DeFi introduces real asset pledge, is it reliable?

Produced | Odaily (ID: o-daily)

Produced | Odaily (ID: o-daily)

Recently, the MakerDAO community voted on Real Assets (RWA) as collateral.

As the earliest DeFi (decentralized finance) lending project on Ethereum, the early MakerDAO has been quite conservative in accepting collateral compared with Compound and other DeFi rising stars.

Before November 2019, MakerDAO has been single-collateralized (Sai), only accepting ETH as collateral; then converted to multi-collateralized (Dai), and successively accepted BAT, USDC, and WBTC as collateral.

But this time, MakerDAO expanded the lending boundary to real assets, which seems to be ahead of other lending protocols.

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How to convert real assets into stablecoins?

According to reports, the proposal to convert real assets into MakerDAO collateral was made by a startup called Centrifuge.

The company created a lending platform called Tinlake based on the Centrifuge protocol it developed itself. On the Tinlake platform, asset originators can convert real-world assets (invoices, mortgages, car loans, or royalties) into tokens for loan financing; reduce costs by simplifying the financing process, thereby improving the liquidity of physical assets and Investment transparency.

Currently, Centrifuge has partnered with Paperchain and ConsolFreight to tokenize music streaming royalties and trade invoices.

1. Detailed process

First, music creators register on Paperchain and upload their music integration data on various platforms (currently mainly Merlin, Spotify, Apple and YouTube); Paperchain uses its own data model to price and predict its future streaming revenue every 24 hours ( tentatively referred to as "Accounts Receivable").

First, music creators register on Paperchain and upload their music integration data on various platforms (currently mainly Merlin, Spotify, Apple and YouTube); Paperchain uses its own data model to price and predict its future streaming revenue every 24 hours ( tentatively referred to as "Accounts Receivable").

Then, Paperchain packages and sends the account receivable to the Tinlake platform to generate a non-homogeneous token (NFT) with legal effects; then convert the NFT into an interest-bearing ERC20 token, and Paperchain can set the income of the token rate and number of releases.

Investors use the stablecoin DAI to purchase these interest-bearing ERC20 tokens for investment; these stablecoins are sent to Paperchain, which converts them into fiat currencies.

At this time, although the accounts receivable have not yet arrived, music creators can directly advance their copyright income from Paperchain.

When the accounts receivable arrives in the account, Paperchain gets the music creator's income, and then redeems and destroys the CRC20 tokens purchased by previous investors, thus forming a complete closed loop.

The above is the general version preset by Tinlake. After joining MakerDAO, the "investor" in the above process becomes MakerDAO, that is, MakerDAO accepts interest-bearing ERC20 tokens as collateral and generates DAI, as shown below:

2. Issues requiring attention

After understanding the entire operation process, there are still a few questions to explain:

Drop tokens are similar to senior bonds in traditional financial investment portfolios, with small returns, generally fixed, and low risk; Tin tokens are similar to junior bonds, with high returns, but they first bear the risk of default, and only Drop tokens are fully When being redeemed, Tin tokens can only get a return on investment, and the risk is greater, and the principal may be lost.

Drop tokens are similar to senior bonds in traditional financial investment portfolios, with small returns, generally fixed, and low risk; Tin tokens are similar to junior bonds, with high returns, but they first bear the risk of default, and only Drop tokens are fully When being redeemed, Tin tokens can only get a return on investment, and the risk is greater, and the principal may be lost.

In addition, if the asset promoter does not want to issue two tokens to set up a portfolio, they can also issue only one token, but it must be Tin. If TIN and Drop are issued, the TIN issuance ratios set for different types of assets are also different.

For example, for Consolfreight's freight invoices, the TIN issuance ratio is at least 10%. This means that losses as a Drop token holder will only be incurred if the loss exceeds 10% of the portfolio value.

Second, asset originators can create separate Tinlake pools (asset pools) for each asset type, such as one Tinlake pool for invoices and one Tinlake pool for mortgages.

All Tinlake pools are independent of each other, and the interest rate is configured separately. Therefore, each set of Tin and Drop is unique and cannot be used universally. For investors, the risks and benefits are limited to the Tinlake pool they belong to and cannot be shared across Tinlake pools.

Furthermore, converting real assets into cryptocurrencies is currently not open to everyone. For example, both ConsolFreight and Paperchain are based in the US and are therefore subject to US securities laws. This means, you must be a US citizen and accredited investor or you will be turned away.

Finally, according to Tinlake’s original vision, stablecoins are not limited to DAI, but can also be USDC, but do not include other stablecoins; the one that sets the interest-bearing ERC20 tokens can be a centralized entity (now the asset promoter himself) , or a set of smart contracts that automatically price assets, or a DAO that manages Tinlake deployments.

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Is the Tinlake model worth promoting?

To clarify whether the value of the Tinlake model is worth promoting, it is still necessary to weigh the pros and cons and discuss its advantages and risks.

1. Advantages

Judging from the pilot situation, Tinlake has indeed enhanced the liquidity of real assets. In particular, the cooperation with the lending platform has expanded the source of stable coins and also ensured that the collateral can be realized faster.

