An article to understand the business model and product components of Centrifuge, one of the leading RWAs

Author: Jiang Haibo, PANews

Real world assets (RWA) may be the next growth direction of the encryption market, but the connection between RWA and the blockchain is not easy. It needs to meet compliance requirements, have a credible asset issuance framework, and have corresponding assets on the chain. fluidity.

Centrifuge is currently a relatively comprehensive project in the RWA field. It has established a framework that links on-chain and off-chain transactions, and hopes to become a consensus layer for RWA that does not require trust. According to data from rwa.xyz, Centrifuge is already the program with the highest number of active loans in the private credit sector. In this article, PANews will disassemble Centrifuge's business model and product components.

Centrifuge Chain

First of all, Centrifuge has its own independent and exclusive blockchain - Centrifuge Chain, which is developed based on the Substrate framework and can share the security of the Polkadot network. Centrifuge Chain successfully won Polkadot's 8th slot auction in January 2022.

Centrifuge believes that the dedicated blockchain for RWA has many advantages, including low transaction fees and excellent scalability. Compared with general-purpose smart contract blockchains such as Ethereum, it has stronger flexibility, can provide a dedicated block space to process RWA transactions, and can define the order of transactions to ensure that RWA Related transactions can also proceed normally.

As of May 17th, Centrifuge's main product, Tinlake, was still deployed on the Ethereum mainnet, but it is already preparing to be deployed on the Centrifuge Chain, and related functions are being tested online first.

Tinlake financing platform and structured products

The interaction between the real world and encrypted assets in Centrifuge takes place on Tinlake, its open source smart contract platform. In Tinlake, borrowers can tokenize assets through asset promoters, and then put these tokens into the asset pool created by Tinlake. In this way, borrowers can use real assets as collateral to obtain stablecoins invested by investors on the chain. As of May 17th, TVL (approximately equal to active borrowing) in Tinlake was $201 million.

Tinlake effectively divides the risk and return of physical collateral in a structured way to meet the needs of different investors. The structured product consists of two ERC20 tokens: DROP and TIN.

1. DROP tokens: DROP tokens are senior and represent the fixed-rate part of the Tinlake pool. DROP token holders have priority in the pool's profit distribution, but have relatively little exposure to risks such as loan defaults. Therefore, DROP tokens generally have lower risk and lower reward.
2. TIN tokens: TIN tokens are junior and represent the floating rate portion of the Tinlake pool. Compared to DROP tokens, TIN token holders have a lower priority in the profit distribution of the asset pool, but have greater exposure in terms of returns and risks. Therefore, TIN tokens generally have higher risk and higher reward.

In Tinlake, investors can choose to buy DROP or TIN tokens, and invest according to their own risk tolerance and return expectations. Among them, TIN tokens have a minimum subscription ratio. If the TIN ratio is too low, DROP tokens cannot continue to be purchased.

Legal Structure

Centrifuge has done a considerable amount of work in terms of compliance according to the legal structure of asset securitization in the United States. Its legal structure is based on 506(b) or 506(c) under Section D of the U.S. Securities Act of 1933.

Each asset sponsor on Centrifuge needs to set up a corresponding independent legal entity for the fund pool, namely a special purpose vehicle (SPV). SPV can play a key role in asset securitization, separating the asset sponsor's business from the financing activities in the pool. It only provides one channel and has no employees. Legally, these assets have been sold to the SPV, and even if the asset promoter goes bankrupt, it will not affect the assets held by the SPV, thereby protecting the interests of investors. Investors sign an agreement with SPV after completing KYC and other compliance operations.

The current legal structure was developed for the issuance of asset securitization products in the United States. If you are a U.S. citizen, you must meet the requirements of the U.S. SEC for "qualified investors" when investing in this product. Centrifuge is also working to introduce product structures for non-US jurisdictions, but in the current situation, countries subject to US sanctions cannot invest in Centrifuge's products.

Financing Process

The relationship between asset sponsors, issuers, investors and Centrifuge in Centrifuge, as well as the specific financing and investment process are as follows:

1. Borrowers hope to finance on-chain through assets such as invoices or real estate as collateral.

2. The asset promoter (who has a business relationship with the borrower and performs underwriting, and also invests in the higher-risk TIN token) sets up a legal entity SPV for the fund pool. Even if the parent company goes bankrupt, the SPV will also bear the responsibility. A pool may include multiple collateral loans of the same type but to different borrowers.

