE.

来源：RWA.xyz

Team and Investors

Centrifuge was founded in 2017 by Lucas Vogelsang, Maex Ament, and Martin Quensel. According to LinkedIn, the team currently has 56 members. Co-founder Maex Ament has a long history in the traditional supply chain finance sector and possesses many years of industry experience; software engineer Alina Sinelnikova graduated from the Massachusetts Institute of Technology (MIT) and has many years of development experience; other core members have strong professional capabilities in the traditional finance industry and technology development.

According to disclosed information, Centrifuge has undergone three rounds of financing, raising a total of $12.1 million. Investors include top-tier venture capital firms like Coinbase Ventures and IOSG Ventures. BlockTower and other investors are also partners in its products. Overall, a strong lineup of venture capital firms has provided Centrifuge with abundant resources regarding products, capital, and compliance.

Centrifuge Financing Situation (Source: ROOTDATA)

On July 17, 2023, Centrifuge announced the establishment of The Centrifuge Credit Group. This credit group comprises 9 members and was established to provide fair and objective reviews for the lending pools on the Centrifuge protocol, ensuring that the community and partners receive a comprehensive assessment. Additionally, the group is responsible for handling inquiries related to the setup of new and existing funds, asset evaluation, and risk analysis. From the disclosed information, all 9 members have extensive knowledge in lending, financial products, and other related areas.

Key Players

In addition to involving borrowers, asset originators, and investors, Centrifuge’s business, due to its unique legal structure and lending mechanism, is also associated with three “roles” and one architecture:

Centrifuge Chain

This chain is developed based on the Substrate framework and can share the security of the Polkadot network. The chain will provide connectors that allow direct integration with any generic EVM blockchain. CFG is the native token of the network, which can be bridged to Ethereum.

SPV

Special Purpose Vehicle is a specific legal entity, generally responsible for purchasing, packaging securitized assets, and issuing asset-backed securities in the offshore asset securitization process, mainly used for investment. Since its business scope is strictly defined, it is generally considered a high-credit entity that will not go bankrupt.

Tinlake Protocol

Tinlake is a smart contract deployed on Ethereum that converts real-world assets into ERC-20 tokens and then provides access to decentralized lending protocols. It is also the main front-end product of Centrifuge. In July of this year, Centrifuge officially launched a new, secure, reliable, and concise upgraded app version, which is gradually phasing out Tinlake.

Tiered Investment Institutions

Centrifuge has introduced three investment tiers: senior tranche, junior tranche, and mezzanine tranche, which allows customization of the risk-return profile of asset pools for different types of investors. The senior tranche usually offers lower, typically stable or fixed returns; the junior tranche is the first to bear the risk of default but receives higher returns; the mezzanine tranche has returns and risks that lie between the two. Investments at various tiers are allocated in a certain proportion in a loan. When implemented on-chain, the standard includes a two-tier structure, with the senior tranche called DROP and the junior tranche called TIN.

Centrifuge Layered Architecture (Source: Official Document)

Product Mechanism

The overall mechanism involves off-chain auditing, KYC, establishment of SPV, and on-chain establishment of liquidity pools and provision of liquidity, among other steps:

1. Borrowers wish to finance on-chain using assets such as invoices or real estate as collateral.
2. Asset originators (who have business relationships with borrowers, execute underwriting, and invest in higher-risk TIN tokens) establish a legal entity SPV for the liquidity pool. A liquidity pool may include several collateral loans of the same type but corresponding to different borrowers.
3. Asset originators initiate and verify RWAs, minting an NFT for the collateral asset on-chain.
4. Borrowers sign a financing agreement with the SPV, collateralizing the NFT in the Tinlake pool, which mints DROP and TIN tokens.
5. Centrifuge collaborates with SEC-licensed qualified investor verification service provider Securitize to assist investors in completing the KYC and AML processes.
6. Investors sign an investment agreement with the SPV corresponding to the Tinlake pool, which includes the investment structure, risks, and terms. They then use DAI to purchase DROP or TIN tokens.
7. When investors provide DAI liquidity to the corresponding liquidity pool, the SPV exchanges DAI for US dollars and transfers them to the borrower’s bank account.
8. Investors can request redemption of their DROP or TIN tokens at any time but must ensure that DROP tokens are redeemed before TIN tokens and that the number of TIN tokens does not fall below a predetermined minimum ratio.
9. At the time of NFT maturity, the borrower pays the financing amount and financing fees, and the NFT is returned to the asset originator.

Centrifuge Product Architecture Diagram (Source: Official Documentation)

The overall architecture is designed in accordance with the U.S. securities laws. Through SPV (Special Purpose Vehicle) and KYC (Know Your Customer), Centrifuge is striving to meet compliance requirements, but this also results in some investors being unable to participate due to centralized KYC.

Product and Related Data

Centrifuge currently has 17 pools, a total of 34 tokens, including senior and junior tranches, with a total TVL (Total Value Locked) of $228.1 million.

