Centrifuge's deeply thoughtful approach to Token Design and Integration

I am very new to the blockchain and cryptocurrency world and still trying to understand how even leading projects like Bitcoin and Ethereum operate in this new era of digital finance and open source , decentralised protocols.

I began to take interest in 2017, coinciding with the boom in ICOs and the abundance of new projects promising to ‘moon’ and provide lucrative returns to investors that if anything like me had little idea about the real world value of these projects. What I didn’t realise at the time is how important the token can be, not only as an instrument for investors hoping it will increase in value, but if it was needed for the project to work in the first place and if and how it was was aligned to its broader goals and functionality.

Some things I think about now is if a token is even necessary for every blockchain project; does it make sense in the application, is it useful in the architecture, is it likely to be utility or security, can be it a vehicle for governance, and is it consistent with the vision, aims, function and strategy of the project etc.

I discovered that Centrifuge, unlike many other projects, decided to build without releasing a token, at least not in the conventional way. At first, this approach seemed to me strange and counterintuitive. Upon reading the rational for this decision covered in the literature online, I can not only understand but appreciate the Centrifuge’s Team decision not to issue a token. On my understanding, the decision not to included:

  • it can add undesirable complexity unless the product fundamentally requires it: A token brings with it an array of issues, including design, issuance and distribution schedules, usage fees, reward frameworks, governance implications etc.

  • removes the risk of people attacking the system for financial profit and to extract token value, or mitigate perhaps the ability to use it as a speculative instrument which can destabilise the project’s aims.

  • recognition of the competing/conflicting interests of investors on the one hand and project developers and community members on the other- with investors wanting a rise in token value, listing on large exchanges and developers/community members perhaps wanting a more stable price and time to build the project and set, meet and revise their roadmap. These goals are not always in harmony and can sometimes derail a project, particularly at its outset. It’s obvious Centrifuge sought to prioritise building a viable, practical product over issuing a token during the formative years.

Rather than opting out of a token altogether, Centrifuge appears to have built a more sophisticated model through the introduction of its Tinlake Pools. This model goes hand in hand with Centrifuge’s goal to democratise and make fairer, more efficient and transparent the financing of projects and interrelationship between Asset Originators, Investors and Underwriters.

The creation of the Tin Token seems to allow anyone to participate as an underwriter for a project through the depositing of Dai or other stable coins into a pool and staking it. Having a pool of disparate but committed participants means they can help shape the financing terms of that asset. The DAI/other stable coin in the pool can then be used to finance other projects, which might not otherwise be able to attract the interest of traditional underwriters (banks). The Tin Token can serve as a potential high reward/high risk instrument for investors.

The Drop Token in contrast is a lower risk/lower yield option that offers more protection from losses and can be used in the Decentralised finance space.

One of the strengths of this model is that participants can develop a token portfolio subject to their risk appetite that has a ratio of Tin and Drop tokens.

This multi-token model (I might leave the RAD token to one side as I’m feeling a bit overwhelmed!!) stems from the Centrifuge’s vision to transform financing and ensure higher quality of assets, reduce risk to the system and inspire a community driven mechanism for distributing funds to innovative businesses.

My knowledge gaps with Centrifuge are enormous but I am excited to learn more and would really appreciate any comments, corrections or suggestions to help me improve my understanding.

I hope I have not inadvertently provided false or misleading information about this specific topic - I am still very much learning so any feedback would be welcome.