With a total value of over $ 13 billion, decentralized funding really shook the crypto world last year. It offers a new way to capitalize on the cryptocurrency market. DeFi is now just a niche trend with gigantic potential to spark a revolution in the commercial loan market. In order not to be a young sector anymore, DeFi needs to be urgently connected to real assets and exist in an environment where it can be used by real businesses, corporate clients etc.
As a concept, DeFi really looks like a win-win solution for those who already own cryptocurrencies as they ultimately get a passive income from incentive mechanisms and income farming, and for borrowers who can benefit from a loan with terms that are not a traditional place can offer.
Volatility and coverage
But still, There are several issues with DeFi that urgently need to be addressed. The first major disadvantage for everyone involved is the overcollateralisation to account for price volatility.
In most cases, the protocols require borrowers to guarantee their loans to at least 150% of the loan value. In order to, Say you want to borrow $ 100. This means that you need to guarantee your loan with a minimum amount of $ 150. If your collateral is less than $ 150, your loan will be subject to a settlement penalty.
Overcollateralization is a major barrier to achieving one of DeFi’s main goals – access to financial services. The same problem occurs with stable coins issued by DeFi protocols as they also require excess collateral.
The volatility of the collateral has resulted in losses of 6.65 million dai (approximately $ 6.65 million) for Makers and could lead to similar cases in the future.
The solution for DeFi
With all the issues in mind, the DeFi space requires infrastructure that can bridge the gap between real assets and the DeFi ecosystem, and allow anyone to use real assets as collateral for borrowing funds from logs.
So would real world assets work? Not quite. The asset must meet simple criteria that allow the above problems to be solved:
- The asset needs to be stable to resolve volatility and collateral issues.
- The asset must periodically generate fixed income securities to generate real cash flows.
- The price of a security should be transparently determined on the basis of several proven and recognized sources.
The asset that meets these criteria and solves the above problems is represented in the form of bonds or fixed income securities.
Why bonds benefit traditional markets and DeFi markets
With more than $ 5 billion in DeFi loans alone and more than $ 13 billion in total, this is a perfect way for businesses to borrow money without the book building and marketing effort.
At the same time, by moving traditional financial products to the decentralized open source world, the number of intermediaries required to raise funds is drastically reduced and their costs are minimized.. While under the current system, the cost of issuing bonds may include fees paid to exchanges, paying agents, trustees, banks, lawyers and rating agencies.
When you look from the investor’s point of view, they get logs with stability never seen before in the market. The use of bonds prevents the protocol from being over-guaranteed and ensures the stability of the asset even in times of high volatility in the crypto market, thereby eliminating the risk of liquidation.
More importantly, through the use of real debt obligations, the logs can generate fixed periodic returns that can be distributed among investors. Basically This means that DeFi investors can benefit from both the income from the guarantee and the interest payments from the borrowers.
Obstacles to building such a system
In general, DeFi is isolated from traditional funding. The first and most obvious problem is that DeFi loans require collateral in the form of digital assets. Nowadays, There is no turnkey infrastructure to use real assets as security in DeFi protocols.
The next problem is now heavily related to the overall structure of the DeFi market: Borrowers can only attract funds from DeFi protocols in cryptocurrencies, and this also applies to interest payments. As companies operate in the traditional system, the loan and debt repayment must be set in fiat.
And the final problem is the lack of a traditional legal framework for borrowing from a log. There are no formal agreements that make it difficult to account for the loaned funds.
I think the DeFi market urgently needs to build a regulated bridge to the traditional financial market in order to ensure stable growth. At the same time, Corporate institutions, both debt holders and issuers, will be ready to take advantage of DeFi’s best infrastructure and benefit from a loan on terms no traditional place can offer.
By connecting it to fiat cash flows mixed with fixed periodic income, DeFi investors can benefit from both the income from the collateral contained in the log and from the interest payments made by borrowers. At the same time, Stable, real collateral such as bonds reduce the settlement risk to a minimum and ensure protocol stability.
To achieve this, the DeFi market needs complex infrastructure solutions that will ensure compliance with applicable regulations for corporate institutions and allow them to access funds and repay loans in fiat. At the same time, This infrastructure must be operated taking into account the interests of the DeFi community in order to ensure the correct interaction between connections and protocols.
The views, thoughts, and opinions expressed herein belong solely to the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Artem Tolkachev is the founder and CEO of Tokenomica. Artem has been a key thought leader in blockchain and tokenization in the CIS region for more than six years. He has been a lawyer and entrepreneur in the field of intellectual property and information technology since 2011. In 2016, Artem founded and led the Deloitte CIS Blockchain Lab. As part of this initiative, he led a number of innovative projects that included the implementation of blockchain solutions for companies, the tokenization of real assets, and the legal and tax structuring of offers. of security tokens, cryptocurrency development and blockchain legislation.