Centrifuge - RWAs 2.0

All right. And up next, we have RWAs 2.0, institutional DeFi. We have Maex Ament and Asad from Centrifuge.

So, I open with my comedy bit? No, just kidding.

Hey, here we go.

Just kidding.

Good. All right. So, we're trying to make up for a little bit of time. We have 20 minutes. Um, we are here to talk about obviously about real-world assets. That's the idea. Not about beards, although we could. I wanna introduce myself real quick. My name is Maex. I am one of the co-founders of Centrifuge. I'm here with Asad. Um, introduce yourself.

Head of BD at Centrifuge.

And, uh, so I'll have a few slides just talking a little bit about the history of, well, how we at Centrifuge saw and see real-world assets. And then I hand over to Asad to talk about the future, about RWA 2.0. And to do that, I wanna talk real quick about the world before RWAs. So what was there before? How the heck did we come up doing something like Centrifuge? And Centrifuge, actually the idea came 2016, we incorporated 2017. So that is give or take 8 years ago. And so why did we build Centrifuge? Well, gotta start a little bit earlier at the company that we built before, the same founding team that built Centrifuge. Had a very boring traditional fintech before called Taulia. And what is Taulia still doing? Well, Taulia is financing invoices. So it's a specific type of real-world asset, and we do that by going to the largest corporations of the planet— think Walmart, Home Depot— pull the invoices from their ERP system, most famously SAP, pull the invoices from there, and then finance those invoices. Right? Just, uh, very Web 2.0, very traditional. And that all worked great and well until this system that I just mentioned, SAP, this ecosystem, this ERP system, decided they don't want to play with us anymore. So SAP decided at one point, after they spent $4 billion acquiring our main competitor, that they want to change their licensing system a little bit. They want to change their API a little bit. So So it was not that easy anymore for us, for our business, to help those small-medium businesses, those suppliers of the large corporations, to get liquidity. Obviously we didn't like that. So good news is at the end SAP acquired us, so there's a happy ending on that one. But what we decided back then is like, fuck that, the next company we're not relying on the ecosystem anymore. And if SAP doesn't ring a bell, I mean, the same shit happened around the same time, a little bit earlier, with Twitter, with Facebook. So dozens, hundreds of startups built on top of Twitter, on the Twitter API, on Facebook. And once they changed their business model, they got fucked. So a little bit similar for us. Again, happy ending, I'm not complaining. But we decided our next startup, our next idea, gotta be unstoppable. And so 2016, '17, when we then came up with the idea, came across Ethereum. And went into that rabbit hole, I think is the word, and started to build Centrifuge on the Ethereum network. That was one reason. So we want to build something where nobody actually can dictate whether we can run the system or not, whether someone can change an API. The second was on the financing side. We want to build something where those invoices that we want to finance, they can be financed by whoever likes them to finance them. At Talia, we always were restricted. Is the invoice large enough? Is it in a currency that we support? Is it in a country that is supported? So that one we want to change as well. So that's why the idea of Ethereum came up in 2016. We incorporated in '17. I'll let you later talk about the Jesus moment and if we're there yet, but let's go a little bit back again. This slide is not meant to brag, maybe a little bit, but the main, the main message here is this is 2018-19. I'm not sure who was there. Stuff like Dharma was one of the partnerships we had with Maker. We actually defined the DeFi Coalition or the DeFi— I don't know, I can't read it— the DeFi Community. So the term DeFi actually came up 2018, 2 years before DeFi Summer. It was fucking hard. I mean, 2018, '19, there were like 10 people on blockchain. There was our first bear market. And so it was really slow. So we build a lot of that infrastructure. And Luca just complained about the term real-world assets that some of us started to use 2018, '19. Well, I mean, it's all relative, right? Before that we used the term business NFTs. So that's a shitty name. So real-world asset is actually improvement. I'm not saying it's the best term yet. So, well, there's a case to be made. They're just assets obviously, but I still think there is worse options here. So wasn't easy in '18, '19. And, um, but here's a little bit of the, the history that we, uh, over the last 5, 6 years, uh, achieved. Again, incorporated 2017 as a actually pretty traditional company in the middle of the ICO craze. We decided not to do an ICO. And, um, another thing where Luca just mentioned that we started Centrifuge as a securitization engine with the two, uh, uh, with senior and junior tranche. That's actually not true. When we started Centrifuge We had somewhat of a different idea first. We want to bring all the transactions of the world, all invoices, purchase order, all commerce on a blockchain and net that shit. Like, see cycles there and just net it, clear it, and then do the financing. Yeah, guess what? 2017, there was no lot of single corporations that want to play with us, so we had to do the second thing first, the financing, before we could go to the clearing and the netting. And The other one, so a few steps that are maybe important in the, in the history of Centrifuge. Our first real transaction was actually 2 years in with Paperchain. This is the music royalty thing that we, that we just touched on. Really tiny transaction, mainly retail investors put money into the pool, but music royalties, we just advanced pretty much the payments for artists that waited 60, 90, 80 days, 180 days for their money from Spotify. A few years later, our first pool together with Maker. I think it was NewSilver Real Estate.

