Written by Distributed Capital
Real-world collateralization of physical assets is the one building block that is currently missing from DeFi LEGO. Physical assets collateralized lending in the form of NFTs is inherently very different from token collateralized lending. How are physical assets priced? How will they be liquidated in the event of an emergency?
Centrifuge is trying to solve these problems, bringing more liquidity to the DeFi world while stepping into the realm of physical asset collateralization.
Centrifuge is a decentralized asset finance protocol whose primary goal is to bring real-world assets onto the blockchain. The ecosystem includes the Centrifuge Chain, the Tinlake lending dApp and the P2P messaging protocol.
Centrifuge brings real-world physical assets into the DeFi world, thereby reducing the cost of financing for small and medium-sized businesses and providing DeFi investors with a stable source of revenue that is independent of the value of floating crypto assets.
In today’s financial system, only the largest companies have direct access to liquid capital markets. Most businesses rely on banks for financing. The lack of an open and transparent market, market inefficiencies and high transaction costs prevent some smaller businesses from obtaining competitive interest rates.
Centrifuge wants to bring the benefits of DeFi to all borrowers who have not had access to DeFi liquidity until now.
Regarding Tinlake, the first product open to users, Centrifuge allows anyone to start an on-chain credit fund and create a pool of mortgages. centifuge also offers CFG rewards, where investors can earn additional revenue by participating in the ecosystem.
Tinlake is a smart contract-based, open asset pool that brings together asset originators and investors as a way to leverage the unlimited potential of DeFi. Ultimately, Tinlake will be a fully decentralized funding protocol and interoperate with different blockchains to bring in a variety of funding resources.
Through the Tinlake pool, companies or “asset originators” can gain liquidity for real-world assets such as invoices, real estate mortgage loans, and royalty streams by way of DeFi. They finance their assets by tagging their financial assets as NFTs and using those NFTs as collateral in the Tinlake pool.
For each Tinlake pool, investors can invest in assets in two different tokens: TIN and DROP. tin is referred to as a “risk token” and investing through Tin carries the risk of default but provides a higher return. dROP is referred to as a “stability token” and protects investors against the risk of default and provides a stable (but usually low) return. This is similar to the junior/senior investment structure common in traditional finance.
Each asset sponsor creates a pool for its funded assets. All Tinlake pools have different risk/return models, and investors can choose a model with different investment preferences; Tinlake pools are set up as “revolving” pools or open pools that investors can join or exit at any time, and the funds provided by investors can be reallocated by the asset sponsor (unless redeemed by the investor).
Revolving pools allow individual investors to invest/redeem at any time. Taking fully into account certain investor preferences (e.g. risk metrics in Drop pools are lossless), the decentralized resolution mechanism matches both investment and redemption actions. This ensures that asset originators have a stable source of liquidity, while investors have the flexibility to invest and redeem.
Investing in Tinlake pools
Investors can choose to whitelist any one (or both) of the Tinlake tranches. If an investor wants to invest in Tin or Drop tokens, they can lock the DAI in the Tinlake pool at any time during a cycle. At the end of the cycle, investments and redemptions are executed automatically, usually every 24 hours. A decentralized, automated mechanism will match investments and redemptions, ensuring that pool risk metrics remain intact: for example, amounts such as Drop are always protected by TIN investors who bear the first loss.
When an investment is executed, the locked Dai will be exchanged for TIN or DROP tokens for distribution to investors. Transactions are executed at the current token price, which includes the accrued interest rate, and the full pricing model is calculated according to the NAV model, with different token prices for Drop and Tin, which also takes into account the potential losses assumed in the form of charge-offs. (For example, if you currently open a pool you will find that Drop’s price is 1.0358 and Tin’s price is 1.0315, both Drop and Tin’s prices include the accrued interest rate.) In order to redeem Dai with TIN/DROP tokens, investors can lock these tokens in Tinlake. After an order is executed, they can receive the corresponding DAI based on the current token price. the investor’s recovery of TIN/DROP tokens used for investment and the redemption of DAI are not affected by the investment cycle. Until the Tin and Drop tokens are securely locked in the Tinlake smart contract, investors will receive accrued interest and CFG rewards.
