Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Cassidy Daly & Lucas Vogelsang: Centrifuge – Introducing Real-World DeFi

Episode Date: June 30, 2021

Centrifuge is an open and permissionless protocol built on Polkadot and Ethereum that unlocks collateral for DeFi. Centrifuge allows for the tokenization of real world assets such as invoices, real estate, or goods, and puts them on the blockchain. This allows users to borrow against these assets from investors. Investors lend dai in exchange for an interest rate that depends on the borrower and the asset used as collateral.We were joined by Lucas Vogelsang, CEO & Centrifuge Co-founder, and Cassidy Daly, Token Design & Research at Centrifuge. They explained why they built the protocol and how it works, the first application built on top, Tinlake, its integration with other DeFi platforms such as Maker, and their vision for the future.Topics covered in this episode:How did Centrifuge come about and what is its visionWhat challenges do they face using real world assets as collateralHow users are protected against spam and fraudThe underwriter token modelWhat are the value limits on what can be borrowed?Some use cases of where Centrifuge can make the biggest impactWho are the lenders involved in the protocol?How the protocol works on a technical levelThe Centrifuge token - CFGAltair - the Kusama parachain on PolkadotWhat the integration of Tinlake assets in DeFi looks likeEpisode links:Centrifuge websiteTinlakeUnderstanding TinlakeCentrifuge on TwitterLucas on TwitterCassidy on TwitterSponsors:Exodus: Exodus the easy-to-use crypto wallet available on all platforms and supporting over 100 different assets. - https://exodus.com/epicenterSolana: Solana is the high performance blockchain supporting over 50k transactions per second to power the next generation of decentralized applications. - https://solana.com/epicenterParaSwap: ParaSwap’s state-of-the-art algorithm beats the market price across all major DEXs and brings you the most optimized swaps with the best prices, and lowest slippage - http://paraswap.io/epicenterThis episode is hosted by Brian Fabian Crain & Friederike Ernst. Show notes and listening options: epicenter.tv/398

This is Epicenter, Episode 398 with guests Lucas Fogelsang and Cassidy Daly from Centrofuge. Welcome to Epicenter, the podcast where we interview crypto founders, builders, and fault leaders. I'm Ryan Farmin Crane and I'm here with Frederica Ernst. So today we're speaking with Lucas Vogelsong and Cassidy Daley, who are respected CEO and co-founder and leading token design in research at Centrifuge. So, but before we talk with Lucas and Cassidy about Centrifuge, we'd like to talk about our sponsors for a minute. So, So, first of all, Exodus. Exodus is an easy-to-use wallet, which support hundreds of assets and has native apps for all the platforms, including iOS and Android.

It's fully a non-custodial wallet and the firm belief is in the not-your keys, not your coins mantra. So you can go to Exodus.com and give it a try. And then secondly, Solana. So Solana is the next generation blockchain with super fast blocks, very cheap fees. And scalability is the single biggest challenge, I think, that, you know, we're facing crypto today. And so Solana has really optimized everything to provide the most perform a blockchain. So you can go to Solana.com slash Epicenter to learn more. And that the Paraswap.

Paraswap just came out with a huge update that's even faster and more liquid. It's cheaper than Uniswope and comes with a new gas token that can cut your gas fees by up to 50%. Paraswap is now multi-chain and has expanded to Polygon and Binance Smartchain. Start trading at paraswop.io slash epicenter. Cool. And with that, let's get into centrifuge. Well, let's start at the beginning. Can you share with us a bit? Like, you know, how did centrifuge come about and what's the vision for the project? So centrifuge came about when we started looking at how we expand sort of this new world that we're building in crypto to businesses, to users all around the world and how we allow them to use

their existing assets that they have. So we looked at how we actually allow a business to use, say, an unpaid invoice that they have or a real estate investor to use their property to get liquidity from defy instead of banks. Back when we started actually, defy didn't even really exist. We just said, okay, well, what if people could use crypto to pay for this? And as this defy ecosystem developed, we sort of refined our idea. and our mission to focus really on how we tap into this liquidity, how we allow users to use it for stuff that exists outside of the world of truly

crypto-native assets. And so what Sanifuge does today is we allow users to borrow money. Usually stablecoin, you most often die against any kind of real estate. We work with, I mentioned real estate, trade finance, to bring those assets on chain, allow investors to invest in them, earn yield on a stable asset, but to do so fully in crypto. Senator Fuge is live on maker as the first real estate. So new silver is our first asset originator that got a $5 million die, debt ceiling that they're using to actually mint the first die in the world that's backed by real estate.

basically bringing real world assets to the Web 3, I can imagine there's a lot of different challenges to overcome. What were those to you? The challenges are slightly different, but in a lot of ways, similar to a lot of the on-chain stuff that we do. Well, the biggest issue for us that we started working on was actually how do we bring liquidity in these assets.

