Centrifuge Q&A with Polkaswap

Dropping some Centrifuge alpha for 2022

Centrifuge joined the Polkaswap Community Collective for a Q&A in their Twitter Spaces. Read on to learn more about the big changes coming to Centrifuge in 2022 and beyond 👇

Can you please introduce yourself and tell us about your past life/professional experiences, story with blockchain, and how you ended up at Centrifuge.

Hey! I am Cassidy and I work on Token Design and Research at Centrifuge, and we are the same team behind Altair. I have a foundation in economics and international finance and also worked as a consultant for the Federal Reserve. At the time I could see that the financial system really needed to change, but it didn’t feel possible to do that from within the existing system. That is why I first tried to start my own project, and later worked with many teams to design their token economics. That’s how I met Centrifuge — and immediately became passionate about the team’s mission.

Let’s start at the beginning so everyone can follow. It is your mission to unlock economic opportunity for all, and to allow everyone access to financing without using a third party or intermediary. Which problem did the founders identify and how does Centrifuge offer a solution, or which need in the market will Centrifuge fill and how will you do that?

We all know how important finance is in powering the world around us. But the Centrifuge founders saw how inaccessible the financial system is for small businesses. Large financial institutions dominate the industry — and small businesses and small lenders alike are not able to get access. They actually first started another successful company — Taulia — to target this exact same problem. They got pretty far, but they wanted to take it to the next level. That is why we built Centrifuge: to use blockchain technology and DeFi to make finance more open and more fair for everyone.

Can you elaborate on the difference between Centrifuge and Altair?

Centrifuge is real-world DeFi on Polkadot. It enables users to tokenize their assets in the real world and finance them on-chain: plugging into DeFi liquidity in places like Maker and Aave!

It solves inefficiencies in finance by pooling assets on-chain so that businesses can access financing and allows small lenders to pool their capital and invest in these different types of real-world assets — from real estate to inventory to invoices.

Altair is our parachain on Kusama. It is the experimental, boundary-pushing little brother of Centrifuge — focused on fringe use-cases like financing your jpegs 😉

Altair is where all the new functionality will come first. NFT Playground, asset-financing pools, and more — all this will happen on Altair first. Centrifuge is focused on the real world, but Altair wants to push the boundaries of the imagination!

Your first two products have been live for a while now: Tinlake and RWAmarket.io. Can you elaborate on what they are at this moment, how they will evolve and what role they will play in the future?

Tinlake is the name of the Centrifuge app. This is where users can go to lock their liquidity to finance the different asset pools on Centrifuge. There are currently 12 different asset pools live and almost $75M in TVL!

A user that is interested in diving into the different types of asset pools and providing liquidity directly to each pool should head over to tinlake.centrifuge.io to check it out. But what if you just want to provide liquidity to one pool but get access to different types of assets? That is when you would head over to the RWA market on Aave. Centrifuge partnered with Aave to launch this RWA market. Today it provides financing to 7 different pools on Centrifuge and has over $18M in TVL.

Both pools on Centrifuge and the RWA market will continue to grow as new assets get added and DeFi users lock in their liquidity.

Let’s talk about it with a potential use case that listeners might be thinking about: let’s say I have an apartment or house valued at $200k and an open mortgage for $100k. What can I do, what is the process?

So actually, an individual with a house won’t go directly to Centrifuge, but would go to one of the asset originators that uses Centrifuge. For example, the asset originator New Silver works with individuals directly to get financing for their mortgage. New Silver then opens up a real-estate financing pool on Centrifuge and pools many different mortgages together to access the DeFi liquidity on Centrifuge.

How does it work to tokenize a RWA? What are the terms and conditions? Can anyone just tokenize their RWA?

Because Centrifuge is a public chain, anyone can tokenize a RWA! But that doesn’t mean that they can access financing. Remember the example with New Silver: the way Centrifuge solves this problem of access to financing is by pooling assets together. So an individual doesn’t even need to worry about how to use blockchain right now, they can turn to one of these asset originators who then connects to Centrifuge.

But one day we do hope that blockchain develops and scales enough that individuals can also start using Centrifuge directly.

Who takes the risk in Tinlake? What if I default on the mortgage of my house? What happens next?

