Like many small business owners, Amazon sellers can find it hard to get the credit they need to expand. They hit a brick wall because all too often the option to unlock capital from their assets is either prohibitively expensive or limited to bigger firms. But that’s about to change, thanks to the world of decentralized finance (DeFi).
Centrifuge, the on-chain ecosystem for structured credit, offers among its use cases a way for small business owners to collateralize their assets on chain and access DeFi liquidity.
Inventory technology provider Databased.Finance uses Centrifuge Protocol, meaning that Amazon sellers’ assets can now be pooled, placed on Centrifuge’s marketplace, and used as collateral to access financing
“Centrifuge enables a radically faster, more cost-effective, and fully transparent model for connecting investors and borrowers with bankless liquidity,” Cassidy Daly, product strategy lead at Centrifuge, explained to Decrypt.
Centrifuge launched in 2017 and has financed a total of $317 million in assets on its marketplace—making it a leader in this nascent sector, per aggregator RWA. With an infinite variety of illiquid assets—from real estate to carbon credits and natural resources—all ripe for tokenization, the sector is predicted to become a $16 trillion market by 2030, according to a recent report by the Boston Consulting Group.
Uncorrelated to crypto
Inventories are just one of the many “pools,” or types of loans, that Centrifuge caters to. Real estate is the sector that forms its second largest pool, with lender New Silver. This pool has financed over $73 million and enables developers to access finance in order to fix up homes for resale.
But even while Centrifuge provides those seeking credit with the critical infrastructure to connect their RWAs to DeFi liquidity, it serves another purpose for investors.
In December 2022, Centrifuge announced a $220 million fund—the largest on-chain investment in real-world assets to date—with DeFi fintech MakerDAO and crypto investment firm BlockTower Credit, which became the first institutional credit fund to bring its collateralized lending operations on-chain.
“TradFi institutions are beginning to realize that the future of finance will be on-chain,” said Daly. They are becoming aware of the opportunity to make private credit more accessible and the efficiencies in using a smart-contract marketplace that “can compress the middle and back office of fund management to create valuable economic efficiency for the entire system,” she explained.
The Centrifuge protocol provides new financial infrastructure that can streamline and automate asset management processes and provide real-time insights into asset performance. In addition, Daly said, “Investors in DeFi get access to a diversified portfolio of real-world assets to access stable yields that are uncorrelated to crypto—which is increasingly important in uncertain times.”
DeFi’s real-world opportunity
Centrifuge serves as a bridge between traditional finance and DeFi, while leaning into the strengths of both sectors and bringing a multi-trillion dollar credit market to DeFi, Daly said. “Not only does this make the growth potential of DeFi limitless, it also brings stability to DeFi by providing capital that is not correlated to crypto assets.”
We’re thrilled to announce that $220 million in Real-World Assets (RWA) are coming to Centrifuge, in partnership with @BlockTower and @MakerDAO!
BlockTower Credit will be the first institutional credit fund to bring their collateralized lending on-chain.https://t.co/WhSMpUWJwk
— Centrifuge ꩜ (@centrifuge) December 14, 2022
Sébastien Derivaux, a member of the team working on Real-World Finance at MakerDAO, agreed. “This integration not only advances DeFi but it also brings many benefits to the MakerDAO ecosystem,” he said, explaining that asset diversification both increases DAI safety and makes it extremely stable. “This move will also help MakerDAO meet the increasing demand of DAI by tapping into a multi-trillion-dollar asset class,” he added.
Affordable access to capital
Chuck Mounts, chief DeFi officer at S&P Global, a provider of credit and risk analysis, considers that the market for Centrifuge’s services is still nascent, and is optimistic about its future prospects. “The lower cost of capital, and the lower friction versus traditional, is going to make it the pathway of future financing,” he said.
Centrifuge’s plans are correspondingly ambitious. The platform is scaling and building out a community of credit experts who benefit from the rich data the marketplace provides for scenario analysis, credit scores for borrowers, and more. “We are building a new institutional ecosystem and opening capital markets to make private credit more accessible, and more efficient, and in the end, this results in a cheaper cost of capital for borrowers,” said Daly. Borrowers benefit not only from the low cost of capital, but also the open access, security, and flexibility afforded by a decentralized platform, she added.
Today, large financial institutions dominate the industry, and most small businesses and lenders are locked out. “Centrifuge steps in to change that,” said Daly. “We are building the future of finance where every business has affordable access to capital.”
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