3. The asset sponsor initiates and verifies RWA, and casts an NFT on the chain for the mortgage asset.

4. The borrower signs a financing agreement with the SPV, mortgages the NFT in the Tinlake pool, and the Tinlake pool mints DROP and TIN tokens.

5. Centrifuge and Securitize cooperate to help investors complete the KYC and AML process. Securitize is an SEC-licensed agency that provides accredited investor verification services.

6. Investors sign an investment agreement with the SPV corresponding to the Tinlake pool, which includes investment structure, risks, terms, etc., and then use DAI to purchase DROP or TIN tokens.

7. When an investor provides DAI liquidity for the corresponding fund pool, the SPV converts DAI into US dollars and transfers the money to the borrower's bank account.

8. Investors can request to redeem their DROP or TIN tokens at any time, but they must ensure that DROP tokens are better than TIN tokens for redemption, and TIN tokens cannot be lower than the set minimum ratio.

9. The borrower pays the financing amount and financing fee when the NFT is due, and the NFT is returned to the asset sponsor.

Relationship with MakerDAO and Aave

Among the major DeFi protocols, MakerDAO and Aave are actively developing RWA business, and the related business is carried out through Centrifuge.

There are multiple MakerDAO-related fund pools on Centrifuge. These fund pools are integrated with MakerDAO’s Vault and can withdraw funds directly from the Vault. The largest active fund pools are BlockTower Series 3 and BlockTower Series 4, which are the initiators of BlockTower. They are both private pools. The priority capital is obtained from Maker Vault, and the secondary capital is contributed by the initiator BlockTower. The funds in these two pools are respectively For 37.33 million US dollars and 97.17 million US dollars. In addition, two fund pools, BlockTower Series 1 and BlockTower Series 2, also initiated by BlockTower, will be launched soon. In addition, there are New Silver Series 2, ConsolFreight Series 4, Fortunafi Series 1, and Harbor Trade Credit Series 2 on Centrifuge, which are fund pools integrated with Maker Vault. The corresponding value in the liquidity pool is 12.05 million US dollars and 3.61 million US dollars. , $8.43 million, and $2.14 million. The capital pool related to MakerDAO has a total of about 161 million US dollars, accounting for 80% of Centrifuge TVL.

There is another benefit of pools integrated with Maker Vault. Each fund pool has a reserve pool. The funds in the reserve pool can be lent by the issuer or redeemed by investors, but no interest will be generated. Usually, there is no funds left in the reserve pool. If the fund pool is integrated with Maker Vault, as long as the debt limit of the Vault has not been reached, when the user needs to redeem, he can directly withdraw funds through the Maker Vault and transfer personal debts to the Maker Vault.

Aave and Centrifuge have jointly established a lending pool dedicated to RWA. Depositors can deposit USDC, in addition to earning interest income, they can also get Centrifuge mining rewards. Borrowers use various DROP tokens as collateral to borrow USDC to improve capital utilization. At present, the total deposits in the RWA market in Aave are $7.62 million, of which USDC deposits are $3.41 million, and the total borrowings are $2.78 million, which is not high compared with MakerDAO.

CFG Tokens

Centrifuge's native token is CFG, which is mainly used to pay gas fees for on-chain transactions, participate in governance activities such as protocol upgrades and parameter adjustments, and maintain the security of Centrifuge Chain.

It should be noted that there is currently no protocol fee in Centrifuge, and the current lending is built on the Ethereum mainnet. Recently, there have been more and more discussions in the community about the fees of the Centrifuge protocol. The vote to turn on protocol fees has been cast off-chain on OpenSquare with 100% yes votes. But before voting on the chain, the fund pool needs to be deployed on the Centrifuge Chain, and this function is currently being tested in the Centrifuge Pioneer Network.

Summary

According to the data of rwa.xyz, Centrifuge is currently the project with the highest active loan amount in the private credit field on the chain, with a TVL of 201 million US dollars. According to the official website data, about 80% of them are fund pools integrated with Maker Vault. Since the debt of these fund pools has not yet reached the upper limit and there are new fund pools being established, the recent data growth of Centrifuge may mainly come from these fund pools, and may continue to grow.

Centrifuge has its own chain, but Tinlake, the current main financing platform, is still built on the Ethereum mainnet, and related functions have also been tested on the Centrifuge Chain's first network. At present, Centrifuge does not charge protocol fees. After the test is completed and deployed on the mainnet, the protocol fees may be activated through on-chain voting.