Stability in a Volatile Market: The Power of Real-World Assets

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The crypto industry has been hit with controversy after controversy in 2022 resulting in high volatility. This includes DeFi, which is reflected by the decrease in total value locked (TVL) is down approximately 75% from its all-time high — a huge fall for the DeFi space. The insolvency of Three Arrows Capital (3AC) has also shone a light on the significant risk posed by uncollateralised crypto loans. Many have wondered about the future of DeFi and how it can grow sustainably. In this article, we will explore what we believe will be a major contributor to the solution: Defactor and Real-World Assets — sustainable, collateralised lending.

What is a Real-World Asset (RWA)?

RWAs are any asset with real-world value. It is converted into a digital representation or “tokenised” and then secured by blockchain technology and immutable distributed ledgers. Once tokenised, ownership can be transferred, thus allowing for value exchange. All types of real-world assets can be tokenised; commodities such as gold, tangible assets such as an invoice or even real estate.

How do RWAs provide a yield?

Yields in DeFi refer to a method of earning rewards or interest by depositing your cryptocurrency into a pool with other users. The existing mechanism for yield generation is not anchored on real-world assets, making the current world of DeFi very volatile. Unfavourable market conditions have exposed the instability in present yield models, as shown by the huge drop in cumulative total value locked (TVL) in DeFi protocols from over $180 billion at its peak to $50 billion.

RWAs can provide a yield for liquidity providers by investing their capital into pools on the blockchain backed by tokenised RWAs. Businesses can then apply to have capital from the pool as a form of alternative liquidity, allowing them to continue their business operations. This alternative source of liquidity is then repaid with interest.

Businesses are provided the line of credit they need, while investors are given the stable returns.

What are the benefits of real-world assets?

Volatility and cryptocurrency have become synonymous with one another. Current yield offerings are based upon volatile assets that can drop 80% within a few months or even go to 0. We have seen the devastating results this can have for investors and wider crypto-sentiment over the past year.

RWAs can provide assurance to an area rife with uncertainty by allowing DeFi protocols to access an entirely new class of assets such as the ones aforementioned. The yield earned from invoices, commodities etc., have no correlation to the rest of the crypto market or the fluctuations in Bitcoin, Ethereum etc. Since the RWA has intrinsic value, the token representing it now has a baseline value. For a DeFi ecosystem, a sustainable yield is essential.

Conclusion:

Tokenised RWAs can provide many oppurtunities. Defactor is focusing on utilising RWAs to transform the trade finance sector and to provide Liquidity Providers with sustainable, attractive yields.