Cassidy Daly & Lucas Vogelsang: Centrifuge – Introducing Real-World DeFi #398

Transcript

this is epicenter episode 398 with guests lucas vogelzang and cassidy daly from centrifuge [Music] welcome to epicenter the podcast where we interview crypto founders builders and fault leaders i'm brian from ukraine and i'm here with federica ernst so today we're speaking with lucas folsom 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

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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 uh from d5 instead of banks back when we started actually d5 didn't even really exist we just said okay well what if people could use crypto to pay for this and sort of 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 what centrifuge does today uh is we allow users to borrow money usually stablecoin you most most often die against any kind of real-world asset we worked with um i mentioned real estate trade finance to bring those assets on chain allow investors to invest in them earn a u earn yield on a stable asset um but to do so fully in crypto centrifuges uh live on maker as the first real or lasted so new silver is our first asset originator that got a 5 million die uh 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 they all those to you the challenges are are slightly different but in a lot of ways it's similar to a lot of the on-chain stuff that we do well the 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 uh 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 risks than if i want to borrow money um and so if you try to build them build a

marketplace where uh investors and borrowers come together oh it's 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 like money markets like ave 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 on non-fungible assets and so the approach we're taking there is um we allow these real world assets to be bundled into different pools um the the word that or the concept that exists in the traditional world is securitization meaning you take different different

assets uh you put them into one 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 at the right time the right amount and and on the other side finding a bar doing this matching you can actually now just throw all of these assets into 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 rep need money for their for opera um for funding their operations so i i put

money into that pool right and on the other side there's more borrowers and so that that sort of solves this this coordination challenge so we've seen in d5 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 we're doing we already have implemented and there's a few things we're we're still working on i love hopefully we can talk a bit about both so sort of the the problem here is is of course like how do you know um what exists out there in the real world 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 if in in case all else fails um obviously if you're investing in one of these pools you there is a legal recourse you can go and you can sue um 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

um and and so like you can rely on that as an ultimate backstop but then um really the the second level of defense maybe that that we have is i talked about we we bundle different assets into pools and what we give investors is we give investors the choice to invest in actually two different tranches it's a each pool has two different tokens where if you want high risk high return you can invest in what 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 tranche

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 uh say we have we have one million dollars 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 um 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 hundred thousand on the other side for the junior

investors they would see a fifty percent loss because they're losing fifty thousand on the hundred thousand 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's what wants to put money into 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 they're taking that risk for me and so that structure basically gives you insurance that if there's like a single default uh if there's there's issue with the

different assets um that that is covered by by sort of these junior investors and so that's that's a a very crucial part um and so for example maker um in the example of new silver they are investing in the senior tokens whereas other investors that really know that the real estate market that like like to have these high these higher yields are investing in in the junior and ultimately this is sort of where we're developing the product to it's actually that these junior investors become more important uh 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 10 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 um 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's 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 um in 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 centrifuge let's get to our sponsor exodus exodus is a fantastic cryptocurrency wallet that strikes the 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 they're old school and

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um because i do think they really tackle this problem that that you mentioned federer 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 did it what it is exactly and so i we have 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 that loan should be priced at five percent interest per year or eight percent sort of 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 um some of their junior 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 five percent or eight percent interest and so if a borrower comes and says they want to borrow money for a set house um these different underwriters can uh stake towards the the loan proposals that they like so five hundred thousand at eight percent or four hundred thousand at five percent um the pool then will just sort of select only the assets that get the most

um endorsement by these different uh underwriters thus like you have now a as cassidy mentioned in 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 uh go and look check out the house themselves and see if it actually exists and like talk to talk to the or look at which neighborhoods might have the most potential for development right so 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 what does actually the best pricing mean right like we're trying to build a fairer and a more efficient financial system and that means we're not over charging the borrowers but we're also not under charging and that means it just needs to be the price needs to be more than the uh 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 such that the pool ultimately lends out uh 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 oracle's instead of trying to pull in data more but creating

actually an incentive system around that it seems that going from from what you just said that if an underwriter and a borrower collude so basically say i i'm 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 um the underwriter would never be out as much as i could potentially gain right so do you have some sort of reputation um system to to combat that yeah this is this is this is i think the

one important part what we do by bringing by bringing in underwriters that actually vote on chain right is that we start creating a track record of these underwriters that is verifiable on chain right if you're borrowing against a house here in in germany and you're borrowing against or you have a loan in the us and like different people doing this stuff because it's going to be impossible to to like build up this 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 you have these uh game theoretic issues that you mentioned um and you 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 us 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 would ultimately lose out another important part of how you can counteract that is of course you 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 uh that doesn't get the vote or sort of signal of confidence by the second underwriter um that would be very detrimental right like they would clearly signal something's wrong and so that this so so by actually allowing underwriters to sort of do their work independently verifying all of this off-chain stuff themselves uh we we add the second protection here besides reputation we

