As I dive deeply into the Centrifuge chain I am curious about many things. One thing that I don’t fully understand and would like more clarification on is how the Tinlake pools are determined to be higher or lower risk? I understand that the tokens used for collateral with Maker Dao will be Drop (higher risk/ higher return) and Tin (lower risk / lower return). I just don’t know how the process works and want to know more. Please let me know if you understand.
Hey @doobs good question about risk. The goal of Centrifuge is to create a decentralize lending protocol, which is a system of collaboration to allow many parties to come together to evaluate the risk and collectively determine the price of an asset. This is done in the real world today through the use of credit ratings agencies, credit bureaus, research analysts, valuation firms, and alternative data providers which all contribute to credit underwriting models that are used to predict the likelihood of a default of a borrower.
We think that by digitizing the lending process and establishing coordination over a protocol will allow for major efficiency gains, better accuracy, expanded access to capital, and a lower cost of capital borrowers.
Currently, Tinlake is a 2 sided marketplace. On one side there are Asset Originators who set their price/risk and upload their loans. On the other side are Investors who complete their due diligence and determine whether to invest. It is a good start, but it will get more interesting when we shift to an n-sided marketplace. This is where collaboration comes in.
In order to shift to an n-sided marketplace, we will need a pricing/risk oracle, which will come soon. This will allow for multiple third parties to input or verify data. As an example, a real estate originator may have third parties provide home appraisals or a small business lender may have someone verify that there are no existing liens on the business before disbursing a loan.
In addition, we envision the concept of an underwriter token. The Underwriter is a specific persona within the Centrifuge ecosystem. The Underwriter will be willing to complete due diligence on a pool and stake tokens as a way to express confidence in that pool in exchange for collecting a fee from the other investors. They Underwriter will consume all of the data that is added to the Oracle and then stake their own money as first loss capital. Here is the concept that we released in August 2020: Token design proposal for underwriters to minimize trust in real-world assets
The bottom line is that there are many factors that go into determining the risk. Our Asset Originators try to structure their DROP tokens by charging a certain interest rate, by adding a certain amount of TIN risk buffer, and by minimizing concentration risk in the underlying assets such that there is low risk of an impairment for DROP investors. While there is no guarantee that the investments will perform as planned, the structure is intentionally designed to minimize risk for investors. Hope this helps and keep the questions coming!
that was an amazing answer to my question. Thank you so much for taking the time to answer it. I guess there will be many new opportunities as Centrifuge grows. An underwriter token seems like a perfect idea and I am going to have to keep my eye out for the development.
really impressed with all this project has to offer. Thank you!
Thank you for this interesting summary!