Unlike, say, ETH or other tokens that have liquidity, that are fully fungible, a lot of these assets in the real world are non-fungible, right? Like your house is not the same as mine, your invoice, your credit. If you want to borrow money, that's the different credit risk than if I want to borrow money. And so if you try to build a marketplace where investors and borrowers come together, this is something that's much easier to do if we're all borrowing and lending the same thing. And that's why you see money markets like Abe or blending protocols. like Maker that just work with fully liquid assets, actually picking up and becoming sort of

successful, building out their use cases much earlier than lending on non-tungible assets. And so the approach we're taking there is we allow these real assets to be bundled into different pools. The concept that exists in the traditional world is securitization, meaning you take different assets, you put them into one entity, one pool, is what we call them, and then you allow investors to buy shares of that pool. And so that gives you the advantage that now,

instead of having to find a borrower that, or a lender that wants to invest in exactly that house, and then at the right time, the right amount, and on the other side, finding a borrower doing this matching, you can actually now just throw all of these assets into a pool, And as an investor, I can just say, oh, I want to invest in real estate and I can buy tokens from this real estate pool. Or I want to invest in trade finance. I want to invest in companies that are growing and need money for funding their operations.

So I put money into that pool. And on the other side, there's more borrowers. And so that sort of solves this coordination challenge. So we've seen in DeFi that there are problems with listing things as collateral in terms of making sure that this is a trusted asset and there is a good price feed for it. And basically, a lot of people actually have to collude to actually make this go south. I could imagine that this is even more difficult with real world assets. I mean, basically, as you said, my house is not the same as your house and my car is not the same as your car. And even when you bundle things together,

how do you protect yourselves and users against spam or fraud? So there's a few things we're doing. We already have implemented, and there's a few things we're still working on. I love, hopefully we can talk a bit about both. So sort of the problem here is, of course, like how do you know what exists out there in the real world? A very simple thing we do, well, I mean, it's actually rather complicated, but so the first layer of defense is, well, we do make sure that there's legal recourse. And so in case all else fails, obviously, if you're investing in one of these pools, there is a legal recourse. You can go and you can sue the person that tries to walk away with your money.

And so, like, this is not where we don't live in a completely lawless world, right? And so, like, you can rely on that as an ultimate backstop. But then really the second level of defense maybe that we have is, I talked about we bundled different assets into pools. And what we give investors is we give investors a choice to invest in actually two different tranches. Each pool has two different tokens where if you want high risk, high return, you can invest in what is typically called the junior tranche. Those are, we call them tin tokens. They have a variable return and take first losses.

Or you can invest in the senior trunch. and that gives you a fixed return, so fixed interest rate, but you're protected by the junior. And maybe to just give you a very quick example, say we have $1 million from that investors invest, $900,000 invest in the senior and $100,000 invest in the junior. You have a million dollars in assets on the other side, right? Maybe that's 20 different loans. Say one of those 20 different loans worth $50,000 defaults. So you now have only $950,000 left.

That means actually then if you're a senior investor, you're not suffering anything because you have those junior investors covering the first $100,000. On the other side, for the junior investors, they would see a 50% loss because they're losing $50,000 under $100,000 that they invested. And so what this actually gives you, it gives two different kinds of investors, two different kinds of products that they both actually like more, right? if I'm the lending protocol or I'm just like some retail investor that wants to put money into a savings bank, not thinking much about like the risk or exactly what these assets should be, then I know there's like other investors that effectively want to leverage their position.

They want to have more risk exposure and make more money and they're taking that risk for me. And so that structure basically gives you insurance that if there's like a single default, if there's, there's issue with different assets, that that that, is covered by these junior investors. And so that's a very crucial part. And so for example, Maker, in the example of New Silver,

they are investing in the senior tokens, whereas other investors that really know the real estate market that like to have these higher yields are investing in the junior. And ultimately, this is sort of where we're developing the product too. It's actually that these junior investors become more important over time And actually maybe I want to hand over to Cassidy to talk a bit about what we have in store there.

Yeah. One of the most exciting things that we have in store and are working on, we're calling the underwriter token. And really, it's actually just these tin tokens that these more advanced either junior investors or underwriters would be able to actually give a more accurate assessment of the risk of these assets. So more accurate because it is distributed. There are going to be a lot of different entities participating in this, whereas today in traditional systems, this is generally either just a bank that you're working with or a credit agency.

And the incentives there are really not aligned for either of those parties. Either you're a bank that's just trying to make the best return that you can. And so they're not necessarily incentivized to price the risk as accurately to the borrower favor. And the credit agency almost has the opposite because they're just paid directly by the business in most cases. And so they're just looking to make money and are also not really aligned with the incentives of accurately pricing this risk. So the idea here with this underwriter token model is that by holding the tin token, you actually have skin in the game as an underwriter or junior investor here. And that aligns the incentives a lot more closely to actually have something to

lose if you were to price this risk inaccurately. I think there's still a lot of work that we have to do there and making that system work well. But super excited to move that forward. And I think that's one of the next big pieces that we have here in Centerfuge. Let's get to our sponsor, Exodus. Exodus. Exodus is a fantastic cryptocurrency wallet that strikes a right balance between ease of use, security, and great features. You can get Exodus on the iPhone, desktop app, web app, Android, whatever platform you use. It's a non-custodial wallet and that is so critical. Because what's the point of crypto if you don't control your own assets? With Exodus, you always do.

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I can give a bit of a picture a bit more of what the underwriters actually will do because I do think they really tackle this problem that you mentioned, Federica, which is like how do you price these real world assets, right? Because they exist outside of crypto, and you need to know, okay, what it is exactly. And so what we have in these pools is we have these investors that have skin in the game, that take first loss. And so they actually, what they can do is they can, they need to actually decide.

They need to be able to know if this loan that we're giving here to a borrower that wants to buy a house, if the loan should be priced at 5% interest per year or 8%. So the mechanisms that we're designing now is effectively, we're creating, we're enabling these pools to actually have logic where different underwriters can stake some of their two-neur tokens to assets that they like, meaning assets that they think are priced correctly are valued correctly.

