With the Aave governance now deployed on mainnet and Centrifuge’s Tinlake V3 release coming soon, there couldn’t be a better time for a proposal to introduce a money market on Aave for real-world assets. The proposal released on our governance forum can be found here, so feel free to give it a read and head over to our governance forum to join in the conversation!
Real-world assets bring stability to the highly volatile market, diversify risk and are the avenue to move DeFi beyond its niche status. Despite the rapid evolution of DeFi, the on-chain lending ecosystem is only just beginning to develop. Extending decentralized lines of credit to existing businesses in an efficient way has been an unsolved puzzle in the DeFi ecosystem. Until now: Aave money markets and Centrifuge’s Tinlake are the two pieces that finally create the full picture.
Aave’s support for multiple markets makes it easy for the Aave community to start onboarding real world assets into the protocol and allow investors to opt into lending against these assets: Aave users can provide liquidity to the market by depositing DAI and earn interest from a balanced collateral portfolio of different RWAs. The Centrifuge Real World Asset Market will be managed by AAVE token holders through the same governance processes as with the existing markets live today. They set the different risk parameters and onboard these pools as they see fit.
“We’ve always been excited about Aave and how they’ve been driving innovation in DeFi. We have been waiting for the right moment to connect; with the launch of our revolving pools feature, it’s the right time to make Centrifuge accessible to Aave users. A Centrifuge money market on Aave offers a truly composable DeFi product: SMEs that have been left underserved in traditional finance will now have a competitive lending alternative, and investors benefit from diversification and yield.” — Lucas Vogelsang, CEO of Centrifuge
Tinlake V3 introduces revolving pools, an important feature that enables a RWA money market to work smoothly. This allows pools to repeatedly add assets, which can continuously be financed by the RWA money market on Aave. Adding a RWA money market to the Aave Protocol would make it possible for anyone to invest in Tinlake pools without a minimum investment threshold.
Centrifuge finances real-world assets using DeFi. The stack includes the Centrifuge Chain and the asset-backed financing DApp called Tinlake. Asset Originators that seek financing for their real-world assets (RWA) use the Centrifuge Chain to tokenize them into NFTs, and then drop them in a Tinlake pool to be financed. Investors can then invest in the Tinlake pool using ERC20 stablecoins to receive yield. Centrifuge communicates with both Centrifuge Chain and Ethereum, bridging both the real-world to DeFi as well as the DeFi ecosystem.
Centrifuge has been involved in the DeFi space for financing RWA since 2018, and more than $2M of real-world assets have been financed through their Tinlake DApp. Centrifuge introduced RWA as collateral in Maker, and Tinlake has been tried and tested there. Tinlake’s compatibility with DeFi projects makes it a great way to diversify DeFi use-cases, and now they are ready to bring RWA to the Aave Protocol.
The Tinlake DApp allows Asset Originators to finance their assets and Investors to invest in them, all without the trust of a middleman or relying on a single-point-of-failure. Asset Originators can make use of financial tools that are usually only reserved for big corporations: securitizations. The protocol coordinates the various parties required to structure, administer, and finance collateralized pools of assets categorized by type and risk (IE invoices, mortgages, auto loans, or royalties). By simplifying the process and reducing costs, Tinlake’s protocol creates financing flexibility for Asset Originators, allowing them to optimize risk allocation and access instant funding from DeFi or their traditional investors.
Tinlake has two different ERC20 tokens that lenders can buy: TIN and DROP. The TIN token is the junior tranche that takes any first losses and is primarily bought by the Asset Originator and other lenders that seek leveraged exposure to the portfolio. Tinlake is configured to require a minimum amount of investment in the TIN token. Any losses that occur in a portfolio will first be covered by TIN token holders. More information on how the two tranches work can be found here.
Adding RWA to the Aave Protocol opens up DeFi to a world of new possibilities outside of crypto assets, bringing in a new wealth of assets and real-world applicabilities. Asset originators can receive liquidity upfront, and investors automatically receive yield for investing in the pool, so everyone benefits from this sustainable, audited, and regenerative DeFi.
At Aave, we are excited to explore these synergies with Centrifuge, and the upcoming Tinlake release is a great opportunity to bring a RWA market to the Aave Protocol. Their 3rd version of Tinlake will include revolving pools, on-chain NAV, and more, and like Aave, Centrifuge puts security first with audited smart contracts.
Here’s a link to the full proposal and we encourage you to participate in the discussion in our governance forum! Your feedback is extremely valuable to the Aave and Centrifuge teams.
To learn more about Centrifuge, feel free to visit their website, follow them on twitter, and sign up for their newsletter.
As always, feel free to follow Aave on twitter or talk to us in Discord!