The Critical Role Of Real-World Assets In The Future Of DeFi
July 11 2022 - 12:14PM
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Crypto was born from the desire to create a better, more equitable
financial system built atop of an infrastructure that’s inclusive,
and accessible to anyone, no matter who they are or where they
live. Since the introduction of Bitcoin in 2009, the cryptocurrency
industry has matured far beyond its original concept as a medium of
exchange, spawning countless new use cases. Decentralized finance,
as these new use cases have collectively become known, refers to a
range of financial services that can be accessed by anyone without
the involvement of a centralized institution or intermediary, such
as a bank, broker, or loan shark. DeFi, as it’s known, provides
banking for the unbanked, or banking without a bank. Its scope goes
far beyond simply saving money and sending payments. These days,
DeFi refers to a world of cryptocurrency exchanges, automated
payments, capital transfers, spot and futures trading, lending,
borrowing, high yield staking, liquidity provisioning and much
more. The truly remarkable feature of DeFi though is not the extent
of its functionality, which these days has matched – and some say
even surpassed – that of traditional finance. Its most important
quality is that it can be accessed by anyone at all, without any
need for a bank account or identification. Just as impressive, DeFi
is designed in such a way that no single entity can have more power
over the financial network than anyone else. DeFi is decentralized
by design, with matters of governance dictated by the network’s
users rather than just a few individuals. DeFi’s Dilemma For all of
its achievements and promises, DeFi still has a long way to go.
According to DeFi Pulse, at the time of writing the total value
locked in all DeFi protocols, it tracks stood at just $41.56
billion. That’s far less than some companies even. Apple, the
richest company in the world, has a market capitalization of $2.37
trillion in comparison. DeFi has also been accused of being nothing
more than a playground for so-called whales who make up the crypto
rich, and the home of abundant scams that simply accept people’s
funds then disappear into the sunset, taking their user’s tokens
with them. One of the problems with the DeFi industry is that it
seems to have lost sight of its original vision of getting its
services into the hands of the people that need them most. DeFi’s
potential to bank the unbanked has been written about countless
times. One of the biggest problems it can solve is that of access
to capital. In the traditional financial system, only the biggest
businesses are able to get direct access to liquid capital markets
in a timely manner, while the vast majority of smaller and
medium-sized businesses are left to fend for themselves. Most DeFi
users are far too focused on getting rich for themselves. It means
they’re not concerned with building applications and platforms, and
coming up with creative ways to increase liquidity in the space.
There was a time when the words “mass adoption” was on everybody’s
lips, but today it seems like barely a whisper. While lots of cool
things are undoubtedly happening in the DeFi, the space also needs
more focus on how it can extend its benefits to everyone. DeFi’s
Destiny It’s for this reason that the promise of bringing
real-world assets (RWAs) into DeFi is such an exciting one. When we
talk about RWAs, we’re referring to anything that exists in the
real world that can be “tokenized”, or represented on the
blockchain as an NFT or cryptocurrency, and used to provide
liquidity to DeFi. If we can bring RWAs into DeFi, it would result
in a flood of new capital and liquidity in the space that many
believe would be truly transformational. It’s an almost unlimited
and virtually untapped market that’s a perfect fit for DeFi. The
technology exists to tokenize assets such as real estate (both land
and buildings) and non-physical things such as invoices and advance
payments and bring them onto the blockchain as non-fungible tokens.
If exploited, these assets could bring trillions of dollars’ worth
of fresh liquidity into the space. It would finally solidify DeFi’s
position as a viable alternative to traditional finance. There
would be big economic benefits too. The biggest beneficiaries of
such a flood of capital into the DeFi sector would be small and
large businesses that have previously always struggled to gain
finance. One recent study by a U.S. bank found that 82% of small
businesses that went bust did so because of a lack of cash flow.
Yet the vast majority of those businesses likely have assets. The
problem is that traditional banks don’t want to touch those assets.
This is where DeFi could make a difference. Struggling firms would
be able to use those assets as collateral, with ordinary users
stepping in to provide the capital they need to stay in business.
RWAs will enable DeFi to step up to the plate as a viable
alternative capital source for thousands of businesses that
struggle with access to finance. At the same time, the introduction
of tangible assets would also provide encouragement to investors
with a more conservative appetite for risk to consider putting
their money in DeFi. One of the advantages of RWAs is that they
provide a stable return that’s uncorrelated to the wild ups and
downs elsewhere in the crypto economy. RWAs will provide more
accessibility, stability, and equality, paving the way for much
broader adoption. Making It A Reality There’s a big role to be
played by startups like Centrifuge that are creating the
infrastructure required to bring RWAs into the DeFi space. Through
Centrifuge’s decentralized application Tinlake, businesses can
transform assets with tangible value, such as car loans, trade
invoices, music streaming royalties, or IOUs, into digital
securities. Centrifuge will then issue an interest-bearing ERC20
token against those securities, which can be used across DeFi
protocols to borrow crypto. At the same time, Centrifuge provides
stable yield to investors who’re willing to lend their capital. Up
until recently, Centrifuge’s offering was fairly limited because it
could only tap into liquidity held within its own ecosystem. That’s
why the recent launch of a new solution called Centrifuge
Connectors will be a game-changer, helping to bridge the gap
between RWAs and the wider world of DeFi. Connectors was launched
in collaboration with Ava Labs – the developer behind the Avalanche
blockchain, optimistic interoperability protocol Nomad, and smart
contract platform Moonbeam. Centrifuge Connectors allow borrowers
to access capital from multiple different DeFi protocols and
blockchains, without the need for any third-party integration to
bridge those assets. In this way, it becomes possible for investors
to provide liquidity for borrowers without first bridging those
assets to the Centrifuge blockchain. Previously, users would be
required to transfer their liquidity to Centrifuge, first of all,
adding lots of hassle to the process. Centrifuge Connectors,
therefore, eliminates one of the biggest obstacles for investors,
making it much easier for anyone to participate while reducing the
cost and difficulty of capital acquisition. In return, investors
will finally be able to tap into a stable yield that’s free of the
volatility that plagues traditional crypto assets. Thanks to
Centrifuge, countless businesses who were locked out of the world
of traditional finance now have an accessible way to seek capital
when it’s needed, using assets such as invoices, real estate, and
payment advances. What’s more, those assets are collectively worth
trillions of dollars. In other words, it represents an almost
limitless untapped market that DeFi is only just beginning to
explore. If the effort to bridge RWAs into DeFi is successful, it
will be the most important achievement so far in the ongoing effort
to bring DeFi to the masses. The sheer value of RWAs provide will
be more than enough to start unlocking DeFi’s potential, not only
for those hoping to make it rich today, but also for future
generations who will strive to achieve the same.
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