So in the example of a house, right, you have the value of the house. Is it worth $500,000 or is it worth $600,000? And should the borrower pay 5% or 8% interest? And so if a borrower comes and says they want to borrow money for a set house, these different underwriters can stay towards the loan proposals that they like. So 500,000 at 8% or, for $400,000. 400,000 at 5%. The pool then will just sort of select only the assets that get the most endorsement by these different underwriters.

Thus, like you have now, as Cassidy mentioned, a way to decentralize this pricing challenge. So you can now build sort of a system where anyone can come in and underwrite these assets. They can pull in external data sources. They can look at historic real estate market data. They can look at credit rating information. They can go and look, check out the house themselves and see if it actually exists and talk to talk to the or look at which neighborhoods might have the most potential for development, right? So if you have all these different things that you can bring in and ultimately so these different underwriters can collaborate to then come up with the best credit rating or the best sort of pricing of this asset. And for us, what does actually the best pricing mean, right?

Like we're trying to build a fairer and the more efficient financial system. And that means we're not overcharging the borrowers, but we're also not undercharging. And that means it just needs to be, the price needs to be more than the risk of default, but not too much more. And that's exactly where like then these underwriters are incentivized to stake towards these assets such that the pool ultimately lends out money at these rates. And that's sort of the idea of where we see actually solving this, all of these challenges. with real world assets, not with just oracles and sort of trying to pull in data more, but creating actually an incentive system around that.

It seems that going from what you just said, that if an underwriter and a borrower collude, so basically say, I have a house and I want to have a mortgage on it on centrifuge, but the house is an absolute dump and basically I really shouldn't be getting any money for it. but I have an underwriter who's willing to signal that they looked at the house and that it's fine. The underwriter would never be out as much as I could potentially gain, right? So do you have some sort of reputation system to combat that? Yeah, this is, I think, the one important part, what we do by bringing in underwriters that actually vote on chain, right, is that we start creating a track record of these underwriters that is very viable on chain.

If you're borrowing against a house here in Germany and you're borrowing against or you have a loan in the US and like different people doing this stuff, it's going to be impossible to to like build up this reputation. And so like for borrowers, this is very challenging. But with underwriters, them being on chain, they actually do have a reputation that goes beyond just a single transaction. And so you can exactly, you have these game theoretic issues, as you mentioned, and you tackle those with reputation and you tackle them with giving exactly that transparency, right? So an underwriter that has done underwriting for months or years and has done that on many different assets and now effectively has a reputation, they will attract capital, right? Because we're now changing the dynamics of, as an investor, do I invest in real estate? in the U.S. or do I invest in real estate in Germany to actually which pool has reputable underwriters

that have a proven track record and have a significant amount of money at stake, right? And so now actually if they start doing these kind of, if they did one of these deals where they were colluding with the borrower, then they would give up all of that, all of that reputation and would ultimately lose out. Another important part of how you can counteract that is, of course, you do. don't want to have just one underwriter in the pool. That's sort of the single point of failure that you don't want, right? The minute you have two underwriters, and generally they agree on which loans should be added, but then there's one loan that doesn't get the vote or sort of signal of confidence

by the second underwriter, that would be very detrimental, right? They would clearly signal something's wrong. And so that this, so by actually allowing underwriters to sort of do their work independently verifying all of this off-chain stuff themselves, we add the second protection here. Besides reputation, we also add redundancy. And just to build on that, the second, third, or fourth underwriter, they're incentivized to check that information

from that first underwriter, because they would stand to lose first if those assets were to default. So having that skin in the game provides that incentive to really deter, deter this sort of collusion in both of those ways that Lucas mentioned. And then on the flip side of it, one could actually question how do we make sure that there's enough competition as well, that they're not overcharging these borrowers as well. And I think that's where having

a transparent system comes into play as well, because you then have borrowers that are able to look at lots of different sources for financing and actually having the underwriters be able to compete on a good rate for the borrower on the one side, but also being the first to lose on the other side if some asset were to default. Is there minimum value on which I can borrow one? I mean, we just talked about houses, right? So basically houses, I can see how a loan on a house would sustainably finance underwriters, a couple of underwriters to actually keep the system stable,

but say I want to take out a loan on my car, or say even my reputation or, you know, something else, would that work as well? So you can take out a loan on your reputation if someone's willing to trust it, right? There are, I mean, in the real world, there are many places where you do that. If you're building a company and you convince people

to give you money to build that company, sure they're investing and they're getting shares in that company, but ultimately they're trusting that you actually want to build this. And so that does happen in the real world. I think sort of what we want to get to is a place where it's always easier to lend money to people to users when there's some like data available. So like in the case of real estate, you can verify and check what's in the land register or like what real estate platforms say that certain properties are worth, right,

sort of looking at all that. I generally wouldn't say we want to limit it to anything. I'd love to find a way that this can be done safely, and I do believe it can, right? Because if you assume that people are generally honest and you price the dishonesty correctly, then you can actually make money lending to dishonest people. This is a bit of a, I mean, not to generally,

honestly honest, but maybe some dishonest people. And that's the truth in every in every astaclass. I mean, even in crypto, right, like by the point, by the time you're onboarding an ERC20 token of a major defy project into another defy protocol, well, like, there's a fair amount of trust in that the leadership or the team behind that certain defy project is actually not just going to disappear the next day, right? And so, like, I think, yeah, there's obviously, they will never work completely without trust.

