Backed by MakerDAO, it counterattacked and became the leader in credit on the chain. Learn about Centrifuge, the underlying service provider of RWA in this article.

MakerDAO, which has benefited from RWA, has been firmly investing in RWA assets in the past six months. It increased its holdings of RWA assets by US$100 million in one week last month and currently has more than US$3.3 billion in RWA assets.

As the underlying technology service provider for MakerDAO to expand RWA assets,Centrifuge also successfully took advantage of the situation to “counterattack” this year and became the chain with the largest active loan amount. Credit Agreement. According to the RWA.xyz data platform, Centrifuge’s active loan amount on January 1, 2023 was approximately US$84 million, and so far, it has grown to over US$240 million, a growth of 286%, far exceeding the former credit leaders Maple and TureFi .

According to the encryption data platform RootData, Centrifuge has conducted 4 rounds of financing, raising a total of US$15.8 million. Investors include Coinbase Ventures, IOSG Ventures, etc.

Despite being favored by MakerDAO, the leading DeFi and well-known investment institution. Centrifuge, like Maple and TureFi, cannot avoid defaults and bad debts. At the beginning of this year, Centrifuge was exposed that approximately US$5.8 million in loans in two lending pools were overdue. In August, some communities said that the loans that were about to default would cost MakerDAO US$1.84 million. Investments are subject to risk of loss. According to RWA.xyz, Centrifuge currently has more than 15.5 million US dollars in outstanding loans. The MakerDAO community even proposed stopping lending to the tokenized credit pool on Centrifuge.

As the fastest growing on-chain credit protocol this year,How does Centrifuge work? What is the mechanism for dealing with disputed defaults and bad debts?

RWA has become the new life-saving straw for on-chain credit, and Centrifuge counterattacked and became the leader

In addition to on-chain U.S. debt, on-chain lending has also contributed to the RWA track. For example, the familiar MakerDAO, Compound, Frax, and Aave, the old blue-chip DeFi, are all in the market. In addition to these old blue-chip DeFi, some on-chain credit protocols have also benefited from the RWA narrative. According to RWA.xyz data, on-chain credit increased by more than $200 million from January 1 to September 30, an increase of more than 80%.

But despite this, compared with credit loans, which account for a large proportion of the traditional amount market, the development of credit in the crypto field has just begun. Around the end of 2021, institutional on-chain credit protocols represented by TrueFi and Maple emerged. Compared with the traditional DeFi over-collateralized lending model of Compound and Aave (lending another asset by over-collateralizing one digital asset), they It mainly provides low-collateral or even unsecured lending services to crypto-native trading investment institutions and market makers. However, institutions applying for loans need to submit some information for credit review, such as monthly submission of reports containing balance sheets, annual submission of independently audited financial accounts, etc. Even on Maple, borrowers need to sign up for credit risk data platform Credora, which provides lenders with real-time information to help them assess the level of risk a borrower has accumulated on different cryptocurrency trading platforms.

The low-collateral or even unsecured credit lending model has also attracted the participation of many institutional customers, such as Alameda Research, Wintermute, BlockTower, etc. In mid-2022, Maple’s active lending on the Ethereum chain alone reached nearly $1 billion, and TrueFi reached nearly $500 million at its peak. Goldfinch, whose active lending is second only to Maple and TrueFi, has raised $37 million in three rounds of financing from large crypto venture funds such as a16z and Coinbase Ventures, as well as angel funds such as Balaji Srinivasan, Ryan Selkis and Tarun Chitra.

However, as the crypto market entered a deep bear, DeFi’s overall liquidity was insufficient, and CeFi experienced a thunderstorm. Institutional lending protocols represented by Maple and TrueFi suffered large defaults and bad debts. For example, in June last year, after the thunderstorms of Terra and Three Arrows Capital, Maple Finance officially issued a document stating that after the encryption lending company Babel Finance went bankrupt and defaulted on a US$10 million loan, it may face short-term liquidity challenges and insufficient cash.