NewSilver was the first, yes, which is now one of our largest ones still.

So that was 2021. We actually thought and wanted to work with Maker early on, 2018 already, but yeah, shit takes time, so it took us 3 years to get there. And now we're actually there where we are the collateral for some of the stablecoins. So it's Again, not all of the collateral, but parts of it for Maker, for Frax. I don't know if you can read that actually. And for a few others. Yeah, so I mean, stuff started pretty simple when we had the idea, right? We thought about, well, we wanna finance assets, we wanna bring assets on blockchain, we wanna finance them really early on, wanna put them in a little vault, a Maker vault, get some DAI, everybody's happy, gets money. As soon as the invoice is due, we put it back, back the die, and you get your invoice back. So assets, right? In between the last 6, 7 years, shit got complicated. And again, unfortunately you can't read it, I think. I can't at least. But I mean, what are real-world assets over the last 6, 7 years? Incredibly complicated for a variety of reasons. TradFi came in and used their terminology. Regulations came in. Deejays messed up things to some extent as well. So what, what are real-world assets for the last few years is, is a super messy, super complex thing. And where we want to get to is actually to the simplicity back again. Because what is it? It's something that is out in the real world, want to bring on chain for all the attributes that a real-world asset then has on chain. And, um, yeah, I mean, some learnings on the way, or one learning on the way Again, we tried that for 8 years now. We tried it with retail. The first pool that we had was a retail pool. Retail doesn't care about real-world assets, and it just moves too slow, and it's not enough money there. So it's about institutions. We need the institutions to play with us. That is one learning. We need them to be on board. And it's not about building just another infrastructure. We had that experience when we competed in '17 and '18 with those nonsense. What's it called? Enterprise blockchain.

Enterprise blockchain.

Yeah, permission blockchain and Hyperledger bullshit. And, uh, no, it's about DeFi. It's about collaborating. It's about owning your assets. Um, so at the end of the day, it's about institutions, about DeFi. It's about institutional DeFi. That's, that's, that's, that's, that's what we do. You might ask— I gotta hurry a little bit. Um, yeah, why are we not there yet? Like, 8 years is quite some time. We raised some money, so why is this not solved yet? Why are we still talking about it? Why isn't there billions and billions of real-world assets on-chain? Well, we actually pretty close, but still. Well, I mean, we made a couple of mistakes on the way. We centrifuge, but unfortunately the space itself as well. I mean, we like that headline here a lot. Like, if you use collateral, use some real collateral, not some bullshit like Terra did. And there's a lot of that stuff happening, as you guys know, in 2022 and to some extent '23. So that pulled us back. But let's be honest, the excuse department is closed. That's some faults that the industry did. Let's start looking forward and maybe look into the future.

