RFC: Additional CFG Token Utility

Proposals for additional functionality for the Centrifuge Token (CFG) to improve the protocol

The Centrifuge Parachain is live! So, what’s next? If you haven’t had a read yet - check out Lucas’s post on our Real World DeFi Roadmap. He touches on a crucial element of the parachain launch, and with it, the migration of asset financing pools from Tinlake on Ethereum to the Centrifuge parachain: CFG utility.

CFG utility should empower holders to participate in the protocol long-term and actively shape its functionality. The CFG token currently has 3 main utilities: transaction fees on the Centrifuge parachain, on-chain governance, and chain security. In this post we propose 2 additional key utilities to implement with CFG for the Centrifuge community to consider.

From here, the governance process could follow the following steps:

  1. Community discussion. Please comment below!
  2. Signaling vote on the forum. A vote will be posted for the community once it looks like we can get a good temperature check. Individual topics could also be separated and voted on independently.
  3. A clear and detailed proposal (i.e. including relevant parameters and reflecting the discussion around this proposal and the signaling vote on the forum)
  4. An on-chain vote for CFG holders on whether to implement the detailed proposal
  5. Technical implementation according to the specifications in the detailed proposal (if the on-chain vote passes)
  6. An on-chain vote to upgrade the chain to implement the newly developed features.

*Please note, there will be a follow-up post explaining the voting procedure and policies for the Foundation and core team.

Proposal #1: Turn on Protocol Fees

The first proposal for the community to consider is to turn on protocol fees. These protocol fees can be implemented as servicing fees in CFG tokens for use of the protocol for locking an NFT, entering into a borrowing transaction, etc. These fees would be paid in CFG into the on-chain treasury, and the token holders would govern the best way to deploy these funds to grow the protocol (ex. grants, or burning a percentage of the treasury each spend period, at a rate set through CFG-holder governance.) Read more about how the Treasury is implemented with Substrate in the Polkadot documentation here.

Why now? And what does this mean for token holders? Given the growth of Centrifuge pools on Ethereum to over $80M TVL (total value locked), and the upcoming launch of pools on Centrifuge chain, the Community can consider that the protocol is both large and mature enough to support protocol fees. Implementing such fees on Ethereum would have been too complex and expensive while borrowers were paying high gas fees, and come at a stage where Centrifuge was still proving its value as a protocol. With its current size and coming updates - protocol fees could start to have a real impact on the protocol’s future growth potential, and CFG holders’ participation in that growth by creating a link between CFG and the growing use of the protocol.

Proposal #2: Staking on Pools

The second proposal is to implement on-chain staking to enable CFG holders to determine which pools to launch. This mechanism could help the Community to curate pools on Centrifuge, enabling Community-based engagement for all Centrifuge pools. CFG holders would stake towards pools they wish to see launch on Centrifuge. Pools that reach the threshold are then able to open and accept liquidity to finance assets. CFG-holders that are staked to these pools could receive a network reward from the protocol fees (see proposal #1 above). CFG that is staked towards a pool can also be slashed under specific circumstances to incentivize that only quality pools are able to launch on Centrifuge.

Open questions remain for this proposal that should be included in the detailed parameters presented for the on-chain vote:

  • Implementing on-chain staking for pools would be technically difficult and may take some time to implement.
  • What is the staked CFG threshold for a pool to go live?
  • Should the amount of CFG staked increase in order to grow the pool past a certain size?
  • How is the staking mechanism implemented?
  • How are fee rewards distributed to stakers?
  • How is a stake slashed?

Additional Considerations

We have proposed these 2 utilities as the most effective and impactful functionalities the protocol and its token, CFG, could have today. But, of course, there are many other utilities that the community can consider now, or in the future.

Is there another utility you think the community should consider? Drop it in the comments.

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I think having an insurance pool or some supply set aside to cover pool losses in some way would be extremely beneficial. I haven’t thought through the details, but there are probably examples out there. Perhaps it should come from the staked CFGs.

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Hey Cassidy I love the idea of increasing CFG utility via the two proposals presented above. Would protocol fees primarily be intended just for transactions involving asset origination or also for transactions by LPs including locking and redeeming your investment?

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Proposal 2 - involving CFG holders to essentially (1) vote on what Pools/Projects to launch, (2) allow pools to incentivize CFG stakers with transaction fees and (3) slash CFG stakers, is sort of a flawed approach.

(1) CFG holders are just your everyday people - there is a knowledge and information asymmetry / disparity for the average person such that they will be unable to make an informed decision on the underlying risks / value of a project. Absent some way / person of accountability to bridge that knowledge gap and give recommendations - the votes will not be merit-based.

(2) incentives / ROI - will be only value metric that CFG holders would be able to decide on - which means CFH holders would be incentivized to launch Pools with high fees over those of good value.

