What is Centrifuge? (CFG)
Centrifuge CFG Explained
Centrifuge is a decentralized finance (DeFi) lending protocol that aims to make credit more accessible to small businesses, while also providing a stable yield for investors by opening pooled liquidity to the world of traditional finance.
Centrifuge’s associated decentralized application (dApp), Tinlake, is a marketplace for tokenized real-world assets. By minting Non-Fungible Tokens (NFTs) that represent verified real-world assets, companies can collect assets to use as collateral on their loans and quickly access more liquid funds which are provided by individual investors.
In return, investors can utilize traditional business lending methods to earn a more predictable reward on their investment and protect themselves from exposure to the unpredictable volatility of crypto markets.
Originally built as its own blockchain, Centrifuge is also compatible with parachains on Polkadot. Centrifuge has followed Ethereum standards while developing their NFT capabilities and the Tinlake protocol. In this way, Centrifuge bridges the Polkadot and Ethereum ecosystems, attempting to leverage the benefits each has to offer.
Centrifuge is powered by the Centrifuge token (CFG), which provides security to the blockchain while allowing holders to pay transaction fees, stake assets, and participate in Centrifuge’s governance.
Who Created Centrifuge?
Centrifuge was co-founded by a German team led by CEO Lucas Vogelsang, who previously founded the e-commerce company DeinDeal.
Prior to Centrifuge, Vogelsang and other co-founders launched Taulia, a FinTech provider of working capital solutions. Taulia serves customers in more than 100 countries, providing services such as electronic invoicing and supply chain financing. Centrifuge has aimed to build these services within its blockchain architecture.
Through five rounds of funding over its first three years, Centrifuge has raised nearly $12 million. Investors include firms such as Galaxy Digital and IOSG Ventures. A CFG token sale held on Coinlist on May 26, 2021 saw 17 million CFG tokens sold for $19 million.
How Does Centrifuge Work?
Centrifuge is built on Parity Substrate, a platform that allows for the creation of distributed blockchain systems on the Polkadot and Kusama networks. Centrifuge can therefore interact seamlessly with Polkadot once it becomes a parachain, benefiting from the consensus and security protocols of Polkadot’s Relay Chain. Until then, Centrifuge Chain acts as a standalone, proof-of-stake blockchain that conducts its transactions with CFG.
Centrifuge’s core product is Tinlake, an open marketplace and investment dApp built on Ethereum. Tinlake helps bring the traditional finance offering of collateralized loans onto the blockchain.
Traditionally, if a business wishes to gain additional working capital, they have to approach a wealthy private investor or submit a loan application to a large financial institution. However, small businesses rarely have access to the same financing opportunities as large businesses, despite low rates of default on their loans.
The easiest way to understand how Centrifuge utilizes DeFi to overcome these challenges is by exploring the issue from the perspective of the business and the investor:
Tinlake allows businesses, referred to as asset originators on Tinlake, to tokenize their valuable real-world assets, such as mortgages and invoices. An NFT representation of each of those assets, called a tokenized document, is then committed to the blockchain, making both its authenticity and ownership verifiable. This tokenized asset can then be used as collateral for loans funded by the liquidity investors have deposited within Tinlake pools.
Investors, also known as lenders, are participants who lock stablecoins (such as DAI) in Tinlake pools to provide capital to businesses as loans. In return, investors earn a yield on the capital that has been provided to asset originator businesses. Investors can research asset originators before providing liquidity to their pools, in order to gain a clearer understanding of the quality of the business. Once an investor chooses a pool, they lock in their DAI and choose to receive either TIN or DROP tokens in return.
TIN offers investors higher risk and thus higher reward. Investors that choose to hold TIN accept the first risk of loss when a borrower defaults. However, TIN also provides higher, though more variable return on investment.
DROP tokens provide a lower but more stable yield. Investors who choose to receive DROP tokens have the benefit of “protection” that comes from the frontline TIN holders in each pool. Centrifuge describes the difference between TIN and DROP as the difference between junior and senior tranche investments seen in traditional finance.
Accrued interest in TIN or DROP can be redeemed at any time for DAI when an investor wants to remove their liquidity.
Why Does CFG Have Value?
Centrifuge’s CFG token has a variety of functions across the Centrifuge platform that give it value.
CFG is used to pay for transaction fees within the Centrifuge platform. Users pay CFG to node operators for minting NFTs used as collateral on Tinlake and verifying transactions.
CFG also serves as the token to access the platform’s governance mechanism. Governance tokens allow holders to vote on updates and changes to the platform, providing those with the most invested in the platform a voice on its future development. For example, the Centrifuge team has indicated that onchain governance will be used to decide protocol level functionality, such as what portion of the transaction fee will be burned for each transaction.
Why Use CFG tokens?
Users who see a need for the link between real-world finance and DeFi may seek to add CFG to their portfolio. Those looking to support small businesses in gaining further access to capital may also find value in CFG.
As the utility and governance token of the Centrifuge platform, investors who use the platform and are interested in having a voice in its future development may find value in CFG.
Centrifuge also allows CFG holders the opportunity to stake their assets within the network, allowing them to receive a reward for aiding in the security of the network.
Crypto investors may see future value in an investment platform with the potential for rapid adoption, and CFG represents the fundamental unit of that platform. Tinlake’s potential move from Ethereum to the Centrifuge Chain on Polkadot might make CFG even more desirable.