also add redundancy and just to build on that the second third or fourth underwriter there 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 um deter the 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 um if some asset were to default is there a minimum value on which i can borrow on i mean we just talked about houses right so basically houses i can i can see how a loan on a house um would sustainably finance underwriters or a couple of underwriters to actually keep the system stable but say i 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 so you can take out a loan on your reputation if someone's willing to trust it right um they are i mean they're in the real world there are many places where where you do that if you're building a company and you convince 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 that what we want to get to is a place where it's always easier to to lend money to to people to to users when there's some like data available available

um so like in the case of real estate you can verify and check what's in the land register or like what uh 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 i'd love to find a way that this can be done safely and i do believe it can right because if if if you assume that people are generally honest and you price the dishonesty correctly um and then you can actually make money lending to dishonest people this is a bit of a i mean not to to generally honest but maybe some dishonest people and that's that's the truth in in every in every asset class i mean even in crypto right

like by the point by the time you're onboarding an erc20 token of a major d5 project into another defect protocol well like there's a fair amount of trust in that the the leadership or the sort of the team behind that certain d5 project is actually not just going to disappear the next day right and so like i think yeah there's there's obviously they will never work completely without trust uh and that data or some 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 federica we don't have strictly speaking a minimum of of how much you you need to borrow per se but

that said um 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 fine 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 shorter 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 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 the use cases where like centrifuge can make the biggest difference yeah so i mean the 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 um and i think i mean the idea of bitcoin and then also like ethereum and and i think it's that's pretty much a shared ideology i think sort of and this is really what

excites me so much about d5 and where i see like very much the the idea and sort of the vision aligned with what sony future is doing is well it's like defy is transparent and it doesn't have any barrier of entries right like the code your code doesn't doesn't care about where who you are or what you do if you have one ease you can go to maker and you can borrow if you have one yeast you can go to aven borrow like right same rate same terms sorry everything is accessible now if you like 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 robinhood um and icos said no actually all you need is you need to deploy an rc20 token and convince people that this is like a token that will become something cool and that people will want to buy and and i think sort of then like continuing defense so we're just like trying to build to apply 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 landing protocols all this stuff what tennis shoot is doing we're trying to build the same thing we're saying okay well now we have this d5 ecosystem how can we apply it to other assets that are not truly crypto native to real world assets and the but the benefits are ultimately the same right and so who who do these benefits who profits most from these actually it's the smaller borrowers right if you're and this these numbers are actually pretty mind-blowing but if uh google google last year borrowed money 10 billion dollars 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 uh apy on their sort of short-term loans um so that means that google is paying 30 less for their capital right and capital is like it's one of the most important ingredients to building a business so they have like a 30x advantage here at the same time if you look at default rates smes in the us like they there's like a default rate of about two percent per year so if you look at that you're like wondering like why why is an sme paying 10 to 15 when the risk of default across the whole us is like two percent um and like why is google paying so little and like where is where is this spread going and so like this financial system that we live in today right

um is really just geared towards making it very efficient for the largest uh players and is 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 defy can do for a lot of our users and so who we who we see like using centrifuge and and that'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 they look to defy as a 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 uh a great explanation and of course you you mentioned as a comparison your 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 oh it's way more yeah either it's way more even 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 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 web 3 changes the game there it makes it a lot more

this information a lot more available that not only banks but but any investor could actually start financing these different assets um in a way that just did wasn't feasible before yeah i mean before before crypto i at one point worked for about like eight months for this commodities trading company and i think that that is sort of like uh is remem remained very much as a use case that seems like such a good fit and i think there's there were several reasons for it you know 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 they use this archaic instrument letter of credit and

mail documents around and it was like a horrific process but the other thing that stood out to me is that you know this was a pretty big company a medium-sized large company so they might have had like you know 500 million dollars worth of like uh you know goods uh 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 dollars worth we will receive so can you give working can you like give some credit facility and then the bank would be like okay this is 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 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 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 like if you don't fall into one of their like 100 product lines like your 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 dollar secure bond issuance and we'll get the money on the market and people will be bidding for it but if i'm the if i have this like one invoice that is giving me even 100 million dollars in like 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 d5 and sort of getting sort of defining all of this encode building the the underwriter system right where like now an underwriter can actually come and look at your 100 million dollar 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 they're able to tap into similar pools of liquidity with similar cost of capital that like some of these very large uh 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 uh and this sme pays 10 20 to like this difference being being much much um smaller and ideally really just the closer the risk of default right instead of the paying for this rat tail of of processes that your legacy financial institution has when you want to trade tokens on ethereum