Centrifuge app interface screenshot (Source: Official Website)

Users can directly connect their wallets, complete KYC, sign the agreement documents, and then choose a pool to invest in. Currently, the pools use DAI and USDC. The Real-World Asset Market, co-built by Centrifuge and AAVE, has deposited 3.16 million USDC, with an APY (Annual Percentage Yield) of around 3.5%. The other products use DAI as the deposit asset, with APYs ranging from 3.24% to 12%. Staking in Tinlake also yields a 3.13% CFG (Centrifuge Token) reward.

Tinlake app interface screenshot (Source: Official Website)

According to data from MakerBurn, Centrifuge’s Block Tower series, New Silver, and other products have been adopted by MakerDAO as collateral.

MakerDAO’s RWA (Real-World Asset) collateral situation (Source: MakerBurn)

Beyond the product and public chain levels, Centrifuge has also developed Centrifuge Prime, which can serve as an industry infrastructure product. Centrifuge Prime is a comprehensive set of services and technologies developed by Centrifuge to help DeFi-native organizations (such as DAOs, stablecoins, and protocols) easily join and expand their portfolio of Real-World Assets (RWA). Its toolkit includes a compliance legal framework built specifically for DAOs and DeFi protocols, a sophisticated tokenization and issuance platform, decentralized and objective credit risk and financial reporting, and a diversified set of asset classes and issuers. This product is currently in the testing phase.

Tokenomics

Centrifuge is the native token of Centrifuge Chain, designed to incentivize network operation and sustainable ecosystem development. It can be bridged to Ethereum and used as an ERC20 token.

CFG Utility

• Paying fees for transactions on the Centrifuge chain requires CFG
• Ensuring Centrifuge Chain network security and serving as node incentives
• Staking CFG to qualify for financing
• CFG holders participate in protocol governance
• Used to incentivize CFG liquidity
• Incentives to purchase products, such as Tinlake incentives

CFG Circulation

The initial distribution of CFG was 400M, and due to the need for network incentives, it has adopted an inflationary model, with the total supply exceeding 498M as of the date of writing. Currently, 13.7% of the supply is staked or locked. In March 2023, the community passed a proposal regarding the collection of protocol fees with unanimous approval, but it has not yet been implemented on the mainnet.

Documentation shows that at the time of initial distribution, besides investors, team, and community sales, 43% was allocated to the foundation and ecosystem development. However, no detailed unlocking plan has been published yet.

Token Economics Distribution (Source: Official Document)

Competitor Comparison

There are several projects in the market similar to Centrifuge in terms of Real World Assets (RWA), among which Goldfinch and Credix are similar to Centrifuge in product and design architecture.

• Goldfinch collaborates with institutions, funds, and financial companies in the real world with lending needs, bringing off-chain demands onto the chain.
• Credix is a decentralized lending platform that enables borrowers from emerging countries to access previously untapped capital.

Data Source: RWA.xyz, ROOTDATA, official websites of various projects

As can be seen from the table above, despite having the highest active loan volume, there have been instances of default. Of course, Centrifuge has its unique advantages. It introduced the first real-world asset on MakerDAO, launched the first real-world asset market on Aave, and introduced the first institutional credit fund, bringing its collateralized loan business onto the blockchain. It has abundant collaborative resources and brand effects within the industry.

Market Prospects

The increase in demand for DeFi requirements such as asset management, fixed income, and stablecoin collateral is promoting the development of the RWA industry. Although market participants both on-chain and off-chain are continuously entering the market, the actual resistance of the industry should not be underestimated due to the influence of regulatory and market environments; real demand is easily overestimated. In the future, RWA should have better bidirectional interoperability. On one hand, real-world assets can be brought onto the chain; on the other hand, traditional finance (TradFi) can leverage various advantages of DeFi to further unleash potential. As the current leader in the RWA sector, the development of Centrifuge is closely related to the industry. Its latest product, Centrifuge Prime, is also expected to bring new norms and standards to the industry.

How to Own CFG?

You can own CFG through centralized cryptocurrency exchanges. Taking Gate.io as an example, you first need to create an account and complete KYC verification. After depositing funds into your account, you can follow the instructions to purchase CFG in the spot or derivatives market.

Take Action

Check the latest price of CFG and choose your favorite trading pair to trade.

Conclusion

With a comprehensive RWA asset system, strong partners, continuously upgraded and innovative products, and multi-chain development plans, Centrifuge is leading the RWA sector and constantly driving industry development. In the long term, RWA, by bridging traditional finance and crypto finance, indeed brings a lot of imagination. However, its products have experienced a credit crisis due to debt default, and because of centralized KYC restrictions, the products cannot be opened to the entire public. Also, compared to some DeFi products with a 10% yield, Centrifuge’s products may be more suitable for DAOs, stablecoin projects, or institutional parties with large funds. If you want to invest in CFG or participate in Centrifuge products, users need to carefully assess the risks and their risk tolerance.