Taking Paperchain as an example, the traditional music copyright payment cycle is generally 90 days. Through Tinlake, Paperchain successfully completed a pilot transaction on September 11, 2019, and prepaid customers $60,035 in Spotify revenue at an annualized rate of 7%.

The initiation time of the entire pilot transaction prepayment is less than 30 minutes, and the initial cost is less than 3 US dollars (Ethereum Gas fee cost), which greatly accelerates the payment cycle, and creators can focus more on music creation and create better works.

Taking ConsolFreight as an example, the payment cycle of its freight invoice is generally 30-45 days, but now it is also shortened to within one day. The shortening of the repayment cycle is conducive to improving the utilization rate of funds and helping ConsolFreight expand its scale.

On the other hand, real assets enter the DeFi field as collateral, increasing the scalability of assets, increasing the optional range of high-quality assets, and breaking down the barriers between the encrypted world and the real world.

In the future, in addition to invoices and copyrights, fixed assets such as houses and cars are expected to become alternatives.

Moreover, the mortgage rate of high-quality real assets is much higher than that of general encrypted assets.

Taking MakerDAO as an example, the mortgage rate of ETH as collateral is about 66%, and many people will criticize the capital utilization rate of DeFi because of this; but the ideal mortgage rate of interest-bearing ERC20 tokens (especially Drop) can reach more than 95%.

(Odaily Note: Mortgage rate = loan value/collateral value, 150% in the figure below is collateral value/loan value, the calculation methods of the two are different, but they lead to the same goal)

The mortgage rate of 95% is indeed very high. Paperchain’s suggested mortgage rate is 73%, which is still higher than encrypted risk assets.

This is also understandable. After all, assets such as freight invoices are less volatile and will not experience sharp rises and falls.

A higher mortgage rate will be the future of DeFi, and it will also help improve the utilization rate of funds.

2. Risk

While seeing the results, the hidden risks cannot be ignored.

One is the risk of default liquidation. Although real asset prices do not fluctuate violently, there is still the possibility of default and greater liquidation.

Take the ConsolFreight freight invoice as an example. If the affiliated transaction company fails to perform as scheduled or even goes bankrupt, the freight invoice is like a piece of waste paper, and its corresponding interest-bearing ERC20 token will also be declared zero, which will inevitably lead to bad debts on MakerDAO.

While Tinlake created a legal structure to ensure that anyone who owns Drop tokens can make a legal claim to the underlying asset, NFTs have legal effect. But who will take the lead in the subsequent road to prosecution and rights protection?

ConsolFreight, which has already received cash in advance, is bound to not have such a strong motivation. For Drop token holders, sometimes they even face cross-state and transnational rights protection.

Looking at Paperchain again, there are loopholes in its operating mode. At present, the payment depends on the customer's own payment, instead of directly connecting to the music platform to deduct; if the customer fails to make an appointment, it will also cause the liquidation of ERC20 tokens. According to the plan, in the future Paperchain will collect payment directly from each issuing platform, which may reduce the risk of repayment.

In addition, at the time of liquidation, Paperchain plans to sell assets in a more liquid market (such as selling to factoring companies, private equity funds, banks, etc.), and the proceeds will be converted into DAI and returned to ERC20 holders.

However, the liquidity of the above-mentioned platforms is actually not as good as imagined, and the review is more stringent, and the music copyright may not be released in time.

Second, from the perspective of lending collateral, Drop is less risky and easier to be accepted by lending platforms; while Tin is more risky and not suitable for lending platforms. However, Tinlake mandates that a certain percentage of Tin must be issued, which undoubtedly reduces the value of collateral entering the lending market.

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Do Real Assets Need DeFi?

Does Real Assets Need DeFi? Let me start with the conclusion: not very necessary.

In the traditional lending market, the entry threshold is very high, and the review process for assets is more complicated and cumbersome. In contrast, decentralized lending can be accessed without permission, and transactions are conducted 7*24 hours, making lending faster. Especially after the tokenization of real assets also increases their liquidity.

However, as mentioned above, the performance risk of decentralized lending is higher, while traditional lending can rely on the legal system and judicial authorities to enforce the borrower to fulfill its repayment obligations.

In addition, the overall size of the encryption market is not large, and the liquidity is not as strong as imagined. Smaller real assets like invoices can indeed be realized quickly, but if it is a large fixed asset that can easily cost millions of yuan, for some lending platforms, if the liquidity of the stable currency is insufficient, it will cause users to be unable to realize it. problem.

Even for invoice discounting and invoice financing similar to ConsolFreight, there are currently companies (such as Velotrade) that successfully solve financing problems for enterprises without the use of tokens.

In general, real assets do not actually have a real pain point combined with DeFi. In contrast, DeFi may have a greater demand for real assets, because it can tell a bigger story.

Nowadays, there are not many hot spots in this industry, and everyone has extremely high expectations for DeFi-to get out of the original public chain, out of the encryption market, out of the small circle, and embrace the big world.

But at present, it is too early to talk about DeFi entering the real world.