DeFi introduces real asset pledge, is it reliable?

The OKEX market shows that 24 hours after the vote was passed, the MakerDAO governance token MKR rose by 30%, reversing the decline and setting a new high this year-749 USDT, as the earliest DeFi (decentralized finance) lending project on Ethereum Compared with Compound and other DeFi upstarts, the early MakerDAO has been quite conservative in accepting collateral.

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

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

How to convert real assets into stablecoin DAI? Why should real assets be introduced into DeFi? What problems can DeFi solve, and can it bring liquidity to real assets? Will breaking the barriers between the encrypted world and the real world be the way forward for DeFi? This article, Odaily Planet Daily, will try to answer these questions.

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. On the Tinlake platform, asset promoters can convert real-world assets (invoices, mortgages, auto loans, or royalties) into tokens for loan financing; simplify the financing process to reduce costs, thereby improving the liquidity of physical assets and Transparency of investment.

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

1. Detailed process

Below, let's take Paperchain as an example to explain in detail how real music royalties are converted into stablecoin DAI?

First, music creators register with Paperchain and upload their music integration data on various platforms (currently Merlin, Spotify, Apple, and YouTube); Paperchain uses its own data model to set prices and predict its future streaming revenue ( Tentatively referred to as "accounts receivable").

Then, Paperchain packaged the accounts receivable and sent it to the Tinlake platform to generate non-homogeneous tokens (NFT) with legal effects; then convert the NFT into interest-bearing ERC20 tokens, and Paperchain can set the revenue of the tokens Rate and number of issuances.

Investors use the stablecoin DAI to purchase these interest-bearing ERC20 tokens for investment; these stablecoins will be sent to Paperchain and converted into legal tender by it.

DeFi introduces real asset pledge, is it reliable?

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

When the accounts receivable arrive, Paperchain obtains the income of the music creator, and then redeem the CRC20 tokens purchased by the previous investors and destroy them, thus forming a complete closed loop.

The above is the default general version of 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:

DeFi introduces real asset pledge, is it reliable?

2. Issues that need attention

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

First of all, there are currently two interest-bearing ERC20 tokens generated by Tinlake: Tin and Drop.

Drop tokens are similar to senior bonds in traditional financial investment portfolios, with small returns, which are generally fixed and less risky; Tin tokens are similar to primary bonds, with high returns, but they first assume the risk of default, and only Drop tokens are all When it is redeemed, Tin tokens can obtain investment returns, which is more risky and may lose principal.

DeFi introduces real asset pledge, is it reliable?

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

For example, in the freight invoice of Consolfreight, the TIN issuance ratio is at least 10%. This means that only when the loss exceeds 10% of the value of the portfolio, the holder of the Drop token will incur losses.

Second, the asset originator can create a separate Tinlake pool (asset pool) for each asset type, for example, a Tinlake pool for invoices and a Tinlake pool for mortgage loans.

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

Furthermore, the current conversion of real assets into cryptocurrency is not open to everyone. For example, ConsolFreight and Paperchain are both located in the United States, so they must comply with U.S. securities laws. This means that you must be a U.S. citizen and qualified investor, otherwise you will be turned away.

Finally, according to Tinlake's original vision, stablecoins are not limited to DAI, but can also be USDC, but not other stablecoins; the setting of interest-bearing ERC20 tokens can be a centralized entity (now the asset originator himself) , It can also be a set of smart contracts that automatically price assets, or it can be a DAO that manages Tinlake deployment.

At present, Tinlake is still being improved. Centrifuge CEO Lucas Vogelsang said that Centrifuge and its partners will now start work to determine which Oracles (oracles) to use, develop risk models, and review the security of smart contracts. It takes a few months to complete. Once this work is completed, a second vote will be held to determine whether to add the new code to the smart contract on the Ethereum blockchain.

To make it clear that the value of the Tinlake model is not 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 lending platforms has expanded the source of stablecoins and also ensured that the collateral can be realized more quickly.

Taking Paperchain as an example, the traditional music copyright collection cycle is generally 90 days. Through Tinlake, Paperchain successfully completed a pilot transaction on September 11, 2019, and prepaid $60035 in Spotify revenue to customers at an annualized interest 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.

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

On the other hand, real assets enter the DeFi field as collateral, and the scalability of assets is enhanced, increasing the range of options for high-quality assets, and breaking through the barriers between the crypto world and the real world.

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

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

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

(Note from Odaily Planet Daily: Mortgage rate=borrow value/collateral value, 150% in the figure below is collateral value/loan value, the calculation methods of the two are different, but the different routes are the same)

DeFi introduces real asset pledge, is it reliable?

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

This is also understandable. After all, assets such as freight invoices are inherently less volatile and will not rise or fall sharply.

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

2. Risk

While seeing the results, we cannot ignore the hidden risks.

One is the risk of default liquidation. Although the price of real assets will not fluctuate sharply, there is still the possibility of default, and liquidation is greater.

Take the ConsolFreight freight invoice as an example. If the related transaction company fails to fulfill the contract 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 to zero, and bad debts will inevitably occur on MakerDAO.

Although Tinlake has established a legal structure to ensure that anyone with Drop tokens can make legal claims on the underlying assets, NFT has legal effects. But who will take the lead in the follow-up prosecution and rights protection?

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

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

In addition, during liquidation, Paperchain plans to sell assets in a more liquid market (for example, 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 not as good as expected, 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 accept for lending platforms; Tin is more risky and is not suitable for lending platforms. However, Tinlake mandates that a certain percentage of Tin must be issued, which undoubtedly reduces the value of collateral to enter the lending market.

Third, who sets the price for real assets? Fixed assets such as houses and cars can be priced at market prices, and freight invoices can also be priced at face value. However, how to estimate the price of music copyright has become a big problem? Although Paperchain stated that its estimated income is more than actual The average difference in income is -0.73%. But the result of centralization is not very convincing in terms of decentralized lending.

Do real assets need DeFi? Let's start with the conclusion: not very needed.

In the traditional lending market, the barriers to entry are very high, and the review process for assets is more complicated and cumbersome. In contrast, decentralized lending can be entered without permission, 7*24 hours of transactions, and faster lending. Especially after the tokenization of real assets, its liquidity has also been increased.

However, as mentioned in the previous article, decentralized lending has a higher risk of performance. Traditional lending can rely on the legal system and judicial authorities to enforce the borrower's repayment obligations.

In addition, the overall scale of the encryption market is not large, and the liquidity is not as strong as expected. Small real assets such as invoices can indeed be realized quickly, but if it is a large fixed asset starting at one million yuan, for some lending platforms, if its stable currency is insufficiently liquid, 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 the real pain points of combining with DeFi. In contrast, DeFi may have greater demand for real assets because it can tell a bigger story.

Now that there are not many hot spots in this industry, everyone has high expectations for DeFi-out of the original public chain, out of the encrypted market, out of small circles, and embrace the big world. But at present, it is too early to talk about DeFi entering the real world.