Decentralized finance has witnessed explosive growth, with the total value locked (TVL) in DeFi protocols skyrocketing from just $6.45 billion to $79 billion over the last year. Despite the eye-popping growth, DeFi is still confined mostly to early enthusiasts. It appears to be stuck in an echo chamber, meaning it doesn’t interact much with the physical assets. However, a handful of DeFi projects are pushing the boundaries by bringing real-world assets on-chain and opening up new opportunities for asset originators as well as investors.
The $79 billion locked in the DeFi ecosystem is minuscule compared to the estimated $256 trillion value of the real-world assets. A Deloitte report predicts that tokenization of real-world assets would disrupt many industries.
Transferring real monetary value from fiat to crypto
Some real-world asset owners have begun to see the benefits of decentralized finance such as lower fees, faster transactions, no intermediaries, and more. Tokenization enables asset originators to create a digital proof of ownership for real-world assets, and gain access to DeFi liquidity.
Centrifuge is a project that has been unlocking DeFi liquidity for real-world assets by making it easier for businesses to tokenize their assets such as invoices, real estate, and royalties. It aims to reduce the cost of capital for small and mid-sized enterprises while providing DeFi investors with a stable source of return in the volatile crypto market.
Investors who provide liquidity receive returns along with the Centrifuge token (CFG) rewards. The CFG token can be used to pay for transaction fees and participate in Centrifuge on-chain governance.
Asset originators looking to access DeFi liquidity can mint privacy-enabled non-fungible tokens (NFTs) to replicate their assets through smart contracts on the Centrifuge Chain. The NFT represents the asset’s inherent value. You can lock the NFT as collateral on Centrifuge’s decentralized lending platform Tinlake to access financing without involving banks or other intermediaries.
For the uninitiated, an NFT is like a certificate of ownership for a unique object. It contains metadata, owner ID, and other identifiable codes.
No business wants to have all the information about them made available for the world to see. Centrifuge’s privacy-enabled NFTs keep some or all of an asset’s attributes private while a public decentralized ledger tracks the asset ownership.
That way, asset originators can transact on a global network while maintaining privacy of their data, which may include verified company details, business relationships, and reputations. Third parties that want to verify the value of the NFT can request access to the off-chain document whose authenticity can be verified against the on-chain anchor and identity.
Given the inherent human desire for privacy, it is only a matter of time before utility tokens, NFTs, and stablecoins all become infused with privacy. Centrifuge appears to be ahead of the pack.
Synthetic assets and fractionalization
While Centrifuge uses NFTs to give real-world asset owners access to DeFi liquidity, others have taken a bit different approach that suits their business model. For instance, Convergence Finance is a decentralized interchangeable asset protocol that brings real-world assets into DeFi through fractionalization and Wrapped Security Tokens (WSTs).
Convergence allows asset owners to tokenize their illiquid assets to gain access to improved liquidity and instantaneous trades in DeFi. Its ConvO token wrapping layer creates Wrapped Security Tokens (WSTs) representing the underlying asset. The asset owners can sell fractional pieces to people around the world.
Symblox is another platform bringing real-world assets on the blockchain. It enables asset owners to mint synthetic tokens – digital assets that represent one or more underlying assets. Synthetic tokens carry the same value as the underlying asset. They could represent foreign currencies, publicly-listed shares, real estate, and even stock market indices.
Decentralized finance might still be in its infancy, but the way DeFi projects are bringing real-world assets on-chain is impressive. DeFi is no longer in an echo chamber. It has entered the next phase of growth, enabling businesses and individuals to seamlessly tokenize their real-world assets and use crypto rather than fiat for trading and accessing liquidity.