Funding in the Tinlake pool
Asset group originators can use the funds provided by investors to finance collateralized assets. To do this, the asset originator locks NFTs of RWAs (physical assets) into a smart contract pool as collateral. The funding fees and mainstream/maximum funding amounts for these NFTs are provided by an on-chain pricing scorecard and are determined by an external vendor via a pricing prognostic machine. Once the NFT is priced, the asset originator can draw down the borrowing. When the asset originator repays the financing, the NFT is unlocked and transferred back to the asset originator’s wallet.
Investment and Financing Cycle (Epoch)
Since investors can invest/redeem and asset originators can initiate/repay at any time, decentralized pools require a decentralized mechanism to coordinate investment, redemption, origination and repayment.
With respect to Tinlake’s recurring pools, all investment inflows/outflows are locked in a defined period and are automatically executed within that period according to a predefined priority and risk rating. After executing an investment/redemption transaction, the asset originator can use the liquidity reserve to finance the next cycle of assets. The asset originator may also repay the funds at any point in the cycle, but the repayments are pooled in a separate reserve pool. The funds in the reserve can only be used to fund the next cycle so that investors have priority to redeem.
To summarize, at the asset originator level, there are several forms of inflows/outflows during the cycle.
Repayment of financing
Origination of assets and withdrawal of borrowings
At the investor level, inflows/outflows during the cycle can take the following forms.
Length of cycle time
At the smart contract level, there is a minimum duration for the execution of a smart contract on Tinlake. The current cycle cannot be closed until the minimum time has elapsed and the investor can call the contract to close the current cycle. Thus, if the minimum duration of a cycle is set to 24 hours, a cycle must last at least 24 hours, and can last longer. This flexibility in setting the cycle length allows the pool to add money when it is first opened, plus the transaction costs are more substantial. For example, when gas prices are high, pools are slower to start. If a service is added to a mature, liquid pool, the cycle can be limited to a certain length by closing the cycle at predefined intervals. Once this cycle is closed, the smart contract will start processing the current state of the pool and process all locked orders (see more details below).
Investment / Redemption Process
Investors can provide additional liquidity at any point in the cycle. The Dai supplied by the investor will be locked in the Tinlake contract until the end of the cycle. The investor can cancel the lock as long as the current cycle is active. In this case, the locked Dai will be transferred back to the investor’s wallet. At the end of the investment cycle, all locked orders will be processed and executed at the current Tin/Drop price, taking into account the maximum reserve and the minimum Tin risk buffer. Also, after the current cycle has passed, the investor can view the executed orders in the UI. If a partial investment/redemption cannot be executed, it will be carried over to the next investment cycle, during which the DAI remains locked. This locked order can be cancelled at any time.
Redemptions work similarly to the above. If investors holding TIN/DROP want to redeem (some) of their TIN/DROP tokens, they can lock those tokens into Tinlake at any time during this cycle. At the end of this cycle, all locked orders will be processed and executed at the current Tin/Drop price, taking into account the maximum reserve and minimum Tin risk buffer. When this cycle ends and before moving to the next cycle, investors can receive DAI from executed orders in the UI. if some investments/redemptions cannot be executed, these orders will be moved to the next cycle and therefore these tokens will remain locked. This locked order can be cancelled at any time.
Cycle rollover means that after the shortest investment cycle has ended, anyone can invoke the contract to close this cycle. After the investment cycle is closed, no one can unlock their orders. After this cycle is closed, all orders that are locked will be collected and processed. If this cycle is closed without any locked investment / redemption transactions, this cycle number will be buffered. When the cycle turns, the contract first processes the current status of the pool: Total Debt, Net Asset Value, Reserves, Senior Asset Debt, Senior Asset Debt Balance, Senior Asset Value, Junior Asset Value, Tin/Drop Token Price, Tin Risk Buffer.
