Centrifuge
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Centrifuge

Real World Asset Market: What is it and how will it work?

Q&A on the first permissioned market for real-world assets built on Aave and Centrifuge.

Real world assets (RWA) bear monumental potential for DeFi in regards to volume, adoption and risk diversification. Pioneering lending in DeFi, this collaboration between Centrifuge and Aave will be a game changer for millions of businesses by providing instant, bankless liquidity.

What is the RWA Market?

The goal is to launch the first (permissioned) market for Real World Assets (RWA) on the Aave protocol. This will allow Aave depositors to earn yield against stable, uncorrelated real world collateral while Centrifuge issuers can borrow money from Aave, automatically balancing capital needs and providing alternative collateral to volatile crypto assets.

What does this mean for Aave users?

Aave is a decentralized system of lending pools where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an over collateralized or undercollateralized fashion. Currently Aave users can only borrow or lend against cryptocurrency, which is volatile. The RWA Market will mean that Aave depositors will now be able to earn yield against stable, uncorrelated real world collateral.

What does this mean for Centrifuge issuers?

Centrifuge enables issuers to create an on-chain asset fund for RWAs, otherwise known as pools, accessed by our decentralised app Tinlake. Each pool is issuing tokens representing a share (in this pool). Issuers of these on-chain asset funds can now provide the collateral assets to the permissioned RWA market by adding such tokens (called DROP) to the pool in exchange for USDC additionally to DAI. RWA Market diversifies the available stablecoins to issuers.

In short, Centrifuge issuers can now borrow money from Aave, as well as MakerDAO, increasing their debt ceiling potential to the billions.

What does this mean for DeFi?

The Centrifuge protocol is now integrated with the two biggest DeFi protocols, MakerDAO & Aave, and is also part of the Polkadot ecosystem, therefore bridging DeFi across both Polkadot and Ethereum to a limitless market.

Why is this a permissioned market?

When bridging the regulated world of TradFi to trustless DeFi you encounter challenges that only few in DeFi have taken on so far. RWA Market is planning to make use of the new permissioned pool feature on Aave which is designed to be compliant with AML regulations and US securities guidelines. The pool itself will be public on Ethereum but only accessible to those that undergo KYC verification.

How can I use the RWA Market?

This market differs in a few ways from the existing Aave markets. For regulatory compliance, in order to provide liquidity for the RWA market, depositors will need to pass KYC/AML checks and sign a subscription agreement for the RWA market. After depositing USDC in the RWA Market, depositors will receive aUSDC.

How much can I earn?

aUSDC token holders receive continuous earnings that evolve with market conditions based on the interest rate payment on loans. The higher the utilisation of a reserve the higher the yield for depositors. Each asset has its own market of supply and demand with its own APY (Annual Percentage Yield) which evolves with time.

How will assets be overcollateralized in the market?

When taking loans out, (whether TradFi or DeFi) borrowers have to put up collateral. So, for a loan on the RWA market, borrowers need to bring in 4.9% to 15.5% more of USDC in DROP tokens than they borrow. This is called overcollateralization. If the price plummets and the amount in collateral no longer covers the amount they’ve borrowed, their collateral can be liquidated using the overcollateralization as a security buffer.

How will the RWA Market grow?

The RWA Market will add more issuers over time, therefore diversifying its investments to more and more asset classes.

To be the first to find out more news or updates about the RWA Market, sign up here, follow us on Twitter, or Discord or Telegram!

This is not investment advice. Use of this guide is at your own risk. To the maximum extent permitted by applicable law, the services are provided without warranties of any kind, whether express, implied, statutory or otherwise, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, title, quiet enjoyment, accuracy, or non-infringement. Further, to the fullest extent allowed by applicable law, in no event shall the company or its affiliates, be liable to you or any third party for any damages of any kind.

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