With the FTX thunderstorm, Maple Finance did experience larger-scale bad debts. Maple Finance is in default of $36 million due to its borrower, Orthogonal Trading, which had previously inflated its exposure to FTX and was unable to repay outstanding loans in the M11 credit pool due December 4, 2022 due to the FTX incident. The funds deposited by Nexus Mutual and Sherlock institutions into the Maple Finance lending pool were affected. Coincidentally, TrueFi also suffered a BlockWater breach. By the end of 2022, both Maple Finance and TrueFi have dropped significantly to around $20 million.

By 2023, with the rise of RWA narrative, the field of on-chain lending will turn around again, and the market structure will undergo major changes. In addition to the rebound in the number of active loans on the chain of the once leading credit agreement represented by Maple, there is also a rapid growth in the data of on-chain credit agreement such as Centrifuge, which has always been low-key, overtaking Maple to become the credit field. new faucet. Goldfinch, favored by many well-known capitals from a16z, has been developing steadily without much growth or sharp decline.

Maple, which was previously hit hard by its unsecured credit model, has expanded this year to a lending model collateralized by real assets and an over-collateralization model. In addition, Maple launched an on-chain U.S. debt lending pool in April this year, restarted the lending pool on Solana, and launched the Base network. During this period, Maple completed US$5 million in financing in August. Maple’s current on-chain active loans have grown from more than $20 million at the beginning of the year to nearly $100 million.

Compared to Maple, Centrifuge, which was the first to use real-world assets as collateral for lending, has seen even more significant growth. Currently, active loans on the Centrifuge chain have grown to over 240 million US dollars, an increase of nearly three times from the beginning of the year, making it the largest credit loan agreement on the chain.

MakerDAO Promotes Centrifuge to become the new leader in on-chain credit

Centrifuge is actually a very early on-chain lending protocol, which was established in 2017. Unlike Maple and TrueFi, which are more credit protocols for crypto financial institutions, Centrifuge emphasizes lending to traditional real-world assets and can be said to be the earliest player in RWA.

As early as 2020, Centrifuge served as a technical service provider to help MakerDAO build an RWA treasury with the real estate development guaranteed loan project 6s Capital as collateral. The rapid growth of active loans on the Centrifuge chain this year is also mainly attributed to MakerDAO’s layout of RWA assets.

Of the 6 lending pools disclosed on the Centrifuge official website, 8 are related to MakerDAO. For example, there are New Silver series that invests in real estate bridge loans, BlockTower series that invests in structured credit, and Harbor Trade Credit series based on accounts receivable lending, etc. MakerDAO is a priority investor in the pool. (Centrifuge’s hierarchical investment mechanism will be discussed in detail later). Statistics show that the current capital pool related to MakerDAO totals approximately US$200 million, accounting for 80% of Centrifuge’s total TVL (approximately US$250 million).

Judging fromMakerDAO asset list statistics, the BlockTower S3 and BlockTower S4 vaults integrated with Centrifuge were both established this year. There are currently $70 million and $56 million in DAI supply respectively. In other words, MakerDAO has provided Centrifuge with at least more than $120 million in loan funding this year.

The current APR of the capital pool related to MakerDAO is between 4% and 15%, which is mostly higher than the average APR of DeFi of 4%.

In addition to MakerDAO, Centrifuge also became a technical service provider for Aave to invest in RWA assets as early as 2021. Aave and Centrifuge have jointly established a lending pool dedicated to RWA, which operates independently from the Aave lending market. The current fund size is approximately US$5.5 million.

Compared with MakerDAO, Aave’s investment in RWA assets through Centrifuge is still very small. However, as the popularity of RWA narrative continues to grow, Aave also intends to add RWA assets this year. In August this year, Aave passed a proposal to cooperate with Centrifuge Prime to invest in U.S. Treasury bonds. Aave initially invested 1 million USDC and aimed to increase the investment amount to 20% of stable currency holdings. Perhaps Aave’s continued investment in RWA will also bring a new wave of growth to Centrifuge.

How does Centrifuge realize real asset mortgage lending? What is the default risk mechanism?

As the preferred RWA technology service provider for old blue-chip DeFi protocols such as MakerDAO and Aave, what problems does Centrifuge solve and how does it operate?