After that, the smart contract checks if all set orders can be executed with funds available and without breaking the minimum Tin risk buffer funds or the maximum reserve limit. If this is the case, all orders will be executed immediately and the contract will process the new state of the pool. Conversely, if not all orders are available for execution, the order processing and pool status at this point is such. For example, because there are not enough available funds in the reserve (plus newly committed funds) to satisfy all redemption orders or executions, Tinlake will activate the “Emergency Resolution Mechanism”.
The Emergency Resolution Mechanism means that in case the available reserves are not available to redeem orders, anyone can submit a solution and resolve executed orders for the four investment/redemption transaction types with a simple contract call. The smart contract checks if the status resulting from this submission meets all the above restrictions. If so, anyone can submit a better solution within the 30 minute challenge time. The priority of solutions is determined by the weight of the number of orders executed by the Maximum Weight function. The weighting of this function may vary from pool to pool, but typically, for example, Drop redemptions will be the highest weighted.
If a competing viable solution is submitted that has a higher “maximum weight function”, then a new 30 minute challenge period begins. If no more advanced solution is submitted, anyone can call the ‘Cycle Execution’ function after the 30 minute challenge period and execute the pending transaction.
Centrifuge’s P2P network provides a secure model for creating, exchanging and verifying asset data between collaborators and tokenizing these assets into NFTs. Asset originators can optionally share asset details with service providers, who can evaluate the data and submit the information to the NFTs being minted. At the same time, cryptographic signatures can be used to verify the origin of the data.
The components of a P2P network are implemented on libp2p. Centrifuge chains are used as.
Maintain identity in a form similar to the ERC725 standard (identity means that each entity or collaborator on the P2P network has a verifiable Centrifuge ID)
Anchor state confirmation
Cast NFTs based on off-chain documents. these NFTs can be bridged to Ether, locked as collateral for Tinlake, and finance the asset.
So, what data is in the file submitted by the asset originator about the asset information? How do collaborators verify the authenticity of the documents and price the assets among themselves? A document is a specific set of fields used to represent a financial asset. The network supports any type of document as long as it is in a consistent format and is shared among selected collaborators. The exchange of documents is encrypted and accessible only to the parties involved in this private data exchange. Collaborators can be added and removed from a document. Different collaborators can update documents and publish new versions in a set of nodes with access rights.
In the process of minting NFTs, asset originators need to guarantee the privacy of information related to the assets. p2p networks can also do this. centrifuge’s privacy-enabled NFTs are tokenized forms of assets/documents that guarantee the privacy of some or all asset attributes, while a public, decentralized ledger keeps track of the ownership of the assets.
Tinlake pool use case
This is the logic of collateralized lending and repayment in Tinlake. Today there are 18,141,371 Dai locked in Tinlake, and a cumulative total of 77 companies/asset originators have created pools for collateralized lending: some pools have closed their funding cycles, some have locked their NFTs, and most have lending in progress.
And on the front page of the application there are 9 pools with the highest lock volume, created for different companies. For example, the pool with the highest number of locked positions is called 1754 factory (Bling Phase 1), a finance company that makes bonds. 1754 Factory aims to offer Bling customers short-term cash advances of up to €200. Bling is a mobile application for French consumers and can offer users advances of up to 1754 Factory has signed an institutional purchase agreement to buy Bling bonds.
Centrifuge has also entered into long-term relationships with a number of finance companies.
New Silver, founded in 2018, is a technology-based non-bank lender focused on financing real estate for the U.S. “fix and flip” industry, concentrating on single-family residential assets.
ConsolFreight is a trade finance and factoring provider focused on helping SMEs and developing countries.CFs provide working capital financing to stakeholders involved in international trade in goods and services.
Harbor is a fintech company focused on supply chain finance and working capital solutions. The company accelerates supplier payments through Harbor’s trade finance programs to meet the liquidity needs of buyers and suppliers.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/dissecting-the-centrifuge-physical-asset-based-lending-facility-how-is-it-priced-how-is-it-liquidated/
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