and that or some amount of honesty and some amount of good intention but you you need to price it and you need to make sure that you protect yourself as much as possible from fraud here in terms of a strict minimum the other part of your question frederica we don't have strictly speaking a minimum of how much you you need to borrow per se but that said tin lake is live on ethereum right now and gas fees are fluctuating, but sometimes too high, prohibitively high for, you know, lower than a certain amount. So I don't know if we've seen any assets financed for less than a thousand. Yeah, the thousand, it wouldn't make sense already. Yeah. Now let's talk about Solana. We all know that scalability is one of the most important issues facing the blockchain industry today. The Solana blockchain has been engineered from the ground up optimizing for performance and scalability. The network supports thousands of transactions a second with 600 millisecond block times

and over 500 different validators. It's not a charter blockchain, but a single blockchain hyper-optimized for performance. And that makes it easy to maintain composability between the apps on Solana, so they work together seamlessly. The Solana ecosystem is growing at a rapid pace, and it's a great place to build your project and get involved with the community. So go to Solana.com slash Epicenter to learn more. We've talked a little bit sort of like on like what type of asset, but I would actually love if you can like zoom out a little bit here and talk a bit about, you know, like the use case and the problem.

You know, how big of a problem is this like globally? And like where is the problem? Is it in particular types of assets, particular industries? Is it like geographically distributed? And like what do you think are the use cases where like essentially? future can make the biggest difference. Yeah. So, I mean, the

global financial system, right, is quite the monster. And I think for a lot of, I mean, at least when I entered the space, that was a very big motivation was to say, okay, well, actually, we can build this better. And I think,

I mean, the idea of Bitcoin and then also like Ethereum, and I think that's pretty much a shared ideology. I think sort of, and this is really what excites me so much about defy and where I see like very much the idea and sort of the vision aligned with what Sanofuja is doing as well, it's like Defi is transparent and it doesn't have any barrier of entries, right? Like the code, your code doesn't care about who you are or what you do. If you have one Eth, you can go to Maker and you can borrow. If you have one ETH, you can go to Avent borrow. Like right, same rates, same terms. Everything is accessible. If you, like, at actually sort of before even defy came, right? Like ICOs in 2017 very much were sort of

it was the same idea. It was like you can do an IPO, you can sell your company on NASDAQ or New York Stock Exchange, you can spend millions in legal fees and go through this entire like system with a bunch of intermediaries all trying to extract value and like sort of

a bunch of regulation and mostly unnecessary paperwork to sort of get to having your company be traded and everyone being able to buy it on Robin Hood. And ICOs said, no, actually all you need is you need to deploy an ERC20 token and convince people that this is like a token that will become something cool and that people will want to buy.

And I think sort of then like continuing defies, so we're just like trying to build, to have applied the same idea of no bearer of entries, no transparency, like radically lower cost to like all these different financial products that exist. right, ICOs are the first ones, lending protocols, all this stuff. What TENERFUGHRT is doing, we're trying to build the same thing. We're saying, okay, well, now we have this DFI ecosystem. How can we apply to other assets that are not truly crypto-native to real-world assets? But the benefits are ultimately the same, right?

And so who do these benefits? Who profits most from these? Actually, it's the smaller borrowers, right? If you're, and these numbers are actually pretty mind-blowing, but if Google, Google last year borrowed money, $10 billion at half a percent interest rate per year. So they issued a bond and sold it on the market. At the same time, small businesses were paying around 10 to 15 percent APY on their sort of short-term loans. So that means that Google is paying 30 percent less for their capital, right? And capital is like it's one of the most important ingredients to building a business.

business. So they have like a 30x advantage here. At the same time, if you look at default rates, SMEs in the US, there's like a default rate of about 2% per year. So if you look at that, you're like wondering like, why is an SME paying 10 to 15% when the risk of default across the whole US is like 2%? And like, why is Google paying so little and like where is this spread going? And so this financial system that we live in today, right, is really just geared towards making it very efficient for the largest players and is sort of put this in place where like now banks are not really incentivized to try to lower the cost of capital, make this system cheaper to use and make it fairer to use for others.

And I think that's what what DeFi can do for a lot of our users. And so who we see using Sun Refuge and it's super exciting to see is a lot of like what you call what we call fintech startups. So companies that want to build new lending products and don't want to rely on these banks that screw them over on fees are not really interested in negotiating with them until they're like themselves worth billions of dollars. And they look to defy as a solution that gives them more optionality. It gives them like different sources of capital. and it allows them to sort of get rid of this whole legacy world. Yeah, no, I think that's a great explanation. And of course, you mentioned as it compares, you know, Google and a US, you know,

SME that can borrow 10 to 15 percent, but then I think in, you know, in a lot of the world. It's way more, yeah. Either it's way more, even it's just not available, right? Like, you just cannot get access to credit. Yeah. Yeah, I think that's another large problem that we're trying to target is access to credit at all. And I don't think it's necessarily bad intentions by the global financial system. And a lot of cases with banks, it's more of an issue of whether this would be profitable for them or not.

It's just so much legwork for them to do the KYC necessary, do the analysis. is necessary to give a loan to one of these SMEs, especially in different areas of the world. And I think bringing that on chain and bringing the level of transparency that we can with Web3 changes the game there. It makes it a lot more, there's information a lot more available that not only banks, but any investor could actually start financing these different assets in a way that just wasn't feasible before. Yeah, I mean, before crypto, I at one point worked for about like eight months for this commodity trading company.

