From 2022 to 2023, speculative DeFi platforms offering astronomical yields collapsed one by one, plunging the crypto market into a winter chill. Investors and protocol treasuries sought stability through exposure to traditional asset classes such as US government bonds and private credit. Against this backdrop, Real World Assets (RWA) in decentralized finance (DeFi) introduced a new understanding to the crypto market.

RWA-related projects established connections between blockchain and the real world. For blockchain, the emergence of RWAs provided a solid foundation for tokens and growth, increasing stability within the DeFi system. For traditional finance, RWA projects partially replaced traditional financial intermediaries, enhancing asset circulation channels and liquidity while reducing asset turnover costs.

However, regardless of the technology, earning remains the foremost pursuit for degens. With the return of the crypto bull market, DeFi-native yields soared to double-digit levels, causing RWA protocols to cool down rapidly.

It wasn’t until recently that BlackRock launched its first tokenized fund, BUIDL, on a public blockchain, reigniting the RWA track and quickly attracting a large influx of capital. Leading the track, Ondo Finance saw a general rise in RWA protocol tokens, with both new and old projects emerging in abundance. Among them, Centrifuge secured a $15 million financing round.

While a $15 million financing round may not seem extraordinary, considering the recent downturn in the DeFi sector of the crypto market, most of the funds exceeding tens of millions of dollars flowed into infrastructure construction. Therefore, Centrifuge’s performance stands out, particularly given its Series A financing status. Moreover, the strength and backgrounds of the investors remain robust, with ParaFi Capital and Greenfield leading the round, and Circle Ventures, IOSG Ventures, Arrington Capital, Spartan Group, and Wintermute Ventures participating.

Centrifuge was launched in 2017 and ventured into the RWA market in 2021, making it one of the earliest DeFi projects to do so. Its key competitive advantage lies in successful collaborations with the majority of top DeFi projects, laying the groundwork for rapid user aggregation and liquidity anchoring.

Currently, MakerDAO accounts for 80% of Centrifuge’s active loan volume, forming a positive cycle: MakerDAO obtains high-quality collateral assets through Centrifuge, while substantial funding support drives explosive growth in Centrifuge’s business. This win-win model enables Centrifuge to efficiently unleash and utilize real-world assets.

In addition to MakerDAO, Centrifuge has partnered with leading DeFi platforms like Aave to co-create dedicated financing pools for RWAs, bringing more platform traffic and user benefits to the Centrifuge ecosystem. Furthermore, Centrifuge serves as an on-chain credit ecosystem aimed at tokenizing assets of small and medium-sized enterprise owners and collateralizing them on-chain to obtain liquidity.

Let DeFi Expand To Institutions

RWA Protocol Is Aimed At Tokenizing Real World Assets, Namely Utilizing Technological Means To Bring Assets Such As Real Estate, Vehicles, Government Bonds, Etc., Onto The Blockchain, Establishing Connections Between Blockchain Assets And Real World Assets, Thus Achieving The Tokenization Of Real Assets. In Theory, The Practical Use Of RWA Protocols Can Be Very Broad, With Any Real World Item Being Tokenized And Mapped Onto The Chain.

Stablecoins Are The Most Famous Example Of Tokenization, With The Tokenization Of The Dollar Being The Most Well-Known, Such As The USDT And USDC We Are Familiar With. The Principles Behind Both Are The Same: The Project Company Reserves Dollars, Then Recasts The Corresponding Amount Of USDT/USDC, Tokenizing The Dollar Into Stablecoins, Thus Achieving The Tokenization Of The Dollar. In Addition To The Dollar, Gold Is Also A Typical Example Of Tokenization, Such As KAU, PAXG, XAUT.

In Addition To The Dollar, Tokenized RWAs Typically Involve US Treasuries, Debt Instruments, Stocks, And Indices, And Even Include Non-Financial Aspects Such As Carbon Credits (Ecowatt, Flowcarbon), Physical Collectibles (Collector, Tangible), Data Indexes (The Graph), KYC (Shyft Network), And Labor Markets (Human Protocol).

Related Reading: “Web3 Beginner’s Guide: Understanding All Core Cryptocurrency Concepts In One Article“

Tokenization Market Is Heating Up

Choosing between DeFi and tokenization ultimately boils down to which option is more profitable, especially for wealthy individuals. Comparing the yields of US government bonds and DeFi, the yield of US ten-year treasury bonds has been generally increasing, currently reaching 4.7%, while DeFi yields are often fluctuating and do not show a clear upward trend, with median yields remaining around 2%.

The underperformance of DeFi has left large holders without significant profits, prompting a shift towards asset tokenization. In addition to BlackRock’s tokenized fund BUIDL mentioned earlier, other companies are also aggressively rolling out their tokenized funds. On April 26th, Franklin Templeton launched the Franklin On-chain US Government Money Fund (FOBXX), issuing shares in the form of BENJI tokens. Each token represents a portion of FOBXX and can be traded on public Polygon and Stellar blockchains.

