Many individuals and entities build their businesses using borrowed funds. On the other side, investors put their financial resources into fund pools, which entrepreneurs can borrow from. In the traditional financial sector, where intermediaries exist, borrowers use their assets as collateral. However, since the inception, business and individuals find it difficult to borrow from the crypto sector as it has been challenging to use collateral.
Centrifuge is a decentralized platform that allows businesses and individuals to convert their real-world assets into collateral to borrow funds from the decentralized financial sector. Doing this has enabled the DeFi ecosystem to support the everyday financial needs of organizations and individuals.
This means that people and firms can access financial resources to cover their daily or operational needs. To that end, individuals and organizations can use their real estate and other assets as collateral to access funds in the traditional financial sector. In other words, the collateral is tokenized. Centrifuge achieves this by minting tokens to the value of assets that are used as collateral.
What Problem is Centrifuge solving?
DeFi has existed for a long time in a state of complete detachment from the traditional financial system, where borrowing against collateral has existed for a very long time. The DeFi resources have been used for the speculative purpose only, serving a minimal direct purpose in powering businesses and meeting human beings’ everyday needs.
Participation in the DeFi space has also been limited as parties have to deal with crypto assets alone, offering no link to the physical assets. A person with many assets could not get liquid resources from decentralized organizations.
How Centrifuge solve these problems?
Centrifuge makes it possible for borrowers to use their assets as collateral to unlock the vast financial resources found in the DeFi world. On the other hand, lenders are willing to offer their funds or resources to borrowers as security for the loans.
Therefore, Centrifuge creates a bridge between physical assets holders and crypto lenders, unlocking the potential of growth of the blockchain and businesses’ viability. All this takes place without the involvement of banks and other traditional financial institutions, playing intermediaries’ role.
How it works
Centrifuge achieves this huge task by using its two products Tinlake and Centrifuge Chain. Centrifuge Chain makes it possible for users to bring the real assets on-chain as non-fungible assets (NFTs). Examples of the assets that are used as security include trade invoices, royalties, and real estate. These NFTs are then bridged to ethereum, as ERC20 tokens are minted against their value. Tinlake uses these NFTs as collateral when it offers loans.
It is important to note that there is a need for legally binding agreements and other asset ownership documents to back up these NFTs. Underwriters ensure that the assets used as collateral exist.
Ethereum is given out as a loan since it is very liquid and widely accepted in the blockchain ecosystem. The role of Tinlake is to create assets pools, which investors can pour their resources into. Tinlake establishes a link between DeFi and the broader community by communicating the existence of financial resources to borrow.
Centrifuge uses two types of tokens to power up its system. There is the Tin and the Drop. The Tin is a high yielding digital investment asset, yet it is very risky. On the other hand, the Drop is low yield yet less risky. It is the minting and sale of these tokens that creates liquidity in the Centrifuge ecosystem.
Benefits Users Accrue
Both investors and borrowers benefit. There is a decentralized line of credit that benefits fund seekers. Since there is no middlemen involvement, these funds are accessed instantly at a low cost of borrowing. The repayment terms are usually flexible and convenient.
Investors get both high yield, high risk, and low yield- low-risk investment opportunities. The returns on investment are continuous. It is also straightforward for investors to track their investments. They can also invest in different classes of assets.
Centrifuge has created a bridge between the DeFi world and the real world. By that, cryptocurrencies are now used to solve the everyday problems that individuals and enterprises face.