Understanding the Impact of DeFi on Real Word Assets with Lucas Vogelsang

Discussing the future of finance and technology with Lucas Vogelsang, CEO and Co-Founder at Centrifuge

Ishan Pandey: Hi Lucas, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind Centrifuge?

Lucas Vogelsang: I’ve spent my entire career working in startups, first in web2.0, where I quickly realized the inefficiencies with our current financial system. Finance gives people the power to transform ideas into reality, yet the current system is inefficient, not transparent, and serves the largest corporations at the expense of the small businesses that account for over 90% of companies globally. I was always excited about building technology to solve exciting and hard challenges. When I started diving deeper into Ethereum in 2017, I realized the potential of crypto to build a more open, transparent, and affordable financial system.

Centrifuge started in 2018 with a vision to change global trade rules. We were the first protocol to bring real-world assets on-chain with MakerDAO and NewSilver and continue to remain focused on getting the entire world of structured credit on-chain.

Ishan Pandey: Please tell us a little bit about Centrifuge and Real-World DeFi.

Lucas Vogelsang: Centrifuge connects real-world assets (RWAs) to DeFi - hence Real-World DeFi - creating a fully transparent market which allows borrowers and lenders to transact without unnecessary intermediaries. Ultimately, the protocol aims to lower the cost of borrowing for businesses worldwide, while providing DeFi users with a stable source of collateralized yield that is uncorrelated to the volatile crypto markets. Centrifuge was the first DeFi protocol to bridge RWAs on-chain and has integrated with some of the leading DeFi protocols, including MakerDAO and Aave. Underlying RWAs and liquidity providers fully collateralize centrifuge asset pools and have legal rights to the collateral in the case of a default. This makes Centrifuge unique versus many of our RWA peers that largely focus on undercollateralized lending. NFTs are used as digital representations of the real-world collateral on-chain, allowing liquidity providers to have visibility on the exact assets they finance. The protocol is asset class agnostic and has created liquidity pools for assets such as mortgages, invoices, microlending and consumer finance.

Ishan Pandey: Ethereum will switch the cryptocurrency consensus method from Proof-of-Work (PoW) to Proof-of-Stake as it approaches the Merge. What will the post-merge scenario look like for Ethereum at large?

Lucas Vogelsang: The switch to proof-of-stake is a great foundational change at the heart of how Ethereum works. A successful merge should be good for the price of ETH in the short term, but the real impact will take place over a much longer timeline. The new block production mechanism will directly impact Ethereum’s underlying infrastructure, especially when considering how the new MEV implications will affect the behaviour of Ethereum’s fee market. The competition for low fees should eventually translate to the benefit of users, but there will be friction as the market takes time to adjust and react to the realities of proof-of-stake. The long-term positive impact on L2s, the inclusion of sharding, and the continued diversity and innovation that the merge will encourage will be exciting.

Ishan Pandey: The hoopla surrounding the new technology has been matched by growing worries that NFTs may become the focal point of traditional financial crimes like money laundering and wire fraud given the ongoing popularity of some NFTs and the possibility of their use in the Metaverse and beyond. According to you, will the industry face a regulatory crackdown in light of such issues?

Lucas Vogelsang: While we will continue to see enforcement actions for fraud and sanctions violations, we don't expect a general crackdown. Key regulators in the US and EU seem to be bringing parts of the crypto space into a regulated environment. It would not make sense to launch a major crackdown while the regulatory perimeter is being discussed and defined at the legislative level.

Ishan Pandey: According to you, what are the best practices that should be followed in relation to cybersecurity in the DeFi industry?

Lucas Vogelsang: When designing DeFi protocols, emphasizing simplicity is key. Complex protocols are hard to develop and even harder to audit. For example, upgradeability in Solidity smart contracts is a pattern that adds a layer of indirection and complexity to a protocol, which is difficult to check and thus has led to many exploits. Beyond the design of protocols itself, teams should spend more time ensuring the security of their front end. We have seen many exploits recently, e.g. the Curve Finance exploit hack, that was caused by issues in the security of the hosting or domain management of the frontend. These kinds of supply chain issues are hard to prevent due to the reliance on centralized services such as DNS, but are more regularly becoming targets for blackhats and more time should be spent on preventing these issues.

Ishan Pandey: According to you, what are the certain limitations surrounding Dapps and Defi applications running on the ethereum blockchain?

Lucas Vogelsang: Any Dapp or DeFi developer knows that gas optimization is the key metric to focus on. This means reducing the amount of state stored on-chain and the number of transactions required for interacting with their dapp or protocol. Unfortunately, this can also limit the possibilities of an app. E.g. this makes many gaming use cases almost impossible on Ethereum, which has led these projects to find other ecosystems to build on. Another limitation is the ability to schedule code automatically. Everything needs to be user-triggered. Being able to run code automatically is a powerful feature that can unlock many new use cases.

Ishan Pandey: Though both DeFi and CeFi provide a variety of financial services relating to cryptocurrencies, they are vastly different from one another. Kindly elaborate on some of the major differences for our readers.

Lucas Vogelsang: CeFi is opaque as users have no idea how their funds are deployed and need to “trust” a third party. In the last few months, we have seen many CeFi platforms struggle following the Three Arrows Capital (3AC) collapse and reckless lending. DeFi, on the other hand, gives you visibility on the all process without introducing any “trust” assumptions or need to KYC - not your keys not your coins.

Ishan Pandey: According to you, what next trends are we going to see in the blockchain and DeFi space?

Lucas Vogelsang: 3 trends I am excited about:

• Structured Products: these are pre-packaged strategies that allow anyone without prior knowledge of finance or derivatives to access new yield opportunities. DeFi has the potential to bring these products to mainstream usage.

• Cross-chain dapp: It is now possible to create composable cross-chain protocols that are no longer restricted to an ecosystem, thanks to the development of new general messaging passing bridges.

• Privacy: Tornado crackdown highlighted how vital privacy is - I expect a new surge of privacy projects, particularly those utilizing ZK technology.

And, of course, keep an eye on Real-World Assets (RWAs)!

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