Centrifuge: Bringing Real-World Assets to DeFi

In the world of Decentralized Finance (DeFi), there are a number of projects that are looking to bring real-world assets onto the blockchain. One such project is Centrifuge. Centrifuge is a platform that allows users to tokenize real-world assets and trade them on the blockchain. In this article, we will take a deep dive into what Centrifuge is and how it works. We will also explore its main components and what makes it unique in the DeFi space.

The Centrifuge blockchain protocol is one of the first to bring real-world assets on-chain. While various projects tokenize particular assets, Centrifuge is taking a more asset-agnostic, wide-ranging approach that allows users to connect any sort of real-world asset into the DeFi ecosystem.

What is Centrifuge?

Centrifuge aims to connect real-world assets into DeFi to lower the cost of capital for small businesses and offer a reliable source of yield that is uncorrelated to volatile cryptocurrencies.

In today’s financial system, only the largest firms have direct access to liquid capital markets. The majority of small businesses rely on banks for their funding needs. Because of market inefficiencies and transaction fees, these smaller companies are unable to obtain competitive interest rates due to a lack of an open and transparent market.

DeFi is a fast-growing financial technology with few barriers to entry. Centrifuge wants to bring this benefit to borrowers who have previously been excluded from accessing DeFi liquidity.

Centrifuge allows anybody to create on-chain collateral-backed pools of loans using Tinlake, the company’s first user-facing product. For any business, Tinlake provides simple access to DeFi liquidity. These assets will provide a secure, consistent yield for investors’ money that is uncorelated to appealing yet volatile returns in crypto markets. Investors may also participate in the ecosystem by earning additional yield through CFG Rewards.

Tinlake was originally conceived on Ethereum, but it will be completely moved to Centrifuge Chain and Centrifuge’s secure P2P network in the future. This will allow for accurate asset pricing and risk assessment for any sort of assets (such as your future revenue as a business, a home, or farmland), as well as the development of liquid markets for these items. As the ecosystem expands, more data will be on-chain, lowering reliance on a single point of failure and reducing trust in the off-chain world.

A Brief History of Centrifuge

The Centrifuge was created by a German team led by CEO Lucas Vogelsang, who previously built e-commerce firm DeinDeal.

Taulia, a FinTech provider of working capital solutions, was previously founded by Vogelsang and other co-founders. Taulia serves customers in more than 100 countries and provides services including electronic invoicing and supply chain financing. Centrifuge has tried to incorporate these services into its blockchain architecture. 

In 2018, the goal was to develop Centrifuge OS, also known as Centrifuge Operating System, an open, decentralized, public network for a new era of applications in the financial supply chain. The group’s goal later expanded to include building Real World Asset (RWA) DeFi.

Since the publication of the Centrifuge OS whitepaper in 2018, there have been significant changes in how the technology will be developed. Even though the technology has changed over time, the initial aim had remained the same. The project began as a Traditional Finance (TradFi) initiative and was later expanded to include DeFi.

Since the project’s beginning, it has always been about corporate papers as NFT. Similarly, the centrifuge chain that began as a side chain of Ethereum with the Proof-of-Authority idea was also migrated to a parachain on the Polkadot ecosystem using Proof-of-Stake consensus. The native token was also migrated to CFG in 2020.

Two important partnerships have been formed: one with Aave and another with MakerDAO. The assets from Tinlake, a marketplace for asset pools combining Asset Originators and Investors via the Centrifuge protocol, may now be used as collateral in a MakerDAO smart contract thanks to the partnership with MakerDAO.

Centrifuge has raised almost $12 million through five rounds of funding since its inception in January 2016. Galaxy Digital and IOSG Ventures are among the investors. On May 26, 2021, a CFG token sale on Coinlist resulted in 17 million CFG tokens being sold for $19 million.

Centrifuge Core Components

Centrifuge Chain

The Centrifuge Chain is the on-chain home for real-world assets (RWA). It’s a Substrate-based Proof-of-Stake blockchain that allows users to bring their assets onto the blockchain as nonfungible tokens (NFTs). This is where you can obtain funding for any sort of asset through DeFi.

The Centrifuge Chain (CFG) is the chain’s native token. It also incentivizes nodes (known as Collators) and Nominators to participate by providing a block reward. The Centrifuge token gives its holders an on-chain governance mechanism that empowers them to guide the development of Centrifuge, a public chain run by no single entity.

The Centrifuge token is used to stake value and acquire rewards for security and adoption of the platform, currently through liquidity bonuses.

Centrifuge Chain is built on Parity Substrate and has been live on mainnet as a parachain on Polkadot since April 2022. Centrifuge is a Polkadot parachain, so it needed staked nodes (Collators) to collect transactions from users and generate state transition proofs for Polkadot Relay Chain

Only a fraction of all nodes on the network may become Collator candidates. Only the best Collators by stake are chosen into the Active Set. Staked Nominators can elect Collators who have staked their own CFG.

Tinlake

Tinlake process (source: Centrifuge)

Tinlake is an open, smart-contract-based marketplace for asset pools that connects Asset Originators and Investors wanting to take advantage of Decentralized Finance’s full potential. In the end, Tinlake will become a fully decentralized financing protocol that works with various blockchains and connects to a variety of funding channels.

