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The DeFi market urgently needs to connect with real-world assets



With over $13 billion in total value locked, decentralized finance (DeFi) has truly rocked the crypto world in the last year. It offers a new way to make money in the crypto market. At the same time, DeFi is only a niche trend now, and it has huge potential to set off a revolution in the commercial loan market. In order to grow from infancy, DeFi urgently needs to be connected to real-world assets and exist in an environment that can be used by real businesses, corporate customers, etc.

As a concept, DeFi really looks like a win-win solution, for those who already hold cryptocurrencies, because they can finally earn some passive income from incentives and yield farming; Benefit from loans on terms not available in traditional venues.

Volatility and Overcollateralization

However, DeFi has several problems that need to be solved. The first major downside, for all parties involved, is the overcollateralization to deal with volatility.

Grayscale and CoinDesk jointly launched a DeFi fund and DeFi index: Grayscale Investments, a digital asset management company under Grayscale, has launched a Grayscale DeFi fund and a CoinDesk DeFi index with CoinDesk Indexes, a subsidiary of CoinDesk. The Grayscale DeFi fund is a tracker of the CoinDesk DeFi index. investment portfolio, while the CoinDesk DeFi Index is weighted based on the market capitalization of DeFi protocol tokens.

The fund is open for subscription by qualified individual and institutional investors. Grayscale is planning to list the fund shares on the secondary market in the form of shares. As of July 1, 2021, the index is composed of the following assets: Uniswap (UNI, 49.95%), Aave (AAVE, 10.25%), Compound (COMP, 8.38%), Curve (CRV, 7.44%), MakerDAO (MKR , 6.49%), SushiSwap (SUSHI, 4.83%), Synthetix (SNX, 4.43%), YearnFinance (YFI, 3.31%), UMA Protocol (UMA, 2.93%), Bancor (BNT, 2.00%). (Globenewswire) [2021/7/19 1:03:16]

In most cases, the agreement requires the borrower to pledge at least 150% of the loan value as collateral. So, let's say you want to borrow $100. That means you'll have to put up a loan of at least $150 as collateral. So if the value of your collateral drops below $150, your loan is subject to a liquidation penalty.

Australian DeFi startup Maple Finance completes $1.3 million in seed round financing: Australian DeFi startup Maple Finance targets companies with a proven track record in the crypto space, such as trading funds, market makers, and crypto miners looking to expand their businesses mining company. Generally speaking, a typical loan in DeFi requires a large amount of over-collateralization, and users need to constantly check to ensure that their collateral is sufficient as market conditions change. Maple will offer qualified companies a single rate over the life of the loan, which can be collateralized as low as 40% of the loan value, with no recalculation of the initial mortgage deposit. Maple, which can also offer better terms based on the creditworthiness of borrowers, will only make offers to institutional clients. It is reported that the company has completed a $1.3 million seed round of financing with its MPL governance token. Participating investors include Framework Ventures, FTX, Aave founder Stani Kulechov, Synthetix founder Kain Warwick, FBG, The LAO, etc. The total supply of MPL tokens will be fixed at 10 million, of which about 30% will be used for liquidity mining. (CoinDesk) [2020/12/18 15:38:39]

Overcollateralization is a significant hurdle in achieving one of DeFi's main goals: making financial services truly accessible. The same problem will arise with stablecoins issued by DeFi protocols, as they also require overcollateralization.

Forbes columnist: The strong growth of DeFi and NFT is the "double-edged sword" of Ethereum: Forbes columnist Christopher Brookins said in an article today that the strong growth of DeFi and NFT has always been the "double-edged sword" of Ethereum, constantly blocking the network, And greatly increased transaction costs. Higher transaction costs and slower processing speeds could act as barriers to new entrants into DeFi or NFTs, dampening new demand for Ethereum. The lack of fresh demand in the Ethereum market, coupled with macro uncertainty around the U.S. election, appears to be weighing on ETH prices. In the long run, the emerging ecosystem built on top of Ethereum looks promising, especially once ETH2.0 solves the current capacity problems. In the short term, however, prices could see further weakness and volatility before the next leg up. [2020/9/25]

The volatility of the collateral has caused a total of 6.65 million Dai (about 6.65 million USD) losses to Maker, and there may be more similar cases in the future.

