How DeFi is changing borrowing and investing

The Centrifuge platform cuts out banks for SME financing. Co-founder Martin Quensel explains how it works

What is Centrifuge?
We are a platform for SME financing. The platform allows investors to connect with organisations in need of capital, cutting out unnecessary intermediaries, such as banks. The model is radically faster, more cost effective, and more transparent than traditional finance. Investors get a higher rate of return on their capital. Organisations can borrow at a lower rate. The losers are the TradFi intermediaries, who are eliminated. Centrifuge’s investment application, called Tinlake, is already live, with more than $22m invested.

Who are the investors?
The investors on Tinlake are typically individuals and institutions who hold cryptocurrencies, and want a stable return on their capital. Our decentralised application, called Tinlake, lists pools open for investment. Each pool offers fixed rates of return. For example, the FactorChain pool offers an 11% APR to investors.

Is there any currency risk?
None. Cryptocurrencies are typically volatile, so we avoid that entirely by operating only with DAI or other USD-pegged stablecoins like USDC. All returns come from interest paid on loans issued in US dollars, and paid as dividends in stablecoin. It connects traditional financing with crypto/DeFi and creates an interesting non-volatile investment opportunity for crypto holders.

How do the financing pools work?
A financing organisation runs each pool. We call these pool operators “Asset Originators”, as they are the ones handling the financing, in other words, originating the assets. For example, a real estate bridging loan company needs to raise funds. So it becomes an Asset Originator on Centrifuge, and creates a pool. It publishes the APR offered, plus details, such as the loan time period. Investors can browse pools, and select one to invest in. Naturally, their investment is in the whole pool, rather than lending directly to each individual end borrower, as this spreads risk. The big difference is that asset management is done by Tinlake on the blockchain. Setting financing terms for an asset, payments, repayments, and pool performance is automatically performed and calculated. The Asset Originator cannot change or tweak it. All investors have full transparency for the entire pool but also how every single asset performs.

Centrifuge’s investment application, called Tinlake, is already live, with more than $22m invested

Why is DeFi important to the model?
Our DeFi approach brings transparency. All pools make asset-backed loans. This means borrowers put up collateral in case they can’t pay the loan back. A mainstream concept. But with Centrifuge the collateral is digitised and published online. The Asset Originator locks a Non-Fungible Token, or NFT, representing a Real-World Asset into a set of smart contracts (computer programs that execute commands) for collateral. For example, if a borrower is using a future income stream, such as invoices, the asset is turned into an NFT and published on our platform. Investors can research the strength of a pool by examining the NFT asset collateral, if they so wish.

How strong are legal protections?
We’ve retained the best of TradFi practices in this regard. Each pool is a Special Purpose Vehicle legal entity, incorporated with full regulatory compliance. Asset Originators run their pools with traditional due diligence. For example, the NewSilver Series 2 pool is run by New Silver LLC, a company run by a team with decades of experience in real estate management. It finances fix-and-flip mortgages in a very traditional manner, all backed by property collateral.

Who can raise capital on Tinlake?
It is a permissionless platform, so anyone can create a pool to raise capital. We have some pretty innovative and diverse Asset Originators. Paperchain is in the music industry. Musicians often wait months for payouts from streaming platforms such as Spotify. They want cash faster. So Paperchain gives the musician a cash advance. Paperchain needs capital to function, so it lists pools on Centrifuge. Right now investors can back Paperchain Series 3 pool, which pays 7% APR.

Can investors withdraw capital at short notice?
Usually yes. It depends on the rules of the pool. Some allow near instant capital withdrawal. Others require a little more notice.

Can investors manage risk within a pool?
Absolutely. Pools offer senior and junior tranches. The senior tranche pays lower but stable returns, as it is first-loss protected by the junior tranche. The junior tranche offers a higher yield in return for taking the default first. We call the senior tranche DROP, and the junior tranche TIN. The TIN holders take the risk of default first, but receive typically higher returns. Every pool publishes its TIN and DROP rules, so investors can choose the right type of structure.

How often are payouts made?
At the end of each epoch, usually every 24 hours.

How is the Centrifuge platform built?
While Centrifuge Chain is part of the Polkadot universe, Tinlake managing the pools is built to access the liquidity on Ethereum. Our NFT tokens are ERC20 on the Ethereum blockchain, by some distance the most popular and proven method. Centrifuge is also integrated with MakerDAO, the biggest DeFi protocol in the industry, opening up a larger universe of liquidity to our users. It’s worth stating that, in the crypto industry, Centrifuge is seen as a pioneer not just of finance and lending in DeFi, but also for advancing the role NFTs play in the economy.

Who is behind Centrifuge?
I co-founded Centrifuge in 2017 with the CEO Lucas Vogelsang. We each have a long history of successful entrepreneurship. Our last company was Taulia, which created software in the supply chain finance industry with clients such as AstraZeneca, the NHS, and eBay. Last year Taulia provided $30bn of funding to a network of 2 million suppliers in 160 countries. A lot of the concepts used at Centrifuge stem from our knowledge of supply chain finance.

How can investors and Asset Originators get involved?
For investors it’s as easy as browsing the pools on Tinlake, and selecting one to invest in. The user interface is simple. Just decide if you’d like a variable return with higher risk with TIN, or a fixed return for lower risk with DROP. For Asset Originators, simply contact the team at Centrifuge for help with onboarding. DeFi is changing finance, bringing liquidity to asset holders, and income to investors. I’d urge anyone interested in maximising their financial performance to get involved.

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