This decision has also led to a historic high in Assets Under Management (AUM) for on-chain government bonds, surpassing $1.2 billion. According to The Block, the global tokenization market is expected to reach $16 trillion by 2030.

Image source:21Shares

According to The Block’s report, current RWA investment products (such as Ondo Finance OUSG, MatrixDock STBT) and institutional lending platforms like Maple Finance and Centrifuge are experiencing rapid growth in Total Value Locked (TVL). Additionally, the trading volume of RWA tokens on decentralized exchanges (DEX) has reached a historic high this year, exceeding $2 billion, further highlighting the changing interest and demand for RWAs.

Centrifuge is one of the founding members of the Tokenized Asset Alliance. According to rwa.xyz data, Centrifuge ranks at the top of its class with $280 million in active loan volume in the on-chain private credit sector. However, Centrifuge faces high risks of loan defaults, with over $26 million in loans overdue for more than 90 days.

Institutional-Grade RWA Lending Market

But currently, users are unable to hedge, speculate, borrow, or meet liquidity needs through risk-weighted assets or risk-weighted assets. If DeFi wants to expand to institutions, it needs corresponding infrastructure to allow institutions to join RWA quickly and securely.

To this end, Centrifuge co-founder Lucas Vogelsang wrote a proposal in the financing statement aimed at establishing an institutional-grade lending market called Centrifuge Pools, which will be funded and built by DAO. The market is built on Base and integrated with Coinbase verification, and they will be extended as open-source settlement layers. These integrations will enable institutions to join RWA quickly and securely, providing instant liquidity and borrowing capabilities collateralized by RWA.

Centrifuge allows borrowers to finance their real-world assets without banks or other intermediaries, bridging them into decentralized finance (DeFi) to reduce the cost of capital for small and medium-sized enterprises and provide stable sources of income for DeFi investors unrelated to volatile crypto assets. Centrifuge states that none of this will sacrifice compliance or regulatory requirements.

Financing real-world assets requires real-world legal structures, so there needs to be an off-chain legal entity to perform tasks such as contract signing and settlement recovery. Centrifuge essentially simulates the process of corporate lending in traditional finance, with lower financing thresholds, while allowing investors to generate income from real assets. For compliance, Centrifuge is built on the legal structure of US asset securitization.

Related Reading: “Interpreting Future Development Opportunities for RWAs from a Legal Perspective“

For the integration of the real world and the on-chain world, RWA protocols typically establish DAO organizations and set up off-chain foundations as legal entities to manage RWA projects. The Centrifuge DAO consists of several main parts: Centrifuge Credit Group (CCG), Protocol Engineering Team, Governance Coordination Group, K/factory, Centrifuge Network Foundation (CNF), and founding documents.

On top of this, some protocols also use SPVs, or special purpose vehicles. These are independent legal entities set up specifically for the corresponding fund pool of the project, serving to isolate bankruptcy risks, among other functions. For example, in Centrifuge, SPVs are typically used to hold real-world assets being financed. It allows these assets to be separated legally and financially from the main operating company, thereby reducing risks and increasing transparency for investors.

The setup of each pool in Centrifuge is designed to reflect the protocol structure and the actual relationships between parties, with the templates provided based on legal structures used for asset-backed securities for decades. To securitize assets, the legal ownership of the assets is transferred from the asset originator to the SPV.

Image source:Centrifuge Documentation

Centrifuge’s Solution for RWAs

At its inception, Centrifuge, as a decentralized asset financing protocol, aimed to facilitate the exchange of data between businesses, including company reputations, business partners, and more. It’s reported that Centrifuge’s protocol offers several functionalities to users: it can directly connect customers and suppliers and track historical transaction records; users can establish an identity and reputation authentication system for dispute resolution and risk management; exchange financial documents such as receipts, order information, and more.

In 2021, Centrifuge began venturing into the RWA market, becoming one of the earliest DeFi projects to do so and serving as a technical provider behind leading protocols such as MakerDAO and Aave.

On-Chain Tokenization and Trading of RWAs

To generate income from bringing RWAs onto the blockchain, there needs to be a place to store real-world assets and an open market acting as a pool for these assets.

Initially, Centrifuge stored asset data on Ethereum and established the open asset pool Tinlake, utilizing the Aave protocol to provide liquidity for RWAs on Centrifuge. Within Tinlake, Centrifuge allows anyone to launch on-chain credit funds and create collateral loan pools.

Borrowers can tokenize real-world assets through Tinlake, with real-world collateral split into two types of tokens, DROP and TIN, based on risk and return. DROP represents fixed-rate senior tranches, while TIN represents junior tranches with floating rates. Investors can choose to invest in DROP or TIN based on their risk tolerance and return expectations.

Subsequently, Centrifuge built its own proof-of-stake blockchain, Centrifuge Chain, using the Substrate framework, and launched the new funding pool Centrifuge App to replace Tinlake. This allows any EVM-based on-chain user to invest. While retaining the original advantages of Tinlake, Centrifuge App improves the speed of KYC and participation in investments, adds automated KYB (Know Your Business) processes, and lays the foundation for future multi-chain support.