Businesses or “Asset Originators” can responsibly finance real-world assets like invoices, mortgages, and streaming royalties using DeFi and bankless liquidity by investing in a pool built on the blockchain. They accomplish this by tokenizing their financial assets and using them as collateral in their Tinlake pool to finance their assets, using the NFT technology.

These assets provide a secure and reliable return for DeFi investors who provide liquidity and profit yield while also earning CFG rewards. Investors can put money into two different tokens with each Tinlake pool: TIN and DROP.

The TIN, often known as the “risk token,” takes the risk of failures first but also receives greater returns. The DROP token, sometimes called the “yield token,” is protected against default by the TIN cryptocurrency and earns steady (but lower) returns. This resembles a Junior/Senior investment structure found in traditional finance.

NFTs, Anchors, and Identities

Centrifuge is employing NFTs, Anchors, and Identities for document tokenization.

Centrifuge allows users to get rid of intermediaries and produce financial business documents as Non-Fungible Tokens (NFTs) that are long-lasting verifiable, resistant to censorship, and handled in a decentralized way.

A document’s root hash is stored in an on-chain smart contract called the Anchor Repository, which serves as a kind of decentralized depository. By using Anchor Repository, NFT contracts may validate Merkle Proofs, which are the basis of NFT minting by NFT contracts. Collaborators can confirm that the received document is, in fact, an anchor that has been committed and that other collaborators have signed it.

The Centrifuge Identity (CentrifugeID) is a unique identifier given to a participant in the Centrifuge network. The unique identifier of a Centrifuge participant is equivalent to the Ethereum address of his/her identity contract. It keeps track of the many cryptographic keys in use and enforces that this data can only be altered by the creator and/or a delegate approved by the creators.

P2P Protocol

The Peer-to-Peer (P2P) protocol allows you to generate, trade, and verify asset data off the blockchain and is used for private, off-chain data exchange. Asset originators can choose who gets to see asset specifics, with service providers able to evaluate the data and provide pricing and underwriting information.

Cryptographic signatures can be used to verify the data’s source. The P2P protocol is made up of a set of Ethereum smart contracts and a p2p network built on libp2p. Smart contracts on the Ethereum blockchain are used for managing identities in a similar manner to ERC725, anchoring state commitments, and minting NFTs from off-chain Centrifuge documents.

Centrifuge Governance

The Centrifuge Chain has a well-defined governance mechanism that is etched on-chain using the Substrate democracy pallet. Hence, Centrifuge governance follows similar principles and procedures to the ones of Polkadot. This allows CFG token holders to utilize on-chain voting methods for binding and transparent governance.

A stake-weighted majority is required to make any modifications to the Centrifuge Chain. CFG owners may cast a vote with their stakes on community-proposed referenda or the Centrifuge Chain Council, which has seven members elected by CFG holders.

CFG holders can make and approve modifications to the runtime, distribution of treasury funds, chain parameters, and governance system itself. Changes to the runtime, distribution of treasury funds, chain parameters, and governance system are all possible thanks to CFG holders’ ability to propose and vote on them.

Centrifuge Chain Council

The Centrifuge Chain Council is made up of 7 elected members who have special voting rights over other CFG owners. The goal of the council is to introduce measures that are good for the Centrifuge Network, based on members’ skills and experiences in creating, operating, and utilizing Centrifuge. The council also serves as a proxy for CFG investors who may not want to vote on all issues.

Although any CFG owner may propose a public referendum, the majority needed to pass is typically a super-majority, depending on the voter turnout. However, when a proposal is put to the Council and three-quarters of the Council vote in favor of it, the decision merely requires a simple majority and does not take turnout into account.

When a council approves a proposal unanimously, it is subject to negative turnout bias. At lower levels of participation, a supermajority of nays is required to reject at low turnouts. As turnout rises towards 100%, however, it becomes a simple majority-carries.

Centrifuge Crypto Token (CFG) Utility

The Centrifuge Chain is powered by the Centrifuge token (CFG). The purpose of CFG is to encourage desirable behavior on the Centrifuge Chain — that is, mechanism design — in order to build a secure and decentralized system. Users who own CFG will have a stake in the Centrifuge network and may use it to pay for transaction fees, stake towards Collators, and participate in Centrifuge on-chain governance.

Aside from that, Centrifuge CFG will also encourage chain security by rewarding DOT holders in the Parachain Loan Offering and giving a block reward to Collators and Nominators. The Centrifuge platform also gives its users governance. The Substrate native governance module, which includes an elected council and the power to approve network upgrades, is used by the Centrifuge Chain.

Wrapping Up

Centrifuge is a DeFi project that aims to bring real-world assets to DeFi. Centrifuge does this by creating a decentralized network of nodes that can index and anchor data from the real world onto the blockchain. This article has provided a deep dive into Centrifuge, explaining what it is, how it works, and its main components. If you’re interested in bringing real-world assets to DeFi, then Centrifuge is definitely a project worth keeping an eye on.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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