Yeah. And I think, you know, the old head to young head transition, right? I think the timing now has never been better for real-world assets. I joined Centrifuge 2 years ago, and when I started, like, no one wanted to talk to us. No one wanted to talk about what we're doing. Real-world assets still wasn't even really a term that was used. Debated all over the place, you know, tokenization, financial assets, whatever you might want to call it at the time. 2 years later, it's amazing the level of kind of conversation we're able to have. The panel earlier was a pretty impressive group of people coming from a wide variety of backgrounds, all talking about very nuanced, complex subjects of the same thing, right? So it's a pretty amazing evolution that we're on. I think we're on the yellow brick road, and really the goal for us, I think, as an industry is to actually get there, get to real-world assets 2.0, which is the world of institutional DeFi, as Max is saying. And I guess to share a little personal kind of anecdote is I'm very concerned we won't make it, right? I'm very concerned we will actually take a turn, get off the yellow brick road, and, you know, fuck everything up, to be quite honest. It's kind of what we do as an industry, I feel like, in the crypto and blockchain space. And, you know, why is that, right? What is the actual, like, root problem? Why has it— Centrifuge has been building for 8 years and others as well, and why are we still not there? I think it's It's this little guy right here, right? You know, every year we tell ourselves the institutions are coming. And if you go back to 2017, right, the Bitcoin price boomed, everyone said it was amazing, everyone was talking about Bitcoin. If you worked in the space, everyone finally wanted to know what you're doing. 2018, it crashed. And what did we see then? The same exact tokenization story we're seeing today was the same narrative was taking place in 2018. I mean, it wasn't Larry Fink, it was JP Morgan back then. We had the enterprise blockchain stuff. Everyone was talking about, oh, tokenization, tokenization, the institutions are coming. I remember in 2018 at Consensus going to a panel where they talked about looking at exchange transactions, and it was— they were asking the question, are exchanges, you know, seeing institutional volume? And they basically said that there was like 2% of institutional activity, and the rest of it was all like wash trading and retail, right? You could repeat that same exact experiment today, and the margins would be much larger, right? Maybe it was like A million bucks back then would be $10 million, if not a billion today. But the exact same story is true. We have way less institutions than we should have. And for as much as, you know, the boy who cried wolf said the institutions are coming every year, I, you know, I'll just put it plainly. I don't think they're here. I don't think they're coming. Right. So, you know, what's the fix? I've come up with a 12-step guide. I was asked to lower it to 3 because that would be too long of a panel. But I think the reality is we have to build those institutions. Institutions. Um, you know, an easy way of saying this is I don't think BlackRock— anyone should expect BlackRock to bail us out and come in and just start transacting on-chain and provide all the dollars and sophisticated investment capital. I think we legitimately have to really build new institutions, the start today as not institutions, and ultimately become the institutions of the future. And I have these kind of 3 little, like, we'll call them again 12-step program, 3-step program that I think I want to share with everybody. And I think it's good memes, but I think it's a little bit controversial, right? And like the first is, I think, you know, it says build, not biddle, right? I'll just say it very simply. I think degens are a fucking crutch. All right. I really, really mean that. I'm a degen. I appreciate all the degens in the room. But if you're trying to build something that you call institutional DeFi and you're doing it for unsustainable boosted yields linked to nothing, I mean, what the fuck are you doing, right? I really think that we have to build better structures, better systems from the get-go. And I think if you want to build institutional DeFi, you have to start with quality and compliance and then kind of bake in utility. And I'm not talking trash about permissionless systems or decentralized systems. I actually think real-world assets as an industry can learn a lot from decentralized maxis when it comes to building like ideologically pure systems. But I mean, I'll say it again, I think degens are a crutch, right? And then this one, you know, I was trying to play with a little bit and I'm not trying to talk shit about Axie Infinity. I'm a big Axie guy myself. Come find me later, we can talk about it. But, you know, look, play-to-earn was a thing, right? Then we got to, you know, T-bills, 2023 rates were up. Everyone's like, oh yeah, I'm fucking smart, I'm investing in T-bills, right? I will go out on a limb here, and I actually don't think it's that controversial, and say that if you're building in the real-world asset industry, I don't think there's a single person in this room or in the industry that actually has a full view of everything they need to solve and every problem they can own. I mean, you know, you might know a lot about credit, but you probably don't know a lot about crypto. You might know a lot about crypto. You definitely don't know a lot about credit. You might know a lot about technology and products. You probably don't know a lot about the business and commercialization. These are really, really complex