Centaur: Powering Mass Adoption of Decentralized Finance via an Innovative Hybrid Solution

In this post, we discuss DeFi applications that are designed to facilitate credit issuance and management, and we compare them with centralized lending applications.

The full potential of blockchain can only be realized when products and solutions are provisioned to the average user with the least possible friction. This is especially true for applications in finance. Towards that end, credit and loan financing projects have been amongst the top priorities when it comes to bringing blockchain-based financial products to the masses.

Unfortunately, the current best-in-class offerings come up short in comparison to credit solutions offered by commercial banks and other entrenched players in the financial marketplace. The first iterations of blockchain in finance are best described as having been impulsive; the general aim seemed to be to simply “decentralize” everything. With credit, that meant facilitating transactions wherein one person would extend credit to another via smart contracts on the blockchain.

It is difficult to accurately ascertain when exactly it was first used, but the term “DeFi,” or decentralized finance, entered mainstream discourse sometime in early 2019. It has since gained considerable momentum as a promising alternative to centralized control over global finances that we see it today. Broadly speaking, DeFi refers to applications and protocols that are designed to deliver financial services using the blockchain, including credit and other related services such as insurance.

Why Current DeFi Models Fail to Scale

While pure decentralization may work for some sectors, it is not a viable route for many financial applications, especially when it comes to dealing with economically disadvantaged groups. Critics highlight a lack of formal regulation and a set of government-sanctioned guidelines in this emerging industry as major end-point vulnerabilities for the sector as a whole.

MakerDao is one of the most popular examples of a DeFi that is designed to facilitate credit. However, upon closer inspection, it soon becomes clear that it is more of a stablecoin-issuing system than a lending platform. To obtain a DeFi loan on the platform, you must provide collateral in the form of a crypto asset (ETH), and the amount given as collateral must be worth more than the loan itself, which is provided in the form of a coin known as DAI, which is pegged to the dollar.

While DAI works for traders who need a stable digital token to trade with on different exchanges, it does not meet the needs of the unbanked and inadequately banked who, according to the latest world bank estimates, comprise more than 30% of the global adult population. People in these financial demographics have nothing to provide as loan collateral, other than their enterprising ideas and their physical labor, neither of which can be tokenized or offered as a security to take out a business loan, a mortgage, or any other form of credit on the MakerDao DeFi platform.

Examples from Emerging Economies

As it turns out, this is an area that emerging centralized digital lending applications have done an excellent job at. We can use Kenya as a case study since it has one of the highest levels of mobile money service adoption globally and has also become one of the countries with the highest amount of digital credit activity.

According to a recent report by FSD Kenya, a financial inclusion advocacy group, about 40% of adult Kenyans have taken a loan using their mobile phone, and there are almost 30 digital lending apps in the market. Google even attempted to ban a some of them from its app store after complaints from governments and civil rights groups regarding the use of predatory tactics were brought to the search engine’s attention.

How, then, did they succeed?

It all came down to ease of access. Obtaining a loan involved just two steps: downloading the relevant app, and applying for a loan. No collateral of any kind was required, except user data such as their credit score and other financial indicators. These applications even work via text messaging, bringing those without smartphones into the fold.

The advantages of these services did come at a cost. Firstly, their interest rates were exorbitant, with some digital lending apps charging more than 500% annualized returns. Secondly, many of these apps are privately owned by investment firms based in developed countries that repatriate profits made in Kenyan back to the country they are based in. As a result, some claim that digital lending applications of this kind are simply a tool that the rich use to draw wealth from the poor without helping those impoverished communities.

Using DeFi to Deliver Better Results

What if DeFi applications could provide loans to these communities without collateral? More importantly, what if the people taking out loans could also stake their own money and enjoy some of the profits?

This is exactly what Centaur aims to do. It is a platform that combines the best of both worlds. Centaur aims to make it possible for someone in rural Kenya, the Philippines, or India to take a loan without having to surrender any collateral. They can then build their credit scores over time, allowing them to grow the amount that they can borrow. They can even invest in the platform itself so that they earn profits back from whatever interest they pay. Ultimately, this approach can ensure that wealth generated locally stays local, thereby helping the local economy develop and advance over time.

DeFi can only deliver these results if the risk of default can be managed since we do not want borrowers to have to provide any collateral. The most promising way to do this is to leverage existing judicial recovery mechanisms. Centralized lending apps can lower default risks by registering with recognized local bodies and obtaining all the requisite licenses and certifications in the countries where they operate so that they have legal recourse in the event of a default.

In Kenya, for example, digital lending apps can forward the names of borrowers to a credit reference bureau (CRB). This acts as a deterrence that ensures the majority make their repayments. The Central Bank of Kenya put in place a CRB structure in 2013 to protect lenders, especially microfinance lenders, from defaulters.

Thanks to this setup, most companies behind digital lending apps do not need to resort to additional judicial processes to recover defaulted repayments because every borrower knows that once their name is submitted to a CRB, they can never obtain credit anywhere else. It also becomes difficult for them to pursue employment opportunities or participate in trade with institutions and companies since it is now common practice for a CRB clearance certificate to be required for job applications and business deals.

In order to have their name removed from the defaulter list, borrowers must first repay outstanding loans and settle any open issues. Such a system works well for banks as well as for digital lending apps, allowing them to provide loans without any collateral.

Centaur Seeks to Leverage Such Systems

A decentralised finance business can only leverage these types of frameworks if they conduct transactions through formally registered entities in the countries in which they operate, and this is what Centaur is trying to achieve. It aims to build a network on the blockchain of legally recognized and licensed entities in the countries in which it operates to limit risk and make collateral-free credit a reality.

To put it another way, Centaur is a hybrid of centralized lending applications and DeFi. It facilitates the provisioning of collateral-free credit, gives borrowers a share in profits and participation in the decision-making process of the system, plus delivers a far superior user experience than current models.

With its semi-decentralized approach, Centaur caters to numerous verticals in the financial ecosystem, including asset management, lending, and digital payments. Our approach is to apply the principles of blockchain to the centralized approach to lending, and this guarantees that Centaur will remain fast, transparent, and efficient while preserving the safeguard protocols of a centralized system.

We have closely monitored the development of the DeFi industry. Based on our experience, analysis, and experimentation, we are confident that such an optimal solution truly combines the best of both worlds. Our ability to successfully implement Centaur’s vision and achieve our project goals are rooted in our experience within traditional finance. Leveraging that background and know-how along with our extensive trade networks is how we created Centaur.

Financial systems can be transformed using blockchain, but that does not necessarily mean that all existing functions and systems need to be abandoned or completely overhauled in order for positive change to be implemented effectively. Instead, we can simply utilize modern innovations and apply them to the best parts of what has been proven to work. Centaur is proof that such solutions exist, are feasible, and can actually work.