And I think that is sort of like remained very much as a use case that seems like such a good fit. And I think there were several reasons for it. One was just the execution of this thing of like, you know, some company buys from the other company and then, you know, they would have some banks that would go in between and, you know, use this archaic instrument letter of credit and mail documents around. And it was a horrific process. But the other thing that stood out to me is that this was a pretty big company, or medium-sized large company. So they might have had like, you know, $500 million worth of like, you know, goods shipping around and or like invoices receivable for these commodities. They

would be like selling across the world. But they could only go to like their bank. And they could say, look, I have this like huge pool of things. And, you know, it's like $500 million worth that we will receive. So can you give working, can you like give some credit facility? And then the bank would be like, okay, is it like $500 million, you know, so we can give you like $300 million or something like that. But actually it wasn't granular at all, right? They could only go to their bank to give like, you know, kind of all of it.

And you couldn't collateralize the individual receivable, right? because I think that was just impossible to do from a process perspective. And, you know, they wouldn't live long enough. But so I think the idea when you can actually turn each of them in an individual asset and then allow anybody to go in and finance it, it's just like, it's extremely powerful. Yeah, I mean, this is where like, I think when we talk about a bank underwriting the risk of like an individual asset like that, Like if you don't fall into one of their like 100 product lines, like you're, you're an individual wanting to buy a house and you're getting a mortgage. You're like one of their large corporate clients and you have an existing relationship and they're just going to put you into this risk bucket here.

Right. Like this is how like a bank will work. And so the same way like Google can go and say we're doing a $10 billion secure bond issuance and we'll get the money on the market and people will be bidding for it. But if I have this one invoice that is giving me even $100 million in money in the next couple of months, right? And it's relatively small for the financial system that sort of that we know of today. People miss out or sort of don't fit into one of these buckets all the time. And this system today is not really operating at that scale. And I believe that defy and sort of getting sort of defining all of this in code, building the underwriter system, right?

where like now an underwriter can actually come and look at your $100 million invoice. And for them maybe because they are very tech savvy and they're very efficient, they use data sources that maybe banks will never use. So they have this, they've had this system in place. Like they can be made more aggressive at underwriting assets that maybe a bank would never do. And this will then open up, give these assets liquidity,

which they wouldn't have seen before. And giving these assets liquidity means now they're able to tap into similar pools of liquidity with similar cost of capital that like some of these very large businesses can tap into today. And that that is then what is truly changing the system we have today where Google pays 50 basis points and and this SME pays 10, 20 percent to like this difference being being much, much smaller and ideally really just the closer, the risk of default, right, instead of the paying for this rat tail of processes that your legacy financial institution has. When you want to trade tokens on Ethereum, make sure to consider Pereswap. Paraswop is a decentralized

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I think I somewhat understand the borrower segment now. So let's talk about the lender segment. So who do you expect to lend to these institutions? I heard the word investor many times now. I even heard securitization. Is there regulatory barrier here? because it seems like this should be caught under SEC doors? Yeah, so these assets are clearly securities,

and we've always operated under that assumption and made sure that each pool is issuing a regulated security. This is done with the legal framework that we have that is based out of the US. So you go through KYC, you go, you sort of make sure that you've followed your past anti-money laundering laws. and then you can get approved to invest in these pools and then participate by supplying die to the contract. But there is mandatory KYC, which is unfortunately unavoidable until we can start lobbying the global financial system to maybe become a bit more sane about KYC laws. That's really out of our control.

But yeah, so there is a bit of a bearer of entry. I think ultimately this is not really making crypto, making or breaking it for crypto. I fundamentally believe that, I mean, if crypto really, if the only advantage was that you didn't have to do KYC, then I think it would be a very, very bad USP for crypto because there's really so much other cool stuff and so many other benefits that I think totally make worth it, right, outside of that. So yeah, we have basically a KMIC framework. You go through that.

once you pass it, then you're really free to operate in that as you wish. You can supply liquidity. You can remove liquidity. And then also sort of one thing we are doing, and this is a bit where now it gets unfortunately really complicated. But of course, our goal is that investors are not just individuals like you and me, but we also want to bring these assets to other defy protocols. Because these other defy protocols are very much unknown to the law as of today,

A, there's obviously, there's a lot of work that has to be done to make sure we find a legally compatible setup. So far, we've done that with Maker, where we actually are now onboarded. And in the coming weeks, we should have four more, for more assets going live there. We just announced, sort of to the, or we've just published a AVE request for comments in the AVE community to launch a money market where investors can supply liquidity to real world assets and borrowers. So these different pools can then borrow depending on where there's needs. So instead of having to pick whether you want to invest in real estate or in invoices and you

need to manage the liquidity in one pool and another, like the Aben market will basically just give, you will, by supplying liquidity to that, you will give it to whoever has, has liquidity, needs liquidity right now. It's sort of this, the benefits that the Aben money market concept gives you, right? So those are the next steps. And so we're sort of on this mission of, like making working out these compatible legal frameworks like making out the technology to go and sort of extend defy with these real world assets can you explain a little bit of like how does this work under the hood like what are the processes that an asset goes through and the steps that somebody has to take to issue and borrow against such an asset using centrifuge