(3) coupling the above with slashing - creates for system that would be quite risky for CFG contributors - which deters community involvement.

One way to fix this so that you can keep all the above elements is to add a system similar to DOT’s validator approach - where CFG holders nominate validators whom are incentivized (by a % of the nominators fees) to look into Pools / Projects and do DD and risk assessment on behalf of nominators. A positive track record would enable them to charge higher fees, and vice versa. Validators could publish their reports on a CFG database for all CFG participants to review and tip/discuss.

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I second both proposals because these two will increase the utility of the CFG token strongly.

Is my understanding correct that both proposals belong together or can they be treated independent from each other?

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Big fan of Proposal #1. Protocols which generate revenue in fees are a sign of a protocol growing up and becoming serious IMHO. Centrifuge is definitely ready for this.

Proposal #2 is cool, but I can see a number of challenges in making this work. My main concern is whether the community are well enough informed to decide which pools should be launched. Not that the community are stupid(!), just that the structure of these pools can be very technical with a lot of risks inherent within them. I know that the Centrifuge team atm are doing a lot of DD and risk analysis on Issuers, Asset Originators, pool structure etc, - it would be a shame to lose that completely. Maybe a middle ground might be something like the Community vote and decide which type of pools they want and don’t want to exist (eg asset type, loan length, must not be negative environmental impact etc) and from there either the Centrifuge team or a decentralised risk assessor with expertise in the field can decide which pools actually do launch.

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Regarding proposal #2, I believe that stakers should be able to lock up their stake for a predetermined amount of time. Locking your stake suggests a greater trust in the pool being proposed and I believe deserves a higher incentive compared to tokens that are staked without a lockup or shorter lockup. Also, this allows borrowers and investors to more accurately predict the amount of CFG staked towards a pool in the future.

However, I don’t think staking with a lockup should contribute more to a pool reaching its threshold to go live. A stake of 1000 CFG should push the pool closer to threshold by 1000 CFG no matter the lockup.

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Absolutely agree to Ash’s idea of locking the tokens for a determined time (1 month, 3 months, 6 months?).
Revest Finance has the same concept with their financial NFTs

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hi there! could we stack the token so Centrifuge can use these funds to develop marketing/visibility and attract more users? in my opinion there should be more publicity around the project…

I like this idea but it’s not directly linked to assets in pools on Tinlake.

Are you interested in helping out or do you have any ideas to improve marketing?

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no I’m not a marketing expert at all!!! lol!! and I couldn’t help much I’m afraid!!

I’m a big fan of the “centrifuge explainer video” linked on the web site, and I think more similar videos should be published now that Centrifuge is on Polkadot.
a video could explain how pools are created (or “decided”) with a brief resume of what they do (these kind of resume should be available while clicking on the pools in Tinlake by the way); a video should explain the “Real world asset market” functionality/specificity ; a video could explain how investors will be able to use the Polkadot ecosystem to invest in Centrifuge in the near future (talking about the aUsd for example. it’s what I’m actually waiting for!! :innocent:).

I’m sure quick videos will help and attract more users, specially if they are published on the social medias.

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Absolutely! Explainer videos and educational content in general is necessary to educate newcomers and intermediates to experts.

@Rhano : are you interested in getting in contact with @Cedric ?

If @Cedric has knowledge about how to make animated videos, I will gladly get in touch to see if we can work something out.

I have plenty of ideas on how to present a lot of the information - but currently I lack the skill of bringing them to life in videos.

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hello @Rhano ! I have no skills at all with making animated video and in my opinion the use of professionals should be the best solution… and since it’s costly my first idea was to use the token as funding for that purpose.
I’m sure the community would be happy to participate in the project development/improvement by stacking their CFG. we could imagine an option where a part of the stacking reward is used for commercial & marketing?

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I like the idea but this should be treated in another “Request for comments”. If you want to create a proposal on your own you need the right steps of the governance process. Are you familiar with it?

Here is an excellent user manual with the explanation of the process

https://gov.centrifuge.io/t/governance-manual/3725

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I think this reply has not received enough attention.

In my opinion the approach would be very valuable especially in combination with the underwriter-protocol.

In General my personal opinion is that token holders, in most cases, should put their stake behind network actors which actions, goals and sucess-metrics are easy and understandable.

Although, one might argue, that pool-maintainers hold a network role too, but as said above I think their actions, goals and success-metrics are way harder to unify and to understand.

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Thank you @cassidy for this!

I agree with #1. It’ll be a fundamental positive to have Centrifuge earning revenue as mentioned by @OgTheKingOfBashan.

#2 I think could use some more thought. It’s a good start — we do need a decentralized way to do DD / risk assessment on pools in the future. Eventually pools should be able to launch without needing any input from the core team building the protocol.

