For Lucas Vogelsang, CEO and co-founder of Centrifuge, decentralized finance (DeFi) is “the future of the financial system” here, in the now – and fills a niche that traditional finance has largely found to be of no current value.
Why it matters: Centrifuge provides real asset liquidity (RWA), particularly for those who have little access to this type of financing from traditional banks.
- To date, it’s funded $182 million in RWA — think home loans, accounts receivable, and institutional loans — a drop in the ocean, but only the beginning.
- “It’s super powerful to give people with very little access to finance — small businesses, the underserved — access to capital,” Vogelsang said.
The big picture: Tokenized According to a report by the Boston Consulting Group (BCG), illiquid assets, including real estate and natural resources, are estimated to become a $16.1 trillion market by 2030.
How it works: “To the [DeFi] to work we need to find a way to access it and the assets that exist around us need to be made compatible. That’s what we do.”
- A company with physical assets in need of a capital injection can use Centrifuge’s Tinlake – a smart contract-based marketplace for asset pools – to convert its assets into NFTs embedded with relevant documents.
- This is how RWAs are turned into crypto friendly.
Then, Users can create an asset pool collateralized with their NFTs.
- Users who offer funding receive returns in stablecoins and Centrifuge’s CFG token, the latter of which are used to pay transaction fees, participate in Centrifuge’s blockchain governance, or for staking.
The Intrigue: “Borrowers don’t know crypto exists. It’s all behind the scenes,” says Vogelsang.
context: At the moment, short-term loans are the be-all and end-all of the business – they represent a lower risk than long-term loans for the fledgling market.
- But the more transactions Centrifuge makes, the better it gets.
- “We are building a community of credit experts,” says Vogelsang. “We now have data for scenario analysis, borrower credit scores, etc.”
What others say: S&P Global, a provider of credit and risk analytics for traditional finance firms, is exploring how it can better educate investors about idiosyncratic and systemic risks in DeFi and integrate effectively with the crypto ecosystem.
- “This part of the market is still in its infancy,” Chuck Mounts, S&P’s chief DeFi officer, told Axios. “The lower capital cost and reduced friction compared to traditional methods will make it the path of future financing.”
Threat Level: Traditional financial firms are increasingly looking to space, but Vogelsang still sees the benefit of DeFi.
- All parties “get better terms because it cuts out the middleman,” he says — referring to bankers and other intermediaries who would normally get a cut of the transaction to make it happen.
Game Status: Of course, yields have returned to earth after the DeFi summer’s spike, but Vogelsang is far from dismayed.
- “The bull market made many people curious, but so many things were not sustainable,” says Vogelsang with a smug grin. “Today we are earning returns that are customary in the market.”