the simplest description of what what each pool is it's like an on-chain credit fund, right? So you have assets on one side, you have investors on another side. And what we do is we actually top, we couple a legal structure to these smart contracts. So we deploy the, you deploy a pool along that you actually create a legal SPV special purpose vehicle. That's a company, a Delaware company that then effectively signs the paperwork with all these different borrowers and gets the legal recourse against these different assets and investors that invest in this pool basically sign some general terms, a subscription document, that means that when they supply die to that pool, they get certain rights, right? The rights to receive the payments from those

real world assets. And so that's the basic legal setup that has to happen, both technical and legal setup. And then sort of based on that, the asset originator does a lot of work of explaining the kind of assets they want to originate and how they want to structure the pool. So in case of new silver, new silver talks about how they make sure that all the borrowers that they want to work with that they are actually going to repay, what the credit risk is that they're going to take on, what the interest rate is, how much the junior token holders. So what this buffer is, is a 10% is a 20%. And then once that step is done, then investors can come in and start supplying liquidity to the pool. And so as the liquidity, as this goes into the reserve in the pool, that money is then made available for the Asset Originator to borrow. And so then they can start issuing loans to different people that want to borrow in New Silver's case to buy a house and renovate a house.

And so then what the Asteroidsinator does is they take the dye that they can borrow from that pool, turn it into dollars and wire that to the person that in many, cases actually they don't even know about the fact that their that their loan is financed by crypto or that there's like some maker vault minting die to actually generate the money that is used to pay for that loan but so they they're sort of completely abstract that they're like the very sophisticated wallet or like a fiat on off ramp right for these borrowers on the other side investors they they can then just as they like either like supply or redeem so put more money into the pool or take money out. And sort of the smart contracts and manage all these payments from borrowers to investors,

both interest and principles, sort of making sure that everyone gets the share of the interest return and so on. Well, let's talk a little bit about, so Santerfuge has also a token, right, a CFG token. So what's the function of the, I mean, you know, besides we talked about dropping tin tokens, which is different tranches, but then there's also a CentiFuge. huge another token called CFG. Can you explain like how does this token work and how does it relate to this process? Yeah. So we have Centifuge token, CFG, that is the token that power is centerfuge chain. So a centerfuge chain is the special purpose chain that we built using substrate. And that's really

specialized to this centerfuge specific use case. So the centerfuge token, is used there for paying for transaction fees, so sort of like gas on Ethereum. It's also used for the chain security. So right now that's staking by validators and nominators as well as as a governance token. So CFG is used to vote on things from runtime upgrades to probably eventually a lot more features upcoming in the future. Cool. I guess you just mentioned also the the posterate chain. Actually, I should also mention, I forgot to mention this in the beginning, but that like, you know, with course one, the company I co-founded, so we've also been running a validator on that chain.

And I've also sort of participated in some of these early tin-lane pools and like invested in the project as well. So I mentioned that. But so can you talk about, because right now, right, we talked about, maker and, you know, there's things that are happening on Ethereum where you can take some of those assets, but then there's also this independent, at the moment, sovereign substrate chain. So, like, you know, how do those interact and how is that going to change in the future? So right now, this Tin Lake app that we've been talking about is live on Ethereum. That's been great and also given us access to the defy ecosystem that's grown there. but gas fees are quite prohibitive.

And so the plan with centerfuge chain is to be able to move Tin Lake onto Centrifuge Chain from Ethereum to make it a lot faster, cheaper, and just generally make the DAP more accessible for even now potentially even lower values of loans, as we talked about earlier. So the first major use case there is really powering the Tin Lake Dap for Centerfuge. chain. Going forward, adding this functionality will also be easier now that we have this chain that we can really specifically cater to this use case. So we don't have to wait for ETH2.0, which we're still excited about, but it makes us a lot more nimble in terms of dealing with the different use cases that come up for us that might not matter as much to the Ethereum

community, for example. And so as you mentioned, as you mentioned, mentioned, you know, we're built on substrate and that connects us to the Pocodot ecosystem. And so we'll be launching centrifuge chain as a parochene on Pocod. And as sort of a precursor to that, basically a live test ahead of launching centerfuge chain as a parochain, we'll be launching a different network, a different chain called Altair on Kusama. And that's really, for us, the most important thing there is having this sort of test bed with live value. So we're launching Altair as a parochane first, which since centrifuge chain has been live for one year, we see it as pretty important to test that and make sure that everything goes well with Altair first before we do this launch for centrifuge chain.

and then with that next step of moving Tin Lake onto centerfuge chain, that would go onto Altair first. And if any kinks were to come up, iron those out on Altair before we move that over to centerfuge chain. So I think it's going to become a really important part of this sort of testing process for us. I assume you've also looked at Ethereum layer twos and in the end then opted for parka dot slash substrate. What was the decision process behind that? So actually, when we started a centrifuge chain, there were no layer twos that were accessible. So we were already starting to build centerfuge chain at the end of 2019. And so at that time, really the only viable alternative was to build either using substrate.

The Cosmos SDK was something that was available, but not quite as accessible for us to really start moving forward on at the time. So it was actually really just that we needed to move ahead. We didn't want to wait for anything else to become available. And so we went ahead and built centerfuge chain. Now that layer 2s are accessible on Ethereum, I mean, that's great for other DFI projects. I'm excited to see how those develop. But I think at the moment, this is going to be a really great way for us to scale faster. Are there problems with being on another blockchain entire?

