One of the biggest challenges that has faced crypto over the years is the connection to the real world. Since the earliest days of Bitcoin, there’s been a market for buying BTC with fiat currencies. The entire business of stablecoins, now approaching a market cap of $100 billion, arose out of a need for assets that reflected something of value in the real world.
It’s a challenge that’s now extending to DeFi. DeFi innovations offer vast potential to transform traditional financial systems. In January, then-acting comptroller of the currency in the US, Brian Brooks, wrote in the Financial Times that it was only a matter of time until self-driving banks made their debut, powered by decentralized smart contracts running on blockchains.
However, for DeFi to achieve this goal, it also needs to overcome the real-world connection. This is the challenge that Convergence Finance is aiming to solve. Convergence is a decentralized asset protocol aimed at bringing real-world assets into DeFi using tokenization.
Tokenization Has an Adoption Problem
Tokenization has long held significant promise, ever since Ethereum made it possible for anyone to mint their own tokens. However, the tokenized world has existed primarily in the digital realm until now. Security tokens, regulated issuances of digital assets offering equity or ownership rights over particular assets, have niche appeal among a small number of accredited investors, and liquidity lags far behind the markets for utility and other tokens.
Meanwhile, DeFi is a fast-growing market with an appeal to multiple types of investors ranging from enthusiastic amateurs to seasoned institutional players. Despite the lofty predictions from Brian Brooks, if DeFi is to have real-world utility in banking, then it needs to have connections to the real world. So far, that hasn’t happened. The vast majority of TVL locked in DeFi is based on native cryptocurrencies, with some ability to speculate on real-world assets like stocks or indices through synthetic assets.
But there’s no way for anyone to invest in a startup, or shares of real estate, within the current confines of decentralized finance.
What is Convergence?
The Convergence protocol will provide the necessary infrastructure to create Wrapped Security Tokens (WST,) a new type of token where users “wrap” real world assets in a similar way to how WBTC is issued. The Convergence protocol has economic exposure tied in, meaning that even off-chain exposure and economic benefits will be transferred to the holder of the token.
Alongside the WST issuance platform, dubbed ConvO, Convergence will also operate an exchange – ConvX – for WSTs based on automated market making infrastructure. Liquidity will come from Convergence Pools, and the protocol will also be subject to governance by DAO. The CONV token will become the governance token of the ecosystem, allowing holders to vote on proposals such as the types of WSTs to be included in the AMM pools. Holders are also eligible for a share of transaction fees from the exchange, along with exclusive access to new WST offerings and pre-sale events.
One of the most compelling prospects of the Convergence launch is the introduction of fractional ownership of assets such as NFTs or real-world assets like artworks or real estate. Currently, these markets have limited liquidity since there are only a small number of buyers who can afford the high-end NFTs or fine art.
However, a fractionalized investment could see prospective bidder vying for a 1% share of the next NFT drop from Beeple or CryptoPunks. With a decentralized secondary market open to everyone, the potential for new liquidity in markets of previously illiquid assets could be extraordinary.
Convergence has made impressive progress over recent months on its path to launch. In February, the project raised $2 million in funding from a group of investors led by Korean VC fund Hashed, and including NGC Ventures, Genesis Block Ventures, Alameda Research, and more. It’s also established partnerships with Soul Capital, Ellipti, and Winkrypto.
Prior to launching on mainnet in mid-May, the ConvX exchange underwent a successful audit with the security firm, CertiK. Following the mainnet launch, the ConvX and Convergence Pool elements of the protocol are already live. The ConvO minting feature and DAO are still to come later this year.
It took many years before the necessary infrastructure connecting Bitcoin to the real world became widely available. Convergence is aiming to connect DeFi to the real world on a far more accelerated timeline. However, if it can achieve the vision of inspiring users to bring real-world assets on-chain, DeFi could be about to see an unprecedented wave of liquidity wash into the markets.