Real-World Asset loan issuers (“Issuers”) and capital investors are the lifeblood of Tinlake — and soon, Pools on Centrifuge Chain. They work in tandem to build a robust borrowing and lending DeFi ecosystem that brings Real-World Assets (RWAs) on-chain.
Today, we’re focusing on Issuers and how to become one. We’ll explore how pools work, the asset life-cycle and rewards.
What is an Issuer?
Let’s review what an Issuer is. An Issuer performs risk assessments on end-borrowers, creates and manages loan portfolios, and secures assets on our platform. The loans extended by these Issuers are funded by Centrifuge’s capital investors.
Since Tinlake’s inception in 2020, we have onboarded 20 pools encompassing 12 different Issuers, some of whom have had multiple funding series.
Tinlake and the Pool Onboarding Proposal (POP)
How do I apply to be an Issuer?
Every prospective Issuer starts with a Pool Onboarding Proposal (POP), the first step in our decentralized, public-facing process designed to evaluate and onboard RWAs to Centrifuge.
Today, the POP process is composed of three stages:
- Proposal: POPs are publicly submitted for community discussion and voting through the Centrifuge Forum.
- Assessment: POPs enter private due diligence and are risk assessed, legally reviewed, and structured by qualified third parties, resulting in a publicly available report and analysis.
- Onboard: POPs are reviewed in totality, enter final discussion and evaluation, and are voted upon for onboarding RWAs through a Centrifuge Pool.
Who should apply to be an Issuer on Centrifuge?
Centrifuge is designed to be a truly institutional-grade investment engine — and our Issuers play a key role in supporting that.
A strong Issuer candidate will meet most, if not all, of the below criteria. These qualifications are provided as guidance to help Issuer candidates understand the probability of success in attracting institutional investors.
All information submitted via a POP will be reviewed and verified by multiple parties through our public POP process.
- Business Years in Operation: 2 years+
- Off-Chain Institutional Investors: Yes/No (they’re willing to be brought on-chain)
- Strong Pipeline: 12-month forecast that is 2x “Pool Value in Year 1”
- Volume Originated last 2 years: At least 2x target pool-size at launch
- Historical Loan Tape (customer balances and other detailed information) : 2 years+
- TIN Tranche: Issuer is able to fund the TIN up to $50 million in Pool Value, which is at least $5M in self-funded first-loss capital
- DROP Tranche: Pool Manager is able to fund a portion of the DROP tranche
- Asset Maturity: Ideally less than 2 years; 3 years maximum
POPs that do not meet >66% of these criteria should expect minimal (and perhaps zero) engagement from institutional-grade investors.
Assets on Tinlake
What is the classic life cycle of an asset from origination to repayment?
What assets are accepted as collateral?
Many types of Real-World Assets are accepted as collateral: loans, streaming royalties, art, or any other securitized assets that match your business.
What stablecoins are used to invest into the pools?
Currently DAI is the only stablecoin that can be directly invested in the pools. DAI provides the liquidity to fund the underlying assets in the pool. Via RWA Markets on Aave, investors can invest with USDC. We are exploring other stablecoins.
How are assets removed from the pool by the Issuer?
Assets cannot be removed from the pool. If they are financed on Tinlake, they must be repaid (or written off) to stop serving as collateral.
Is the interest rate flat or floating?
Issuers pay a fixed interest rate and most investors receive a fixed and stable yield.
Is it possible to remit periodic interest payments into the pool?
Issuers can pay interest into the pool at any time. Tinlake allows cumulative borrowing (up to the value/pricing of the NFT) and multiple repayments. The Issuer can repay in a manner that supports their business as long the loan is repaid on time. Some Issuers may choose not to pay back interest as it is collected in order to avoid multiple gas fees on Ethereum (which can range from $10-$200 per transaction). Issuers can wait until the full amount is collected and then repay the loan and interest together. (Gas-fee avoidance will cease to be a factor once the pools migrate to Centrifuge Chain and transaction fees drop.)
What is a write-off and when does it happen?
Tinlake allows for flexible treatment of write-offs. If a financing is overdue, the expected repayment amount can be reduced (thereby written off) following a predetermined schedule and set of criteria (e.g., a grace and collection period), as provided by the Issuer.
To learn more about how Write-offs and asset defaults are handled in Tinklake read “What Happens in an Asset Default on Tinlake?.”
Are there any geographical restrictions on the real world assets or investors on Tinlake?
Due to US sanctions, real world assets and investors located in or resident of the following countries are not permitted:
- North Korea
- South Sudan
Why do DROP and TIN prices differ?
The DROP (Senior Tranche Token) token price is determined by interest-rate compounding and the cash drag (reserve/pool value) of a pool.
The TIN (Junior Tranche Token) does not have a predefined fixed or variable interest rate. TIN returns are driven mainly by the spread between financing rates and DROP APRs, and capture the increasing value of the portfolio. As liquidity in the reserve does not generate yield, a high reserve reduces TIN returns.