In general, the core of Centrifuge as a lending platform is to link two parties. One is the investor who wants to obtain income through lending. They are mainly some DeFi protocols in the encryption field, such as MakerDAO, Aave, etc.; The borrowers to be financed are typically startups or organizations that own real-world assets such as real estate, accounts receivable, and invoices. In order to open up the flow of assets between the real world and DeFi, Centrifuge needs to provide some legal and asset on-chain support.

Since the entire process has many chains, involving both the on-chain and off-chain worlds, the process is relatively complicated. Let’s take one of Centrifuge’s lending pools called New Silver Series 2 as an example to briefly analyze the entire operation process.

The New Silver Series 2 lending pool, initiated by New Silver as the asset issuer, is financing a portfolio of real estate bridge loans made to real estate developers with maturities of 12 to 24 months. According to reports, New Silver is a non-bank lender established in 2018 that mainly provides bridge loans to the real estate industry to help borrowers pay for the purchase of new properties before selling their existing properties.

As an asset demander, New Silver first needs to initiate a pool selection proposal (POP) on the Centrifuge forum, and write clearly what it does, its credit status, the use of funds, etc. (However, the POPs announced on the forum currently seem to be incomplete, and the pool application proposal for New Silver Series 2 has not been seen.)

After submission, the pool selection proposal (POP) will enter the due diligence stage, and a third party will conduct risk assessment and legal review to form an analysis report. After the evaluation is completed, the final discussion begins, with Centrifuge’s credit risk group and token CFG holders voting for selection.

After being successfully selected, asset issuers and investors need to start based on the legal risk framework off the Centrifuge chain and the tokenization of assets on the chain.

The off-chain part will help the asset issuer New Silve set up a special purpose vehicle (SPV) as the entity for this financing, and divest the assets to be mortgaged from other assets of the company. . In addition, it is necessary to find a third-party professional team to conduct asset valuation, auditing, trust, etc. to further strengthen security. The borrower signs a financing agreement with the special purpose entity.

Origin:@defi_drag

For investors, Centrifuge needs to conduct KYC and anti-money laundering. Currently, Centrifuge mainly cooperates with Securitize to complete this. In addition, investors also need to set up a special purpose vehicle (SPV) with New Silve to sign a subscription agreement.

On-chain part, the first is the data on-chain. Based on the Centrifuge P2P messaging protocol, the asset issuer New Silve can store and withdraw all off-chain real asset data in Centrifuge On Chain. The chain is developed based on the Substrate framework and is able to share the security of the Polkadot network and is bridged to Ethereum. New Silve can package data into NFTs on the chain through Centrifuge Chain, and use it as collateral to enter Centrifuge’s Tinlake lending pool (on the Ethereum chain) to start the lending mechanism and lend out stablecoins provided by investors.

So for investors, how do you participate in investing in the Tinlake lending pool? What is the risk mechanism for loan default? Centrifuge has made a risk classification and issued two ERC20 tokens DROP and TIN with different risks and returns for investors with different risk preferences to subscribe.

Investors need to use DAI to purchase DROP and TIN tokens. Holding DROP tokens has priority in the profit distribution of the asset pool and enjoys a fixed interest rate; and when risks (such as loan defaults) occur, you will bear losses later, which usually has lower risks and lower returns. For example, New Silve’s DROP token holders enjoy a fixed interest rate of 7%. If you hold TIN tokens, you will enjoy profit distribution later. The interest rate is floating, but you need to bear losses first, which usually has higher returns and risks.

More specifically, assume that the asset issuer/borrower borrows $1 million, and DROP token and TIN token holders fund it 20% and 80% respectively. And the asset issuer/borrower needs to pay 10% interest after the period. DROP tokens can enjoy a fixed interest rate of 5% as agreed.

In the end, it only paid back US$600,000 when it was due. Then the DROP token first gets the principal of US$200,000 and the interest of US$10,000 at 5% interest rate. Of the repaid funds, there was finally US$390,000 left for TIN token holders to share, but they originally invested US$800,000 and could only recover part of their principal.

But assuming that DROP token and TIN token holders provide 80% and 20% of the funds respectively, and the issuer of the asset does not default on bad debts, and other conditions remain unchanged, the DROP token will receive the principal. Of US$800,000 and US$40,000, TIN token holders can get US$200,000 principal and US$50,000 in interest, with an interest rate as high as 25%, far exceeding the 5% fixed interest rate of DROP token holders . Therefore, investors can also choose between DROP tokens and TIN tokens to achieve risk and return hedging.

