Sep 23, 2022 - Economy

Centrifuge turns real world assets into loans

Photo illustration of Centrifuge CEO Lucas Vogelsang surrounded by shapes, binary code, and money

Photo illustration: Sarah Grillo/Axios. Photo courtesy Lucas Vogelsang

To Centrifuge CEO and cofounder Lucas Vogelsang, decentralized finance (DeFi) is "the future of the financial system" here, in the now — filling a niche that traditional finance has largely found not worth its time.

Why it matters: Centrifuge provides liquidity from real-world assets (RWA), specifically for those with little access to this type of financing from traditional banks.

  • To date, it has financed $182 million of RWA — think real estate loans, trade receivables and institutional loans — a drop in the bucket to be sure, but also just the start.
  • "It's super powerful to give people who have very little access to finance — small businesses, the underserved — access to capital," Vogelsang said.

The big picture: Tokenized illiquid assets, including real estate and natural resources, are estimated to become a $16.1 trillion market by 2030, according to a report by the Boston Consulting Group (BCG).

How it works: "For [DeFi] to work, we need to find a way to access it, and the assets that exist around us — they need to be made compatible. That's what we do."

  • A business with real-world assets in need of a capital injection can use Centrifuge's Tinlake — a smart-contract based marketplace of asset pools — to convert its assets into NFTs embedded with relevant documents.
  • That's how RWAs are made crypto simpatico.

Then, users can create an asset pool collateralized with their NFTs.

  • Users that provide financing get returns in stablecoins and Centrifuge’s CFG token, the latter of which are used to pay transaction fees, to participate in Centrifuge blockchain governance or for staking.

The intrigue: "Borrowers don’t know there is crypto. It’s all behind the scenes," Vogelsang says.

Context: For now, short-term loans are the bread and butter of the business — they pose less risk than long-term loans for the still-nascent market.

  • But the more transactions Centrifuge conducts, the better it gets.
  • "We're building a community of credit experts," Vogelsang says. "We now have data for scenario analysis, credit scores for the borrowers, etc."

What others are saying: S&P Global, a provider of credit and risk analysis to traditional financial firms, is looking into how it can better inform investors of idiosyncratic and systemic risks in DeFi, and effectively integrate with the crypto ecosystem.

  • "This part of the market is in its infancy," Chuck Mounts, S&P's chief DeFi officer, tells Axios. "The lower cost of capital and the lower friction versus traditional, is going to make it the pathway of future financing."

Threat level: Traditional financial firms are increasingly eyeing the space, but Vogelsang still sees the advantage of DeFi.

  • All parties "get better terms, because it cuts out the middleman," he says — referring to bankers and other intermediaries who would usually get a cut of the transaction for facilitating it.

State of play: To be sure, yields have returned to earth after skyrocketing amid DeFi Summer, yet Vogelsang is far from dismayed.

  • "The bull market made a lot of people curious, but so much of the stuff wasn’t sustainable," Vogelsang said, with a sardonic grin. "We deserve market-range yields today."
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