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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.
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.
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.