In addition to layering risks and returns, Centrifuge’s capital pool is cyclical and can be invested and redeemed at any time, but it must be ensured that DROP tokens are better than TIN token redemptions, and TIN tokens cannot be lower than the set value lowest ratio. After the asset issuer repays the financing amount and interest when it matures, the pledged NFT will also be returned to the hands.

Centrifuge RWA Basic configuration

In general, Centrifuge, as a platform that connects DeFi and real-world assets, has several core products and components in its ecosystem.

The first is the C-side lending platform Tinlake protocol. It is currently deployed on Ethereum. It converts real-world assets into ERC-20 tokens and then provides decentralization. Access to Lending Agreements. Tinlake will charge 4% of the total supply in each lending pool as a service fee.

The second is the Centrifuge P2P messaging protocol, which allows collaborators to create, exchange and verify asset data securely and privately, and tokenize assets to make them Become an NFT.

The third is Centrifuge Chain, which is developed based on the Substrate framework, can share the security of the Polkadot network, and has been bridged to Ethereum. Currently, asset issuers mainly create NFTs from real assets on Centrifuge Chain.

Centrifuge Chain also has its own native token CFG, which is mainly used to stimulate network and ecological development, as well as community governance. CFG can also be bridged to Ethereum and used as an ERC20 token.

CFG is mainly used to pay transaction fees on Centrifuge Chain; as a node incentive to maintain the security of the Centrifuge Chain network and to pledge CFG to obtain financing qualifications, participate in governance, etc. Since the Tinlake protocol is currently mainly on the Ethereum chain rather than the Centrifuge Chain, CFG usage scenarios and value capture capabilities are limited. However, this year’s growth in active loans on the MakerDAO chain has been impressive, but its token performance has also increased. According to CMC data, the price of CFG is currently US$0.54, which has increased more than three times compared to around US$0.15 at the beginning of the year. However, compared with the record of over US$2 in the 2021 bull market, there is still a big gap.

In terms of the use of CFG scenarios, in fact, in March 2022, Centrifuge announced a roadmap plan to launch and expand the real-world asset pool on the Centrifuge Chain, replace the Tinlake protocol on Ethereum, and expand CFG usage scenarios, including fee mechanisms and pledges. Mechanism etc. However, the migration of the Tinlake protocol has not yet been completed.

As the demand for RWA in the encryption field grows,Centrifuge is also updating some products and expanding some businesses this year, and is committed to becoming the infrastructure of RWA. Tinlake lending application announced in May this year that it had completed a new round of upgrades. In addition to improving the user interface and KYC experience, it has also expanded the integration of multiple public chains and wallets. In addition, a lending and credit group was established in July this year, which is composed of experts in the financial and lending fields to review and evaluate the risks of the Centrifuge lending pool.

In addition,Centrifuge also announced in June this year the launch of RWA infrastructure product Centrifuge Prime, which is mainly aimed at connecting DAO and DeFi protocols to the real world. The legal framework for world assets and a complete set of technical services to bring assets onto the chain. In August this year, Aave approved a proposal to cooperate with Centrifuge Prime to invest in U.S. debt.

However, despite being favored by leading DeFi protocols such as MakerDAO and Aave, Centrifuge, like previous on-chain protocols such as Maple and TureFi, cannot avoid defaults and bad debts. This year, Centrifuge has been exposed to defaults and bad debts. Currently, Centrifuge has accumulated more than 15.5 million US dollars in outstanding loans. In August, the community also said that the upcoming loan default would put MakerDAO’s $1.84 million investment at risk of loss. The MakerDAO community even proposed stopping lending to the tokenized credit pool on Centrifuge.

Compared with the risks on the chain, the review, evaluation and liquidation of asset issuers/borrowers may be a big challenge off the chain. In the credit field of the traditional financial world, P2P lending in the past has brought considerable harm to many investors and even the financial industry. When trying to lower the financing threshold for small and medium-sized enterprises and organizations in the real world, how to prevent on-chain credit protocols from being exploited by bad actors and establish investor protection mechanisms through law and technology may be a long and difficult road.

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