So basically, you've got integrations to make, and most of the defy ecosystem is on Ethereum. Does it pose problems to you? One of the things that we've had to think about that I would say was a complexity, maybe not necessarily a problem, is building this bridge. So right now we do have part of the Tin Lake Dap that lives on centerfuge chain. So those are the anchors for these assets. And then that is using our chain bridge, centerfuge chain to Ethereum bridge to mint NFTs on Ethereum and then finance those with the Tim Lake Dap. So that bridge was definitely a complexity that we've had to worry about.

And part of launching centerfuge chain as a parochane on Pocod will be to access the bridge that other teams are working on there and sort of outsource that work so that our team doesn't have to worry about those specific functionalities and instead we can focus on our specific use case. Taking a bit of the longer view, I believe, defy

definitely started in Ethereum. I think at this point, I would say we're not going to the world is not going to be exclusively on Ethereum anymore. And so sort of for us as any Defy project

I think it would be not in your interest to sort of focus on one ecosystem. And you already see like so many bridges coming up between different ecosystems where you ultimately just want to make sure that you go where the liquidity is, right? And unfortunately, like, finance was seeing a lot of intention. I don't think that's going to sustain. But I think other protocols, other layer ones will bring interesting concepts and ideas that I think sort of similarly to how,

On Ethereum, there was just insane, when defy became really what it was through the interoperability, right? Like any RC20 token work with any other, and that meant you could use AVE deposits as collateral in another lending protocol. And you could vice versa. I mean, everything worked together extremely well, right? And I think in the same way, like crypto and blockchains are going to succeed by focusing on exactly that, making sure liquidity moves where it needs to, and it is available wherever necessary. And for centrifuge, that means the asset originators and underwriters sort of create these pools on centrifuge chain. But then the investors, the investors, they are really just wherever they want to be. And if there's a need for collateral and maker on Ethereum, then it can be bridge to Ethereum.

If it's a money market on Solana, it can be on Solana or it can move to another parochain on PolkaDod. And so from that view for us, I believe polka dot or substrate was like a very good technical solution at the time we started. And I still see, I still believe. And I mean, extremely exciting now. Sort of the point the ecosystem is at. We're just about to find out like what the parochains are going to look like in production in the coming weeks. One of the interesting things have been to see in the Pocodat ecosystem is that Kuzama seems to have taken on a much more significant role over time than maybe initially was envisioned. And now you are also starting this Altaire, so this other kind of centrifuge-like chain on Kuzama.

So I'm curious, like, how is that going to work? And how do you think the centrifuge parochane and the Kusama? parochane are going to play together? It's been super interesting to see how much excitement has built around Kusama as a project. And like you said, I don't think the Pocodot team necessarily foresaw that coming, but it's posed a really great opportunity

for a lot of projects to get excitement around their precursors to what they would launch on Pocod. So I do think, at least most of the projects that I've spoken to, do see Kusama as the more experimental sort of test bed, where things can go wrong. They can push the limits, really, of what's possible before it goes live on their polka dot pair chains. And so that's exactly what we see Altares is really a place for experimentation, pushing the boundaries of what sort of things are possible. So draw back to something that we talked about earlier today, financing, for example, your reputation. That's something that's maybe pushing the limit a little bit of what's

possible today in asset financing. And so that's something that I would see as a use case that would go live on Altair first and really test it out, see what happens before it moves over to centrifuge chain. So I think for me it's really exciting to use Altaire as that sort of test bed and try things out that maybe we wouldn't otherwise be able to on centerfuge chain. Super interesting. I have a question around the economic guarantees of having a governance token and basically the market cap of that governance token and the values that it ultimately controls. What are your thoughts as to this? I mean, I think it's super, super difficult to estimate any sort of market cap for a governance-only token. And I've seen a lot of VCs and projects out there trying to do this.

Usually they try to back into it based on some other sort of understanding of the token, like another use case that it has, or how this has worked for other projects, and then just using that as a comparison, which is really inaccurate. it. So I think it does add value, that's for sure. What sort of value it adds, I think, is heavily dependent on how it's used for the project specifically. So if that governance token is instrumental to upgrades for that product, it's going to be a lot more valuable of a governance token. That's something that's really just voting on minor things like members of the council or transaction fees of a product that barely gets any use at all.

So I think there are a lot of differences there that can be looked at and compared. But in terms of a quantitative assessment, I think that's still super difficult to determine right now. But that said, I would say we've definitely looked at valuation models for the centrifuge token, not looking at the governance aspect of it. So really just looking at the transaction fees on centerfuge chain and modeling what those could look like over time and really giving this token a use case in addition to that. So adding future functionality that I won't mention today just so that we don't get ourselves in a hot place. But it's definitely something that we're thinking about that this token needs to have future use cases, future utilities, and certainly not just governance, I would think. The most common way that governance tokens on Ethereum in defy seem to have kind of gone towards

having value, right, would be that there's some sort of, I guess in this case, right, there could be like some kind of small percentage of the interest going not to the investors, but to some sort of like, you know, CFG holders in the, you know, I think we see that with something like, you're in finance or like, so is that something that's also like possible or do you think that would be desirable at all? I don't think it makes sense to have something akin to what I would call a dividend for stocks for token holders. So, for example, having a percentage of the token supply go to token holders just for the fact

that they hold the token, to me, doesn't make sense because this really should be an incentive for providing value. And if just holding the token is providing value, well, I think, I mean, I don't think that actually makes sense. Maybe someone disagrees, but I really think that incentives should be built in that are rewarding actual active participation in the protocol. So whether that is being a council member and participating in governance in a very active way, or running a validator node, or providing underwriter services for Arton Lake Pool as an example, these are things that are active participation in the protocol that I think should be incentive.

for the health of the entire system. But just holding the token in and of itself, I don't think that deserves any sort of incentivization. That said, one thing that a lot of projects are doing that sort of mimics this, but in a different way, is a burn rate for the token. So transaction fees that are collected on chain, a certain percentage of those being burned.