stuff, right? I mean, you know, Max said it itself. We've complicated the industry, I think, too much ourselves. I also think we've done a disservice to ourselves by not really investing in education and learning. And I really do think that if you really want to make it, you want to get back to an investor mindset where we're actually making real money and changing the world. We have to invest in learning not only for ourselves, but the investors that back us, the participants in our market and our ecosystem, the partners we work with, and we have to educate each other to kind of get there. And I really don't think that we honestly spend enough time doing this, to be quite honest with you. And then, you know, finally, there's a bit of like a sex ed joke in here, right? Where it's like, does everyone know what the DeFi condom is? All right, for those who don't know what the DeFi condom is, I don't know where you've been the last 5 years on Twitter, but essentially it's the idea of, you know, you have a token and you wrap it with some thin compliance layer and it's like, you know, there you go, you're safe, right? I think that's a bullshit way of approaching the industry. Again, you want to build institutional DeFi, you shouldn't be talking about wrapping it up as the only simple way to do it. You should really be building kind of fundamentally better ideas. I put contraception here, but you can put self-regulation, whatever you want to do, whatever your kind of sex ed joke of choice is. Um, but really what I mean there is that we have to build kind of fundamentally improved systems, and like, there's no better way to kill innovation in finance than losing other people people's money. And if we just experiment in ways that are kind of wild and dangerous, and we know they'll explode, we know mistakes will happen, we know that this, this will be kind of what happens in finance, it's part of the process. But if we do it in ways that we allow these kind of destruction to kind of overtake our industry, recreate Luna, recreate FTX, I mean, you know, the world of institutional DeFi will never happen, right? So ultimately, I think it's, you know, contraception, not condom. So just wrap it up. We actually have to build fundamentally improved better systems altogether. Alright, so it's very preachy. I'm the guy standing up in here and kind of sharing things with you. And then, ah, there you go, right. Um, so like, what does that actually look like? And I think, you know, Max can help me kind of call out some of the people here. But this is what I think really the future is. And this is a super hypothetical example. There is actually a press release with Fanoe and Centrifuge today. You can read more about that. But what I'm trying to do here is actually sketch out a picture, which I think is very reasonable, of what can be achieved right now with everybody that's in in the room today, you know. And very simply, I think it's you have kind of online KYC that's integrated on-chain that actually solves really fundamental problems when it comes to compliance with AML and KYC laws. We can debate later whether that's the right thing or not, but I think that's the truth. And that's someone like Violet, right? And they're in the room with us, those guys in Mob. They're a good friend of ours. And then ultimately you have customers in Finoa, right? And Finoa customers are large institutional customers holding stablecoins, VC funds, operators, businesses who make money on-chain hold their assets with a qualified custodian like Finoa. Those assets can now be connected into the world of DeFi, into Centrifuge. That's the headline today. And you can now start to use those to actually get yield on those stablecoins, right? No longer you have to just hold them and take the risk of a stablecoin. You can actually invest in Animoid treasury shares, which— Animoid is our issuer that offers treasury bills. Then taking that a step further, and I'm not one to really, you know, back speculation and leverage because I think those those are kind of the fundamental properties of finance. You can go to an OTC desk like Galaxy. Galaxy does this already today. They offer Bitcoin perps. There's never a better time to speculate on the price of Bitcoin than right now, or yesterday, in my opinion. And you could actually use your Animoi shares as collateral. You don't have to put up cash as collateral. You don't have to put up ETH as collateral anymore. You can actually use a very capital-efficient collateral source, deposit that Galaxy, and you can actually then, you know, execute the trade on Bitcoin perps. This is a world that isn't a year away. It isn't 2 years away. It's legitimately 2 to 3 months away if we want it. And what I mean by if we want it, we have to really kind of come to the point of building together and investing together and really collaborating and kind of getting us to the right point where we're focused on the right things. And again, not kind of just chasing short-term cyclical speculative opportunities. I think that's the future of real-world assets. And we have to kind of get in that mindset. And I think it's really incumbent on us as individuals and builders in the space to really dominate and own that mindset rather than letting someone else tell you to do it.

I mean, just to be clear, that last example, if you go one slide back, yeah, on the right side, that's a little bit visionary. The left side is today. This is not hypothetical. If I'm using Finoar today, a custodian, and I have my, my USDC sitting there or my stablecoins, I can invest them into Centrifuge pools from there, which is kind of cool.

And there you go. Come party with us. Or I mean, build with us.