This is where it is important that Centrifuge has one foot in DeFi and one foot in TradFi, because there are several backstops in the system to protect any users providing liquidity to Centrifuge pools in case of a default.

The first line of protection is the two-tranche structure of Centrifuge pools. DeFi users are locking liquidity in the senior tranche; this is the DROP token. This means they are protected by a buffer composed of the junior tranche, the TIN token. In the case that an asset defaults, the junior tranche absorbs that loss first. Right now the main participants in the junior tranche are the asset originators themselves, Centrifuge, and other sophisticated users that protect DeFi users providing liquidity to the senior tranche.

The next layer of protection is where the TradFi element comes in. Anyone providing liquidity to the Centrifuge pools is actually signing a legal agreement with the pool issuer. So investors are legally protected in the case of defaults, even if they are large enough to wipe out the junior tranche. Though that is unlikely to happen, this legal setup is another method of addressing the risk.

What we are really excited about is soon adding the next layer of risk assessment with the underwriter functionality for the TIN token. The underwriter token design aims to incentivize a system of underwriters to assess the risk of assets looking to get financing from Centrifuge pools. They will stake the TIN token in order to decide whether any particular asset is able to access this financing from a particular pool. This then becomes the first layer of protection, as the staked TIN tokens of the underwriters would absorb any losses first, before the TIN token holders in the junior tranche, and finally the DROP token holders of the senior tranche where DeFi is providing liquidity.

Let’s talk about the investor side: what does he or she need to do and how does an investor gain by providing liquidity for financing these assets? What are the risks and what do they need to take into account?

There are two different ways that an investor can lock liquidity into Centrifuge pools. One is by going to Centrifuge directly at https://tinlake.centrifuge.io and the other is by going to the RWA market on Aave. So it looks a little different for each of these two cases.

If an investor is going directly to Centrifuge, they are going to need to do the due diligence on each of the individual pools that they are interested in providing liquidity to. The pool issuers provide a detailed analysis and executive summary of the assets in each pool, and an investor needs to carefully evaluate each type of asset, the risk involved, and then sign this legal agreement with each individual pool. So it is a little bit more involved if an investor wants to go directly to Centrifuge at the moment.

If an investor is interested in the RWA market on Aave, then they still need to do the proper diligence to understand the risks involved for the asset pools taking liquidity from the market. But it is slightly less involved in that these investors are providing liquidity to this one RWA market on Aave and not separately to each individual asset pool. So this is definitely the simpler option, especially if you are a non-US DeFi retail investor. And I think that is probably the easier first step to start locking liquidity into Centrifuge.

You focus on token design and research. Can you walk us through the tokenomics of AIR and CFG, their utility, why you made certain choices?

The first utility of both AIR and CFG is similar to that of other parachain projects where each token is used to pay for transaction fees on the respective parachain. Both tokens will also be used for chain security by staking towards collators, and in the case of Centrifuge, CFG has already been used on the standalone chain to stake towards validators and earn a block reward for providing security to the chain since it launched in April 2020.

Importantly, both CFG and AIR are used for governance on Altair and Centrifuge. This means that token holders are able to decide on chain parameters like transaction fees, upgrades to the chain, and the addition of new features and utilities.

We are working on a few proposals to CFG and AIR holders for many more utilities directly tied to the asset financing pools that are launching on Altair and Centrifuge. Some of the proposals we are working on for the community include using the tokens: 1) to enable pools to launch on-chain, 2) for insurance for different pools, and 3) for governance of implementing fees for pools.

There are a lot of different utilities on the horizon for both of these tokens and we are really excited to start working on some of these proposals. Then it is going to be up to the community to engage in these discussions and decide which utilities to implement. How these utilities develop will depend on how the CFG and AIR holders vote on these proposals.

Do you expect any proposals to come from the community? What engagement are you seeing in these utility discussions from the community?

We have seen a lot of proposals and discussion about implementing the burn mechanism and protocol fees that go into the on-chain treasury. We are in the process of putting a proposal together with a small working group right now. First this will go up on the governance forum to get some more discussion and engagement from the community. And then hopefully we’ll see that on-chain proposal coming later this year.

So the AIR token will play a significant part in that governance?

