Centrifuge, Preparing for the Bear Market While Growing Your Capital

Reliable Cash Flow in Every Economic Climate

In Centrifuge, interest is compounded every second, meaning an APR of 6% results in an APY of approximately 6.1837% due to continuous compounding. 

https://app.centrifuge.io/

Understanding the key concepts:

APR vs. APY

  • APR (Annual Percentage Rate): The nominal yearly interest rate, not accounting for compounding.
  • APY (Annual Percentage Yield): Reflects the actual annual return, including the effects of compounding.

Centrifuge pools are divided into tranches, each offering different risk and return profiles:

  • Senior Tranche (DROP): Offers lower, stable returns with higher protection against defaults, as losses are first absorbed by junior tranches.
  • Junior Tranche (TIN): Provides higher potential returns but bears the first loss in case of defaults, making it riskier.

For instance, the New Silver 2 pool targets a 7% APY for the senior tranche and 15% for the junior tranche.

Centrifuge employs a multi layered approach to risk management:

  • Issuer Due Diligence: Issuers undergo a Pool Onboarding Proposal (POP) process, including assessments by the Centrifuge Credit Group. 
  • Risk Buffer: Junior tranches act as a buffer, absorbing initial losses to protect senior tranche investors. 
  • Overcollateralization: Issuers often finance only a portion of the asset’s value, reducing default risk. 

Investors can track performance and risks through:

  • Centrifuge App: Provides real time data on pool performance, APYs, and tranche details.
  • Subscan Explorer: Offers insights into staking rewards and validator performance. 

Returns vary based on tranche selection and pool performance:

  • Senior Tranche: Typically offers stable returns between 4% and 7% APY.
  • Junior Tranche: Targets higher returns, around 15% APY, but with increased risk.

For example, investing $10,000 in a senior tranche with a 7% APY could yield $700 annually, while the same investment in a junior tranche targeting 15% APY could yield $1,500, assuming no defaults.

Risks to consider:

  • Credit Risk: Possibility of borrower defaults affecting returns, especially in junior tranches.
  • Liquidity Risk: Potential delays in redeeming investments due to pool liquidity constraints.
  • Interest Rate Risk: Changes in underlying interest rates can impact returns.
  • Regulatory Risk: Evolving regulations may affect DeFi protocols and asset tokenization.

Centrifuge offers a unique opportunity to earn yields by investing in real-world assets through DeFi. By understanding the structure, returns, and associated risks, investors can make informed decisions aligned with their risk tolerance and investment goals.