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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 dos yeah so these assets are clearly securities and we've always we've always operated under that assumption and made sure that sort of each pool is issuing a regulated security this is done with a 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 follow your uh you pass anti-money laundering laws and then you can get approved to rate to invest in these pools and then um participate

by by supplying diet to the contract but there is there is mandatory kyc which is um unfortunately unavoidable um until we can uh start lobbying the the uh the global financial system to maybe um become a bit more sane about kyc laws that's that's really out of our control but yeah so so there is there is a bit of a barrier of entry i think ultimately this is not really making crypto making or breaking for crypto i fundamentally believe that i mean if if crypto really deal 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 kyc framework you go through go through that once you pass it then you're really free to operate in in that as you wish you can supply liquidity you can remove liquidity and and then also sort of one one thing we are doing and this is a bit where uh now it gets unfortunately really complicated but of course like our goal is that investors are not just individuals like you and me but but we also want to bring this at these assets to other d5 protocols because these other d5 protocols are very much unknown to the law as of today 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 going for more assets going live there we are just announced um sort of to the or we've just published a ave request for commons in the avid 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 other market will basically just give you will if by supplying liquidity to that you will give it to whoever has

has liquidity needs liquidity right now and sort of this the the benefits that the the money market concept gives you right um so 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 make working out the technology to go and sort of extend d5 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 nasa goes through and the steps that we have 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

um so you have assets on one side you have investors on another side and what we do is we actually talk we couple a legal structure to these smart contracts so we deploy the deploy pool um along that you actually create a legal spv special purpose vehicle so 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 and die uh to that pool they get certain rights right the the rights to receive the payments from from those uh 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 incident this buffer is is a 10 is a 20 and then sort of once that step is done then um investors can come in and start supplying liquidity to the pool and so as the liquidity basic assets

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 have that that want to borrow from the new silver's case to buy to buy a house right away the house and so um then what the ass originator does is they take this 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 they're that their loan is financed by crypto or that there's like some maker vault uh minting die to actually generate the money that is used to pay for that loan but so they sort of completely abstract

that they're like the very sophisticated wallet or like an on 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 and making sure that that everyone gets the the share of the interest return and and so on well let's talk a little bit about so centrifuge has also a token right a cfg token so what's the function of the i mean you know besides we talked about drop in tin tokens which is

different branches but then there's also a centrifuge another token called cft can you explain like how does this token work and how does it relate to uh you know this process yeah so we have centrifuge token cfg that is the token that powers centrifuge chain so centrifuge chain is the special purpose chain that we built using substrate and that's really specialized to this centrifuge specific use case so the centrifuge 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 uh also the the polka dot though the substrate chain actually i should also mention i forgot to mention this in the beginning but that like uh you know of course one the company i co-founded so we've also been running a validator on on that chain and i've also sort of participated in some of these early 10-day pools and like invested in in the project as well so you 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 uh in the future so right now this tin lake depth that we've been talking about is live on ethereum that's been great and also given us access to the d5 ecosystem that's grown there but gas fees are quite prohibitive and so the plan with centrifuge chain is to be able to move tin lake onto centrifuge chain from

ethereum um 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 is really powering the tin lake depth for centrifuge 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 each 2.0 which we're still excited about but it makes it 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 as you mentioned you know we're built on substrate and that connects us to the polka dot ecosystem and so we'll be launching centrifuge chain as a pair chain on polka dot and as sort of a precursor to that basically a live test ahead of launching centrifuge chain as a pair chain will be launching a different network a different chain called altair on kusama and that's really for us the most important thing there is is having this sort of test bed with live value

so we're launching altair as a parachain first which since centrifuge chain has been live for one year it's um 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 centrifuge chain that would go on to altair first and if any kinks were to come up iron those out on altair before we move that over to centrifuge 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 2s and

in the end then opted for polka dot substrate what was the decision process behind that so actually when we started a centrifuge chain there were no layer twos that were accessible um so we were already starting to build centrifuge chain at the end of 2019 um and so at that time really the only viable alternative was to build either using substrate and 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 centrifuge chain now that layer twos are accessible on ethereum i mean that's that's great for other d5 projects i'm excited to see how those develop but i think at the moment this is um going to be a really great way for us to to scale faster are there problems with being on another blockchain entirety so basically um you've got you know integrations to make a and most of the dfi 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 depth that lives on centrifuge chain so those are the anchors for these assets and then that is using our chain bridge centrifuge chain to ethereum bridge to mint nfts on ethereum and then finance those with the tin lake dap so that bridge was definitely a complexity that we've had to worry about and part of launching centrifuge chain as a pair chain on polka dot 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 like longer view i i believe like d5 definitely um started in ethereum i think at at this point i would say we're not gonna the world is not gonna be exclusively on ethereum anymore and so sort of for us as any d5 project i think it would be not in your interest to sort of focus on on one ecosystem and you already see like so many bridges coming up between different ecosystems where um you ultimately just want to make sure that you go where the liquidity is right and um unfortunately like finance was seeing a lot of intention i don't think that's gonna uh sustain um but but i think other

