Decentralized finance is a walled garden for the crypto-savvy and tech literate. It’s a place where tiny seeds can sprout into wondrous flowers and hyper-growth flourishes, but for all its brimming potential, DeFi remains tiny. On the other side of that walled garden is an entire world of assets whose value and use cases dwarf anything that decentralized finance can produce.
For DeFi to grow, it needs to find a way of letting the outside in, bringing real-world assets (RWAs) to an onchain environment where they can power a wave of decentralized applications that combine the best elements of both worlds. If this can be achieved, the value of the DeFi market, currently measured in the low billions, will 10x and start to be taken seriously on the world stage. Getting there, however, will require serious changes to the mindset and the tech stack that have taken decentralized finance to where we are now.
Why Real-World Assets Matter
DeFi enables individuals and institutions to do a lot of cool stuff, such as use their existing assets as collateral to obtain a loan – permissionessly and instantly. It also supports the creation of synthetic assets such as stocks and indices, allowing for the creation of new markets that mirror the price of their real world counterparts.
Take prediction markets for example. Utilizing oracles and APIs, DeFi enables the creation of markets for hedging against risk across a slew of industries. A farming collective in South America, for instance, could obtain insurance cover that will pay out in the event of torrential rain destroying crops. The use cases for decentralized finance are limited only to the imagination…oh, and one other thing: liquidity.
As noted earlier, the decentralized finance market is still tiny. This causes problems for anyone looking to conduct financial transactions of serious size. There’s a lot of money swilling around in the traditional business world that isn’t earning any sort of yield. Making a slice of that available to DeFi traders would benefit all participants, resulting in deep liquidity in return for an APY that’s attractive to lenders.
Bringing the Off-Chain On-Chain
There’s a lot of talk about “bridging” RWA to DeFi, but what does this mean in practice? A real-world example of this concept in action can be seen in Centrifuge Connectors. Centrifuge is a crypto project intent on provisioning credit to SMEs while simultaneously providing yield to DeFi investors.
Connectors, its latest product, achieves this by supporting borrowing across different DeFi protocols without the need to bridge assets to Centrifuge’s blockchain. Centrifuge Connectors make it easier for such RWAs as invoices, real estate, and royalties to be tokenized and used as collateral for on-chain borrowing.
What’s novel about Connectors is that it solves one of the main DeFi pain points that has empirically limited available credit: liquidity. There are hundreds of millions of dollars in loans available within decentralized finance, but this liquidity is split across multiple EVM blockchains. Utilizing cross-chain technology perfected by Nomad Bridge, Centrifuge Connectors allows real-world assets to be tokenized and then posted as collateral on multiple chains. This enables businesses to maximize their borrowing while giving DeFi lenders a respectable yield.
Tokenize It and Set It Free
There is still a lot of work to be done in educating traditional businesses on the upside of decentralized finance. In particular, there is a need to raise awareness of the benefits of tokenizing off-chain assets. These could represent everything from IP to property and even debt. This is as much an ideological problem as it is a technical one: tokenizing assets and creating liquidity pools that facilitate trading is a straightforward process, but there needs to be faith in the ability of the system to honor redemptions.
There are billions of dollars of real-world assets sitting on the sidelines that are currently unconnected to the rails of decentralized finance. These are idle assets on the balance sheet of businesses that have tangible value. All that’s missing is a means to unlock them through the creation of a two-sided lending marketplace. If it’s to add zeros to its TVL, DeFi needs to look outwards – starting with traditional small businesses.