The world of finance is on the brink of incredible and global changes made possible by decentralized finance. Look closer and you'll see how this trend is gradually breaking through the cryptography wall, consuming traditional financial systems and even embracing
tokenization. Talks and prerequisites for breaking down the barriers between them are increasingly emerging. So what's the problem? Why has the DeFi sector hit its conditional bottom? When will the financial revolution happen, and what role will real-world assets play in it?
DeFi: Some Concepts and History
Decentralized Finance (DeFi) is a set of financial instruments built on blockchain networks.
As we know from history, traditional financial systems (TradFi) have always developed under certain control and regulation, involving the services sector and expanding the list of financial transaction participants. Conducting asset transactions in the real world often involves the participation of third parties, banks, intermediaries, and other entities. This contributes to a certain level of security and traditional stability, but the efficiency of transactions, simplicity, convenience, and regulation suffer. Decentralized financial systems are designed to minimize or completely eliminate the restrictions inherent in TradFi. DeFi reduces or completely excludes intermediary systems, typical of TradFi, thus decentralizing the infrastructure of financial markets. All of this has been accomplished in a short period of time:
2009-2017 - the creation of Bitcoin, Vitalik Buterin's work in the field of smart contracts, the establishment of MakerDAO and the stablecoin DAI were the first steps towards the emergence of decentralized finance.
2018-2019 - the first protocols and projects providing services for consumer lending, insurance, and derivatives trading outside the centralized cryptocurrency sector appeared (Compound, Aave, Synthetix, Uniswap).
2020 - the launch of Ethereum 2.0, the emergence of "yield farming."
2021 - the first integration with real assets. Aave and other DeFi platforms are working on creating bridges between traditional finance and decentralized finance. The DeFi sector is experiencing significant growth, and the TVL (total value locked in the DeFi protocol) has grown from $20 billion to $180 billion, which has attracted the attention of governments to this new sector of the economy.
2022 - the development of inter-network interaction, the attraction of new investors, and the expansion of activities. All of this is happening during a prolonged and difficult bear market.
If the internet created the best standard for exchanging texts, photos, audio, and video, then DeFi will create the best standard for exchanging assets.
Real World Assets
Real World Assets (RWAs) are assets that exist outside the blockchain network but are tokenized and transferred into the network for use within DeFi. This requires finding a suitable asset, which can include:
- Real estate
- Government bonds
- Many other types of tangible and intangible assets.
Next, it is simply necessary to "transfer" the asset from the real world into the blockchain network by tokenizing it. This is done similarly to how it is done now, but on paper and in traditional registries.
The tokenization process can be broken down into three stages:
Real world assets that need to be brought into DeFi must first be identified outside of the network: the asset must be described, including its condition and price, owners, documents verifying ownership, etc.
- Transfer to the network/tokenization
Here, the information obtained in the first stage is recorded in the blockchain along with legal requirements, and an oracle is set up - protocols that will reflect the real value of the asset based on sources located outside of the blockchain.
- RWA management protocol
A protocol is created that will manage all processes related to the disposal of the asset.
Although RWA already exists in the real estate sector in companies like RealT in the US, it is still not very popular and in demand. At the same time, the private lending sector built in the DeFi space is becoming more popular and even trendy for this year.
This material is not financial advice. Be careful when trading in the cryptocurrency market.