Main challenges and potentials for Tinlake success

Hey guys,

Centrifuge and Tinlake are very interesting platforms and I’ve eagerly followed the developments in the last couple of months.
During that time I found that some things regarding Tinlake’s unique value proposition are still unclear to me.
Everything that follows comes from a good place and I hope that jointly answering these questions can be part of the success of these brilliant initiatives.

Challenge #1: How is the risk assessment quality of investment opportunities in Tinlake ensured?
Basically Tinlake allows for a digitalized variant of trading CDOs [=> Please correct me if you see this differently].
This is something that exists already in the traditional finance world and was, among other things, a trigger for the 2008 financial crisis due to opaque and poorly understood risks.
To attract a large number of investors, Tinlake must offer very solid, high quality risk assessments better than existing companies do - how can that be achieved?

Challenge #2: What unique benefits do investors and asset originators get on Tinlake compared against traditional collateralized debt investment solutions?
It is clear to me that a crypto-based gateway to real world assets will generate value at some point due to the automatable connection of smart contracts & DeFi applications - i.e. Centrifuge is a necessary addition to the crypto space imo.
However, I would like to have some more specific examples what these benefits could be for the Tinlake use case.
Here’s what I can imagine:

  • automated risk management through pooling into different risk classes + automated insurance acquisition
  • better transparency (& auditability) of asset originator track record
  • … what else?

Hoping for a lively discussion! :slight_smile:


Are there only the two challenges?


Hey eddie, no I suppose there are many more challenges :smiley:
However, I for one am focused on the ones which are specific to Tinlake and not the common ones for any new (crypto) project.
Please feel free to add the ones you think deserve special attention - this is what this thread is for!

Kind regards

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Hi metamod,

Good questions. Thanks! I’m trying to answer :wink:

Challenge #1: You are right, DROP tokens have similarities to CDOs. I think such securitization structures are very important financial instruments to provide liquidity on scale. These structures are not the reason for the financial crisis of 2008. They were the tool that was used but not the trigger. The trigger was as usual too greedy bankers and fund managers, a financial system out of control, and very intransparent securitization structures. Junk investments got a triple-A rating because even the rating firms were only able to check the securitization structure but not the single assets. Tinlake helps here. It makes the securitization transparent. Every single asset in Tinlake is represented by an NFT. Every investor can check asset price (risk score) and performance in a daily updated NAV, which is completely novel. The Asset Originator providing the assets has to have skin in the came with investing in TIN (the junior tranch) and has to take first losses. Tinlake shows fully transparent on-chain what happens today hidden in a Bank in CeFi. You do not need to trust the bank anymore.
Additionally, we work on fully decentralized underwriting, which would further minimize the trust in the Asset Originator as the remaining “central” piece.

Challenge #2: I think Asset Originator and Investors enjoy the usual benefits of DeFi: trustless infrastructure, works 24/7, interest per second, immediate borrowing, investment, value transfer.
There will be more soon. The power of composability and interaction with other DeFi protocols will make investing easier and more secure. You will not need to invest in a single Tinlake pool anymore but invest in another DeFi protocol, which will manage your investments, leverage, and may insure it as it is already possible for crypto assets. Real-world assets represent a unique opportunity for crypto investors to diversify their portfolio to make it less dependent on BTC and the rest of the crypto market (which is usually not much different). I also think long-term DeFi will be both cheaper for borrowers and offering better returns for investors. The margin banks are making today will not completely be assimilated by decentralized service providers (Asset Originators, Underwriters, Issuers, …). It will be an order of magnitude more efficient and will in addition reward all participants if they contribute to this decentralized credit system.

I hope that makes sense for you. Keen to get your opinion. -Martin

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Hey @martin,
thank you so much for your extensive answer and also for the link to the decentralized underwriting post - very intersting stuff! :slight_smile:
Let me see, if I get this right:

Challenge #1 / risk assessment:
If I understand your points correctly, one important measure to ensure a good quality risk assessment is for asset originators to provide TIN upfront to take first loss, as well as enforcing a fine-tuned TIN/DROP ratio per asset pool. That is certainly a valuable mechanism to incentivize special scrutiny for the (asset originator’s) risk assessment. However, that mechanism alone could still be systematically gamed by an asset originator, which is why you have included a whitelisting mechanism for asset originators. That shows that an investor still needs to put trust in the asset originator’s competence in terms of risk assessment. Here, additional incentives (e.g. analytics dashboards on Tinlake DApp) could help by analyzing asset originator track record and thus driving more investors to
asset originators which have proven to be very precise with risk assessment in a given context.

Your second point is that the securitization structures are now openly visible and single assets can be examined more in-depth. However, what does that mean in detail and what data will (realistically) be published onto the blockchain? Surely any intimate data of the risk assessment (solvency, cash flow, etc.) will fall prey to privacy issues and not be public? Therefore, how can we - for the single assets - generate risk scores that are trustworthy?

Challenge #2 / Tinlake UVP vs. traditional solutions
Thanks - I completely get the composability argument and agree that it must be more efficient long term.

Kind regards

trying to address your points:

Yes, your understanding is correct and your conclusion too. Asset Originators remain currently the weakest and still centralized point in the process. TIN is protecting it and blockchain makes it harder to game it though. The underwriter token can solve it. It is distributing the trust in the AO to all underwriters. They are voting and staking on assets. Incentives are an additional token reward from staking, penalties are that their stakings get burned. Underwriters can be a decentralized investment adviser. You will see their past performance, area of expertise, and reputation on-chain and can just follow them as a DROP investor or DeFi composable. Important is that underwriters are mitigating the conflict between Asset Originators/ Borrowers (borrow cheapest) and Investors (earn the highest yields). They have skin in the game and can earn extra money if their assets perform. They need to balance risk and return.

It is more than “openly visible”. The infrastructure is permissionless, decentralized, and censorship resistant. Examined means, every single assets performance is on chain. Just check the asset tab in a Tinlake pool. Even if you only know that it is an invoice or a bridge loan (asset type), you know the terms and performance. That is already a huge advance if you compare it with existing CDO structures. TIN token holder can ask for all asset details. The NFT is notarizing the asset details in a precise-proof. TIN token holder can even operate their own Centrifuge node, can be added by default as a collaborator to the NFT, and can access the assets details through the Centrifuge P2P network in real-time. That is where the underwriting chips in. The underwriter can create their own risk models, AI driven or whatever, fully automated. Makes sense? The infrastructure is already there. We «just» need to grow it as a community!

Great discussion. Thanks!

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