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.
With the advent of Bitcoin in 2009 the cryptocurrency industry has grown beyond its initial purpose as a means of exchanging money. There have been many other uses for it. These new uses cases collectively refer to decentralized finance. It is a broad range of financial services available that anyone can access without the need for a central institution, intermediary or bank.
DeFi, as it’s known, provides banking for the unbanked, or banking without a bank. This service goes beyond the simple function of sending and saving money. DeFi is now a term that covers cryptocurrencies, automatable payments, capital transfers and spot trading. It also includes lending, borrowing and high yield staking.
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. The most significant thing about DeFi is its accessibility. It can be accessed from anywhere, and without requiring identification or a bank account. DeFi has been designed so no one individual or entity is able to have greater control of the financial system than any other. DeFi is decentralized by design, with matters of governance dictated by the network’s users rather than just a few individuals.
DeFi’s Dilemma
DeFi is still far from its goals and has many more to achieve. DeFi Pulse reports that the value of all DeFi Protocols it tracks at the time DeFi Pulse was writing this article stood at $41.56 billion. That’s far less than some companies even. Apple is the most valuable company in the world with a market capitalization at $2.37 trillion.
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.
DeFi’s problem is it has lost sight of its original purpose of getting services to those most in need. DeFi’s potential to bank the unbanked has been written about countless times. The biggest problem it solves is access to capital. Traditional financial systems have made it difficult for smaller businesses and those with medium to large budgets to access liquid capital markets quickly.
DeFi users tend to be too concerned with getting rich. 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. Although there are many great things happening in DeFi, we need to be more focused on its potential benefits for 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.
RWAs can be brought into DeFi to create a new flood of capital and liquidity that could transform the sector. It’s an almost unlimited and virtually untapped market that’s a perfect fit for DeFi. It can be used to create tokens for real estate, buildings and other non-physical assets. These tokens will then be added onto the blockchain and made 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.
Economic benefits would also be huge. Small and large companies that previously struggled to get finance would benefit the most from such capital flooding into DeFi. According to an American bank, 82% of the small businesses that go bust due to cash flow problems were found. However, the majority of these businesses have assets. The problem is that traditional banks don’t want to touch those assets. DeFi can make a significant difference in this area. It would allow struggling companies to secure those assets, while ordinary users could provide capital to keep them in business.
RWAs are a way for DeFi to become a viable alternative source of capital for many businesses who have difficulty accessing finance. Investors with less risk appetite would be encouraged to invest in DeFi by the addition of tangible assets. 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 are more accessible, stable, and equal, which will allow for a wider adoption.
Realizing It
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 create an ERC20 token that pays interest on these securities. It can be used to lend crypto across DeFi protocols. 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 enable borrowers to gain capital via multiple DeFi protocols or blockchains without the need to integrate with any third party. Investors can provide liquidity to borrowers by using Centrifuge Connectors without having to first bridge those assets to their Centrifuge blockchain.
In the past, Centrifuge Connectors required users to transfer their liquidity first. It was a tedious process. Centrifuge Connectors eliminates one of the most difficult obstacles to investors. It makes capital acquisition much simpler and easier while making it more accessible for everyone. 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. DeFi is just starting to tap into this market, which means it’s almost endless.
The bridge between RWAs and DeFi will be the biggest achievement in ongoing efforts to get DeFi to everyone. 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.