Where can we see historical daily pricing of DROP and TIN for each pool?
Here is an auto-refreshed spreadsheet of the historical prices.
Why do Issuers over-collateralize when drawing from the MakerDAO credit line?
The credit line is directly integrated with a Maker vault. (Note: not all pools have a Maker vault.) For originations/redemptions, the smart contracts mint and lock DROP tokens into this vault and, in return, mint DAI into the pool.
Maker requires an over-collateralization of DROP as additional protection. This over-collateralization comes from TIN. E.g., with an over-collateralization of 105%, a 100 DAI Maker vault will need to be protected at all times with TIN worth 5% of the vault (5 DAI). Thus additional TIN is required on top of the minimum TIN risk buffer for Maker integrated pools.
How is the token price of DROP and TIN that’s displayed on Tinlake calculated and adjusted when there are redemptions by investors? I.e., what is the relationship between the token price and investor deployment timing?
The price is not dependent on redemptions or investments. Token prices are driven solely by the asset side — interest accrued and cash drag.
How are Issuers protected from liquidity withdrawal?
In Tinlake’s revolving pools, all investment inflows/outflows are locked over a defined period of time (“epoch”) and automatically executed at the end of this period according to predetermined priorities and risk metrics. Investors can supply more liquidity at any point during an epoch, which works like an order management system with guardrails.
At the end of an epoch, all locked orders are processed and executed at current DROP/TIN prices considering the current and maximum liquidity of the pool and the current versus minimum TIN risk buffer.
Is reserve the same as cash drag?
Cash drag is calculated as Reserve/Pool Value and is a different representation of the reserve.
When do epochs close?
Epochs close every day at 10AM CET automatically when and if all orders can be fulfilled. Epochs can also be closed manually by the Issuer or Centrifuge team at any time. To learn more see the Closing Epoch Guide.
Note, an issuer can not repay an asset and finance an asset in the same Epoch. Additionally, if redemptions are pending Issuers can not finance an asset until redemption requests are fulfilled.
How are tax documents handled for US persons who invest in a Centrifuge pool?
US persons that invest in a pool are issued a 1099-MISC by the Issuer utilizing the details provided in the KYC process.
How are tax documents handled for non-US persons who invest in a Centrifuge pool?
Generally, non-US investors need to declare earnings themselves in their tax jurisdiction. The W8-BEN/E form that they need to complete is to ensure only that there is no withholding tax in the US.
In most cases, a taxable event occurs only when DROP/TIN tokens are redeemed and profits or losses are realized.Typically it’s the difference between the purchase and sale price of DROP/TIN tokens that would need to be reported. Investors are advised to check their local tax laws.
What types of rewards are there?
There are two types of rewards with three different reward rates: Issuer rewards, DROP investor rewards and TIN investor rewards. These rates might change over time.
Issuer rewards: Only the pool’s Issuer gets these. As these rewards are paid for the origination of assets, they are calculated based on the total outstanding debt.
DROP and TIN investor rewards: Every DROP and TIN investor earns these. When Issuers invest in their own TIN tranche, they earn the same rewards as any other TIN investor. As these rewards are for providing liquidity, they are calculated based on the outstanding investment of the investor.
Reward Rates as of June 17, 2022:
Issuer: 0.00002 CFG per DAI / day
Drop: 0.00054 CFG per DAI / day
TIN: 0.00095 CFG per DAI / day
Do Issuers earn rewards on liquidity reserves?
Issuer rewards are earned on the value in use and not on what’s in the reserve. Investors earn rewards on both.
Other common questions
On the prices displayed on Tinlake, does a new investor effectively come in at par on DROP and TIN token price?
New investors don’t come in at par, i.e., at a DROP or TIN token price of 1 DAI; they come in at whatever price the DROP or TIN is trading. They enter at par only if they join the pool when it launches.
How can an investor tell how much of their investment is deployed and should be marked at the displayed price versus what is being held in reserve?
These are revolving pools. Money is fungible so everyone (in the same tranche) is treated prorated. You can’t earmark an investment. The mechanics are similar to those of an investment in a mutual fund. Thus, Issuers can limit incoming investments with the maximum reserve. More investments coming in and increasing the reserve will drag down yield for all investors.
To replicate the exact yields is practically impossible. Tinlake is dynamic, not static, and interest accrues every second, so to replicate the exact yield you’d basically need to have a time series of the cash drag per second. Cash drag may change several times throughout an epoch with repayments and originations. As a rule of thumb, taking the APY and adjusting for average daily cash drag of the time period to calculate the yield creates a pretty close approximation.
Investors can always calculate their annualized yield based on the token price.
I hope you all enjoyed the Issuer FAQ, and got a glimpse into the work we do with the Issuers. In our next post, we’re going to talk about Pools on Centrifuge Chain and the reasons for launching there. Please look out for it soon!