That is, in effect, on the opposite side of it, sort of like giving out tokens to every single token holder, because the value of their tokens is going up effectively if you're burning up a percentage of the token supply every year. So I think for me, that's a much better way of sort of addressing not just the token holders and their individual value, but the value of the entire system. And I think to me that's more fair than just giving out a sort of blanket dividend to every single holder. I mean, this is, this is, we're getting into rent seeking, right?

I mean, there's maybe some of it is justified to like, basically pay off reward early backers. And that's, I mean, that's the idea of like, like, like how, how investors buy tokens and then you want some value in it. But yeah, generally, I would agree with what you, what you said, Cassidy. I think when when looking at a value of a specific token and how that's going to change over time, one should really be looking at the value that the protocol is providing. And if that token has real utility that it's being used for in that protocol,

then it will take on the value that the protocol is providing. So I think it's really about the use case of the token and how much it's really being utilized to perform the functionality that is of value to the users. So if it's really capturing that, then it will capture the value of that utility. And so that should really be what investors look at when they're looking at holding a token, is what is the growth of this protocol going to be?

Is it going to provide real value? And is the token going to capture that value rather than looking to some sort of blanket dividend just for holding the token? Yeah, I see that makes a lot of sense. Unfortunately, we're a bit strapped for time. But I would like to zoom out again a little bit. if you look at centrifuge as a whole, what it allows you to do is it allows you to sell debt or package and sell debt. And basically if you frame it like that, it sounds a lot like what one of the contributors to the 2008 financial crisis was,

namely that debt is being packaged in less than transparent ways and people buy it without necessarily doing the due diligence. they should have. So how do we avoid replicating, you know, crises we've gone through on Defi? And where do you see centrifuge in the very long term? So like, say, in 10 years? I think, I mean, one of the goals with giving underwriters and economic incentive, right, is exactly addressing that standard and poor and moody's. They major, screwed up in in in in the 2008 crisis and walked away not unscathed but but they're still around right and they didn't have really they did they had their reputation a bit at stake but they had nothing really monetarily at stake and and everyone and this whole like financial system they've been in like

rating agencies got paid to give ratings and they just they stamped the their ratings on whatever they could as fast as possible. And that combined with like no transparency at all, right, is what, what I think very much led led to the situation that we found ourselves in. And so like thinking about how we're approaching this, we have to be prognosent of this issue and make sure that we don't, don't design something accidentally that will end, we'll sort of end in this, in this behavior. I think this is where crypto and sort of open blockchains are exactly, a huge opportunity because one of the core ideas of Cynarfuge is to give that transparency, right, and have exactly those underwriters be competing for the best way to underwrite and sort of make

money on that instead of just sort of having the system of like established players just sort of work on work however they like. And that is sort of how we hope to address this. And I think that's that's sort of in general what what defi is trying to do right that was the thing that stood out to me a lot also when it came to this mortgage back securities right that you know you'd have people buy this pool of assets without having visibility of like what are actually the components and where did it come from and I think having that stuff all on chain seems like a huge opportunity to have much more efficiency and transparency and like better risk management maybe before we wrap up so we've talked about a bunch of stuff you know is a pair of chain

launch and the Altair, but can you tell us a little bit, like, you know, what does the roadmap look like in the next, I don't know, like year, two years and like what can people expect when? Yeah, so the roadmap in the next two years, I've hinted at a few things. We're live on Maker with the first asset class, but we want to bring many, many more. And we believe that, I mean, DFI as a whole is going to, it has this huge opportunity you scale with real world assets, right? Like, real old assets are hundreds or thousands of times bigger than crypto is today. Like, we're crypto is a trillion, but like, that's nothing compared to our, to the real economy.

So we want to bring these, as many of these assets into defy and start sort of scaling TVL, right? And that's going to be on Maker, on AVE, on every other lending protocol that is interested in sort of expanding their use case there. The second priority for us is really building this purposeful chain and, well, building out the Tin Lake functionality to sort of make Tin Lake truly multi-chain, meaning underwriters and asset originators sort of use the chain to then channel the liquidity to wherever it's needed and really building out the underwriting system, because that is where we can go and really attack the cost of capital that is like very high and very unfair towards the smaller

businesses and where we can actually create create these incentives to to address that, to bring it down programmatically. And that's that's hopefully what we'll spend the coming months on. Super interesting. So before we close, where can people find out more about centrifuge and Tin Lake? What kind of resources do you have available for them? So you can go to Sunnyfuge.io, but really the most interesting part I think to start with is tinlake.Sanufuge.io, which is adapt. You can look at all of the pools, the different loans they have. You can see sort of what's happening there. We have documentation that you can read through as well as a discourse server that you can join. And telegram, Twitter, Sanifuge, on Twitter. That's where I would go. You'll see some of us speaking at ECC in a couple of weeks. And yeah, just reach out if you have any questions.

Super cool. Thank you for coming on. Thank you both for having us. Thanks for having us. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device,

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