For those familiar with Substrate, it’s been around for some time. At the 2018 Web3 Summit, Polkadot founder Gavin built a new blockchain in just 15 minutes using the Substrate technology framework, which became a legend in the crypto community. Gavin explains Substrate as truly P2P, upgradeable, with unlimited logic and economic flexibility.

Centrifuge Chain allows users to bring their assets onto the chain as NFTs, containing the most important information for pricing, financing, and valuation needed as collateral for financing. Asset pricing involves the issuer borrowing liquidity from the funding pool. Over time, each asset’s accrued debt is repaid by the issuer, including interest payments and principal repayment.

Image source: Centrifuge Documentation

Although by default any on-chain information attached to these NFTs will be public, Centrifuge’s private data layer allows issuers and investors to securely and privately access additional asset data. These asset data are hashed, anchored on-chain, and added to the NFT metadata to create verifiable links to the NFT without exposing the data.

On-Chain Fund Management

Currently, Centrifuge has 19 pools with a total of 37 tokens, including DROP and TIN, with a total TVL exceeding $289 million. To better manage RWA assets, Centrifuge launched Centrifuge Prime, an RWA investment platform for DAO bonds, in June 2023. It is supported by a community of diversified financial professionals and developers.

To attract sufficient liquidity, Centrifuge previously proposed to the Aave community to allocate a portion of the stablecoins held by the Aave Treasury to low-risk RWA investments through Centrifuge Prime. Centrifuge stated in an interview with The Defiant that expanding the operational scale of Prime is currently its top priority.

Additionally, Centrifuge partnered with asset management firm Anemoy to launch a fund management platform in March of this year, aiming to bring credit funds onto the public blockchain. Subsequently, an unnamed entity from the Celo ecosystem invested $100,000 in tokenized treasury through Anemoy and allocated an additional $1 million for future deployments. Anemoy also integrated with fund management firm Trident Trust, whose vision is to pioneer efforts in automated on-chain fund structures to manage its Centrifuge-based regulated BVI professional funds.

Centrifuge’s native token CFG serves as the on-chain governance mechanism, allowing CFG holders to manage the development of the Centrifuge protocol. Additionally, CFG is used to pay transaction fees on the Centrifuge Chain, and tokenomics details can be found in Centrifuge documentation. From a token price perspective, CFG has shown an overall downward trend in the past month, with a price of $0.6581 USD at the time of writing.

It’s worth noting that 81% of CFG’s circulating supply accounts for the total supply, meaning that the majority of tokens are already circulating in the secondary market, and there is not much selling pressure from the project team or institutions.

Team and Funding Background

Centrifuge is the fourth startup founded by a group of Silicon Valley “startup veterans,” established in 2017 by three co-founders: Lucas Vogelsang, Maex Ament, and Martin Quensel. Maex Ament left the company in 2019. All three co-founders are professionals in the blockchain and finance industries with extensive experience.

The founding team previously co-created and operated Taulia, an enterprise-level supply chain finance service platform that provided efficient supply chain financing support to Fortune 2000 companies worldwide. However, despite Taulia’s assistance in reducing the cost of capital for small and medium-sized enterprises (SMEs), these businesses still faced many financing obstacles. For example, they couldn’t access open liquidity resources directly and had to rely on traditional banking systems with their high intermediary fees. Additionally, the lack of a transparent trading venue hindered their access to funding. Thus, they established Centrifuge to further reduce the financing costs for SMEs.

Currently, the company’s engineering and product teams are based in Berlin, Germany, while business activities are primarily concentrated in San Francisco, USA. The entire Centrifuge team has grown to approximately 56 people, covering various fields such as blockchain, finance, and regulatory law.

Since its inception in 2017, Centrifuge has completed five rounds of fundraising.

In March 2018, Centrifuge secured a $3.8 million investment from Mosaic Ventures and BlueYard Capital.

In 2019, Centrifuge announced a new round of funding led by Crane Venture Partners, raising $3.7 million. Atlantic Labs, Inflection Capital, Compound’s Robert Leshner, and Fabric Ventures also joined as new investors.

In February 2021, Centrifuge raised $4.3 million with Galaxy Digital and IOSG leading the investment. Other participants included Rockaway, Fintech Collective, Moonwhale, Distributed Capital, TRGC, and HashCIB. In May of the same year, Centrifuge announced a $3 million strategic partnership with BlockTower.

In November 2022, Centrifuge completed a $4 million strategic round of financing with investments from Coinbase Ventures, BlockTower, Scytale, and L1 Digital. BlockTower and MakerDAO reportedly created a $220 million pool on Centrifuge.

On April 17, 2024, Centrifuge announced the completion of a $15 million Series A funding round, with ParaFi Capital and Greenfield leading the investment. Circle Ventures, IOSG Ventures, Arrington Capital, Spartan Group, and Wintermute Ventures also participated.

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