The coolest thing about Altair when it comes to that side of governance is that it is completely community owned and driven. The CFG token supply is still partially held by the foundation, which has the mandate to develop and grow the Centrifuge ecosystem. Whereas with Altair, nothing is held by the foundation. The AIR token is fully distributed to the community, and there is also a sizable on-chain treasury that AIR token holders have complete governance over. We are really excited to see a lot more community engagement on Altair as it grows, and looking forward to proposals on how to use those AIR tokens in the treasury to start developing new features on Altair.

Let’s talk about the community and parachain auctions. How did you and the team experience the crowdloans and parachain auctions?

Most of the parachain projects were waiting eagerly on Kusama to launch the parachain auctions, but at the same time were caught off guard that it happened so quickly! There wasn’t a lot of notice for these teams as to when these parachain auctions were going to launch (we actually learned at the same time as the rest of the community). So we had to work super fast to get everything set up to launch the Altair crowdloan.

It was definitely a lot of chaos, but it was also super fun. Especially because we saw so much support and participation from the community — not only for Altair but also for the Centrifuge crowdloan. Both Centrifuge and Altair had among the highest numberof contributors of any crowdloan. We feel really proud that we have such a large and committed community.

What were your main learnings from the Altair crowdloan and parachain auction that you applied to the Polkadot auction?

Most of the learnings were around the basic setup of the crowdloan — how to structure the rewards for the community, how to detail the launch process, what users can expect from the launch and when. For example, we ended up needing to re-open the Altair crowdloan, and we took away a lot of these learnings to improve the process on Centrifuge.

We were able to do things better with Centrifuge, like plan content ahead of time and make sure we were prepared for things to change suddenly — but of course there are always things that you don’t expect. But one thing that has made it easier for Polkadot has been this timelag between the auction ending for the parachain slot and the date all the parachains from this batch actually launch. So this gives these teams a bit more time to prepare the launch process for Polkadot.

The launch process for Centrifuge is going to look really similar to Altair, but with a couple of important differences because Centrifuge Chain is already live. So we need to be extremely careful when we fork the standalone Centrifuge Chain to the Centrifuge Parachain on Polkadot, and we are working hard to make sure that this process goes smoothly.

Now that you have the parachain slots on both Polkadot and Kusama, what are the next steps towards interoperability for you? Which partnerships or integrations can you talk about at this stage?

We are extremely excited about integrations that are coming up. From our perspective, this is the killer use-case of Polkadot and Kusama: the interoperability and integrations that are possible. Integrations with other parachains are one of the key things teams are looking for as an “out of the box” capability with Substrate (the tech behind Polkadot, Kusama, and all other parachains).

We are working really closely with a ton of different projects right now on some exciting new use cases. One of the integrations we are working on first is between Karura and Altair. Some of the possibilities to think about there: bridging kUSD over to finance assets on Altair, moving AIR tokens over to interact with DeFi on Karura, and using TIN and DROP tokens from Altair pools as collateral for kUSD. Another integration we are working on is an integration with RMRK to bring your NFTs over to Altair and financing those NFTs in a pool on Altair with kUSD.

A different use case would be the integration of Moonriver and Altair, and Moonbeam and Centrifuge — to access lots of different Solidity-based projects launching on Moonriver and Moonbeam.

There are so many possibilities here that we are actually needing to tell ourselves to focus! But it is great to see so much amazing development from all the projects in the Polkadot and Kusama ecosystems. The experience for us to partner with these other projects has been really great. It is such an open and transparent ecosystem, and we are able to interact with these teams across lots of public community channels and really support one another — and this makes integration work that much easier. We are really happy to be a part of this ecosystem

What else are you most excited about for this year?

We are also really excited about launching pools on Altair and Centrifuge. This has been a huge project for our team. The Tinlake dapp is currently live on Ethereum, and our team has been hard at work migrating that over to our own chains. We think migrating to native financing pools is a real cornerstone of the Centrifuge ecosystem.

A lot of you also know we have been working on NFT Playground. We pushed back the launch by a few weeks so that we could add some more functionality for users — letting artists list and sell their NFTs — to provide a better foundation for launching pools soon and bringing RWA financing into the Polkaverse.

Follow Centrifuge, Altair, and the Polkaswap Community Collective for updates and more great Q&As!