The total market value of the top 100 DeFi tokens has risen to US$2.316 billion: DeFi MarketCap data shows that as of 6:00 on June 15, the total market value of the top 100 DeFi tokens has risen to US$2.316 billion. Specifically, there are a total of 8 DeFi projects with a market value of more than 100 million US dollars. Among them, MakerDAO still ranks first, with a market value of about 500 million US dollars. [2020/6/15]

Lack of connection to real world assets

This question may be debatable, because many people throughout the crypto space want to remain in their own playground, isolated from the world. However, crypto is becoming a part of the global financial system, and in order to stay, crypto must be connected to the outside world, otherwise it will have absolutely no growth.

But my personal views and beliefs aside, the lack of connectivity to real-world assets hinders the DeFi space in many ways. First, it doesn’t allow traditional companies to borrow funds because they can’t offer anything but cryptocurrencies as collateral. The second problem is the lack of real cash flow behind the protocol token, which means that the price of the protocol token lacks stability, and the protocol token is the main tool of incentives. In the long run, the above-mentioned problems all limit the further development of DeFi as a paradigm, and most importantly, lead to the loss of the value of the protocol tokens and the risk of default.

DeFi Solutions

All things considered, the DeFi space needs an infrastructure that can bridge the gap between real-world assets and the DeFi ecosystem, allowing anyone to borrow money from the protocol using real-world assets as collateral.

So, can any real world assets be used? Not quite. Assets must meet simple criteria in order to solve the above problems.

The asset must be stable to account for volatility and overcollateralization.

Assets must generate recurring regular income in order to bring in real-world cash flow.

The price of collateralized assets must be determined in a transparent manner, based on several well-established and recognized sources.

Assets that meet these criteria and address the above issues come in the form of bonds or fixed-income securities.

Why Bonds Are the Solution to Make Traditional and DeFi Markets Win-Win?

The DeFi lending agreement alone has locked more than 5 billion US dollars, and the overall locked more than 13 billion US dollars. This will be a perfect way for enterprises to borrow money, and there is no need for account building and marketing work.

In addition to this, moving traditional financial products to the open source and decentralized world greatly reduces the number of intermediaries needed to attract financing and minimizes its cost. In the current system, bond issuance costs may include fees paid to exchanges, payment agents, trustees, banks, lawyers and rating agencies.

If you look at it from an investor's point of view, they will get a protocol with a stability that has never been seen in the market. The use of bonds prevents over-collateralization of the protocol and ensures the stability of assets even in times of high volatility in the crypto market, thus eliminating the risk of liquidation.

Most importantly, using real-world claims and debts will allow the protocol to earn fixed recurring income that can be distributed among investors. Basically, it will allow DeFi investors to benefit from the income generated by collateral and the interest paid by borrowers.

Barriers to establishing such a system

Generally speaking, DeFi and traditional finance are independent of each other. The first and most obvious problem is that DeFi borrowing requires collateral in the form of digital assets. Currently, there is no ready-made infrastructure to use real-world assets as collateral in DeFi protocols.

The next question has a lot to do with the current structure of the entire DeFi market. Borrowers are able to attract funds strictly in crypto from DeFi protocols, and the same happens with interest payments. Since businesses operate in the traditional system, borrowing funds and debt repayments must be set in fiat currency.

And the last problem is that there is no traditional legal framework for borrowing from agreements. In the absence of a formal agreement, this creates difficulties in accounting for borrowed funds.


In my opinion, the DeFi market urgently needs to establish a regulated bridge with the traditional financial market to ensure stable growth. At the same time, corporate institutions — including holders and issuers of debt securities — will be willing to leverage the best of DeFi infrastructure and benefit from loan terms not available in traditional venues.

The connection to a fiat cash flow mixed with fixed regular income will allow investors in DeFi to benefit both from the income generated by collateral sitting within the protocol, and from the interest paid by borrowers. At the same time, stable real-world collateral, such as bonds, minimizes liquidation risk and ensures the stability of the protocol.

To achieve this goal, the DeFi market needs complex infrastructure solutions to ensure that corporate institutions comply with current regulations, enabling them to obtain funds and repay loans in fiat currency. At the same time, the operation of this infrastructure needs to take into account the interests of the DeFi community, thus ensuring the correct interaction between bonds and protocols.


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