But as @Frosties puts it: CFG holders may not know how to best make a decision for a pool. Pools could be in a flashy sector or have attractive returns and get voted in — but have issues with their underlying structure. Personally, I’m intimately familiar with how Tinlake works but still wouldn’t feel confident in assessing a new pool.

I also like @Frostie’s idea to have people nominate ‘validators’ — I’d imagine it as a sort of ‘delegation’ — so that people can stake their CFG to those with the experience to do full assessments of pools.

This way, experienced assessors can ‘audit’ an incoming pool and be rewarded for their effort, while also providing to those who delegate their CFG to these auditors. Whether the underlying tokenomics would work here — or if this is veering into territory of a broader ‘underwriter token’ idea — is not something I can say for sure as it’s a bit beyond my knowledge! But that’s my 2 cents.

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This is an incredibly important statement.

I think it needs some qualifying.

The “determination” is perhaps too strong a word, and I’d like to offer “prioritization”. This community is seeing first hand how complex and unique RWAs are in the world of DeFi. We cannot simply copy and paste what’s worked in DeFi to date and must continually challenge our assumptions in order to be successful.

As we look ahead, I think the Staking on Pools naturally takes us into the concept of the underwriter token (risk assessment / alignment).

What I am curious to understand from the community is how other would want to stake on Pools? The role of risk assessment, due diligence, structuring, etc…not to mention the legal framework, verification agents, and other third parties…

It’s pretty incredibly the depth and scope to which Staking on Pools could be considered.

As we think about #2, and “staking on Pools”, I’d like to encourage the community to think about what they would ultimately:

  1. Want to stake against (yield, asset class, geography, ESG impact, etc…)
  2. Amount to stake (how would you decide to stake a little or a lot?)

I personally don’t have the answers, and I’m continuing to wonder what question I would want to be asked (and answer) in order to make that decision.

Undoubtedly, I think this could be tied to how the POP matures over time and how we begin to see each idea emerging on the Forum begin to benefit one another and provide a comprehensive value proposition to CFG holders.

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I agree the POP will have a big impact on staking on pools and the selection criteria will be of huge importance as well.

I personally would highlight the ESG (Environmental, Social, Governance) impact of one pool everyone should think about before placing his/her CFG.

Which pool does someone want to chooose in terms of social impact and relevance? Because choosing one pool is actively supporting it and the AO can use the lended money to pursue its business idea. A very important question and the amount of CFG for staking too. If I am convinced of an idea I rather put more CFG to stake.

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I would like to share my views as well in the ongoing discussion:

In terms of ESG assessment, I doubt participants would be aware or possess required knowledge to make fair assessment. However, the rationale behind staking CFG should be there. For eg: I would like to see Centrifuge ventures African territory and provide lending/borrowing services to Micro, Small, & Medium Enterprises via AOs/Issuers since the potential to tap in huge. This is kind of similar to branch 3 pool which provides micro loans as well in India. This in a way can help boost socio-economic outlook of the geographical region. On the other hand, there can quite a bit of challenged owing to several factors such as current financial credit system, banking facilities, political reasons and others. However, with proper risk assessments and strategy, I understand this market is huge and RWA DeFi can its significant play.

Alternatively, providing uncollaterized loans can be on cards to explore as well. We can have separate pool with regards to this and borrowers/lending business can borrow based on credit limit. Centrifuge Investors can invest in this pool (which provides inbuilt insurance coverage) and earn yield. Upon repayment by borrowers, the investment is distributed back to all investors. Just an option if we want to explore more.

I believe the above does address the factors such as yield, assets class, geography, ESG impact etc as stated by @ctcunning .

In terms of CFG amount to be staked for pool to be live, I believe the % threshold shall be based on the amount that the AO is keen to borrow from the protocol. The same shall be dynamically adjusted since its revolving pool we are discussing.

Additionally, what I would like to see is that in terms of incentivization of liquidity borrowers. While participants engaged in pool-to-go live process (either directly or through delegation method as discussed above) will get CFG rewards for staking, the rewards distributed for this should be vested for certain time period and release linearly (over 12 months). While individuals can un-stake their locked CFG for pool (after certain time), the rewards to claim can be claimed linearly. We want to have less continuous selling pressure of CFG token. Also, I believe, we can explore to incentivize the Pool liquidity providers in other tokens other then CFG if possible.

Lastly I would like to touch upon the treasury. The revenue incurred from protocol fees shall be leveraged to earn higher yield rather than sitting idle. The fees burning mechanism is not something I am too keen on but not against as well. Focus should change from incentivizing liquidity toward incentivizing fees. Holders shall be rewards through fees and not emissions.

The above are my high level thoughts regarding the CFG token utility and Pools.

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