protocols other layer ones will will bring interesting concepts and ideas that um i think sort of similarly to how on ethereum there was this insane when defy became really what it was through the interoperability right like any erc20 token worked 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 would work 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 uh necessary and for centrifuge that means

asset originators and underwriters sort of create these pools on centrifuge chain but then the investors right the investors they are really just wherever they want to be and if that's and if there's a need for collateral in maker on ethereum then it can be bridge tree theorem if it's if it's uh a money market on solana it can be on solana or it can move to another paratrade on polka dot and so sort of from from that from that view for us um i believe polka dot or substrate was like a very um good technical solution at the time we started and i i still see i still believe and i mean extremely exciting now sort of the the point the

ecosystem is at um we're just about to find out like what what the power chains are going to look like in production in the coming weeks one of the interesting things has been to see in in the polkadot ecosystem is that kuzama seems to have taken on like a much more significant role over time than maybe initially was envisioned and now you are also starting this altair so this other kind of centrifuge like chain on kuzama so i'm curious like how how is that going to work and how do you think the the centrifuge power chain and the kusama pero chain are gonna play together it's been

super interesting to see how much excitement has built around kusama as a project and like you said i i don't think the polka dot team necessarily foresaw that coming but it's it's posed a really great opportunity for a lot of projects to get excitement around their precursors to what they would launch on polka dot so i 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 of chains

and so that's exactly what we see altera's is really a place for experimentation pushing the boundaries of of what sort of things are possible so to draw back to something that that we talked about earlier today um 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 altair as that sort of test bed and try things out that maybe we wouldn't otherwise be able to

on centrifuge 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 um 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 that of a product that barely gets any use at all so i think there are a lot of differences there that 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 centrifuge 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 um it's definitely something that we're thinking about that this token needs to have future use cases future utilities and um certainly not just governance i would

think the most common way that governance tokens on ethereum in d5 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 urine finance or like so is 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 note or providing underwriter services for art in like pool as an example

these are things that are active participation in the protocol that i think should be incentivized 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 an effect on 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 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 how how investors buy tokens and then you want some value cool in it but yeah generally i would 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 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 and 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 for holding the token yeah i see that that makes a lot of sense unfortunately we're a bit strapped for time but um i would like to zoom out again a little bit so 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 one of you know what what one of the contributors to the 2008 financial crisis was namely that debt is being packed packaged in less than transparent ways and people

buy it without necessarily doing the due diligence and they should have so how do we avoid replicating you know crises we've gone through on defy and where do you see centrifuge in the very long term so like say in 10 years think i mean one of the one of the goals with giving underwriters an economic incentive right is exactly addressing that standard and poor and moody's they majorly screwed up in in in the 2008 crisis and uh walked away not unscathed but but they're still around right um and

they didn't have really they had their reputation a bit at stake but they had nothing really monetarily at stake um 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 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 to the situation that we found ourselves in and so like thinking about how we're approaching this we we have to be cognizant 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 pause a huge opportunity because it one of the core ideas of centrifuge is to give that transparency right and have exactly those underwriters be competing for the best the best way to underwrite and sort of make make money on that instead of just sort of having this system with like established players just sort of work on work however they like and that is sort of how we hope hope to address this and i think that's that's sort of in general what what defy is trying to do right that was the thing that stood out to me a lot also when it came to this mortgage-backed 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 uh so we've talked about a bunch of stuff you know the parachain launch and the altair but can you tell us a little bit like you know what does the road map look like in the next i don't know like year two years and like what can people expect when yeah so the road map in the next two years i've hinted at a few things um we're live on maker with the first asset class

but we want to bring many many more and we believe that i mean d5 as a whole is gonna it has this huge opportunity to scale with real world assets right like real assets are hundreds or thousands of times bigger than crypto is today like where crypto is trillion a trillion but like that's that's nothing compared to to our to the real economy so we want to bring these as many of these assets into d5 and start um so scaling tbl right and that's going to be on maker on ave on every other lending protocol that is interested in sort of expanding their their use case there the second priority for us is really building this purpose-built chain

of and building out the the tinley 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 um months on super interesting so before we uh 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 centrifuge dot io but really the most interesting part i think to start with is tin lake dot sound refuge dot 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 like a discourse server that you can join and well telegram twitter centrifuge on twitter that's what i would where i would go you'll see some of us speaking at uh 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 you can tell it to listen to the latest episode of the epicenter podcast go to epicenter.tv subscribe for a full list of places where you can watch and listen and while you're there be sure to sign up for the newsletter so you get new episodes in your inbox as they're released if you want to interact with us guests or other podcast listeners you can follow us on twitter and please leave us a review on itunes it helps

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