Why DeFi is getting real

Crypto

Over the past year, the DeFi world has been increasingly embracing real-world assets. This is bringing DeFi and TradFi even closer together.

The tokenisation of real-world assets (RWA) has been one of the hottest topics in DeFi this year, and the headlines just keep on coming.

On October 30 alone Coindesk reported that the tokenised treasuries market had grown almost sevenfold year-to-date, to close to USD 700 million (now USD 750 million). That same day the Monetary Authority of Singapore (MAS) announced that it was expanding its groundbreaking Project Guardian asset tokenisation program to include pilots with regulators in Japan, Switzerland and the UK. A few days prior, Euroclear unveiled its RWA tokenisation service (D-SI) with the EUR 100 million bond issuance from the World Bank.

Source: RWA.xyz

Tokenisation of RWA (often referred to simply as tokenisation) is the process of representing ownership of either financial or tangible assets by blockchain-based digital tokens. As we’ve written previously, there is good reason to believe that tokenisation is going to become mainstream and revolutionise traditional finance.

But it’s not just TradFi that stands to gain by tokenisation. As more and more stablecoins and DeFi protocols integrate RWA, potentially bringing trillions of dollars of physical and financial assets into the system, the DeFi world is set to be transformed as well.

This is something that both investors and other users of DeFi, as well as investors and businesses outside the crypto world, will want to pay attention to. Below are some takeaways.

Converging in the middle

We think it noteworthy that this transformation is being driven both by DeFi players looking to bridge the gap into TradFi, and by TradFi players looking to go the other way. It shows just how quickly the worlds of DeFi and TradFi are converging.

A prominent example on the DeFi side is the decentralised stablecoin DAI. Originally backed solely by other stablecoins and cryptocurrencies (predominantly ether), MakerDAO, the protocol governing DAI, has been slowly adding real-world collateral for years. Now it is ramping up dramatically. This past June it added USD 700 million in US treasuries, more than doubling the bond holdings in its reserves. This is part of MakerDAO’s new endgame plan “to boost platform revenues by investing a part of Maker’s more than $7 billion reserves into real-world assets and money-market funds”.

Looking at traditional players, MAS’s Project Guardian, referenced above, is only one of a number of examples of regulators and financial industry bluechips embracing DeFi practices and tokenisation. Others include JPMorgan, Citi and Franklin Templeton – Franklin Templeton tokenised over USD 300 million of its US Government Money Fund on the Stellar and Polygon blockchains.

Making things safer, better and more mainstream

We think this conversion of the two worlds will be good for DeFi.

For one, RWA will make the DeFi world safer by reducing dependence on purely crypto collateral, which can often be highly volatile.

For another, it will bring new yield opportunities. While many DeFi products offered outsized returns during the 2021 DeFi summer, these proved unsustainable. After last year’s crypto market crashes and the concurrent rise in interest rates, DeFi has mostly underperformed, sometimes dramatically. The infusion of RWA into DeFi has allowed many protocols to become competitive again. In August MakerDAO was able to raise its deposit rate temporarily to 8%, and is currently at 5%. Staked USDT (stUSDT) allows users to earn up to 4.69% APY on their stablecoin holdings and functions like a money market fund. Other protocols, like Ondo Finance, recently introduced its Ondo USD Yield, a tokenised note backed by short-term US Treasuries and bank demand deposits, offering 5.27% APY.

Last but not least, the tokenisation and integration of RWAs, as well as uptake by large traditional players, should make DeFi more understandable and appealing to traditional investors. This could bring more capital into DeFi. Having RWAs as collateral could also provide more creditworthiness to borrowers within the DeFi space, further facilitating lending and borrowing activities. All of this will increase liquidity and spur growth.

The potential is enormous.

END

Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

Read next article

Are you in Switzerland?

It looks like you are using a computer with an IP address located outside of Switzerland. If you are located in Switzerland, please click “Continue” to access the Sygnum Bank AG (“Sygnum Bank”) website. If you are not located in Switzerland, please read below.

Local restrictions – Provision of cross-border services

Sygnum is a regulated bank supervised by the Swiss Financial Market Supervisory Authority (FINMA, Laupenstrasse 27, CH-3003 Bern). The products and services on this website are authorised for sale in Switzerland. Sygnum cannot promote its products and services in other countries where it is not authorised by the supervisory authority of that country to do so. Without prejudice to provision of services on the basis of reverse solicitation, Sygnum provides investment services in accordance with EU third-country regimes (where applicable). Sygnum is allowed to provide services only to per se professional clients and eligible  counterparties as defined under MiFID II.

If you are located outside Switzerland and click on “Continue” to visit this website, you confirm that you have read and understood the above and you are visiting this website on your own initiative without any active promotion or solicitation from Sygnum.

CONTINUE

Investor qualification

The following content is available to professional and private qualified Swiss investors. Please confirm your details below to visit this page, or please see our other digital asset updates here.

Qualified investor - I am a natural person who has the knowledge required to comprehend the risks of the investments based on my individual education and professional experience or based on comparable experience in the financial sector and hold liquid assets of at least CHF 500’000 (excl. real estate and pension funds).

A US Person is defined as (a) an individual who is a citizen or resident of the United States for federal income tax purposes; (b) a corporation, partnership or other entity created or organised under the laws of or existing in the United States; (c) an estate or trust the income of which is subject to United States federal income taxes regardless of whether such income is effectively connected with a United States trade or business.

Disclaimer: This content is purely for educational purposes and has been issued by Sygnum Group. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication. It does not constitute an offer or a recommendation to subscribe, purchase, sell or hold any security or financial instrument. It contains the opinions of Sygnum Group, as at the date of issue. These opinions and the information contained herein do not take into account an individual‘s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes personalized investment advice to any investor. Therefore, you must verify the above and all other information provided in the document or otherwise review it with your external advisors. Some investment products and services, including custody, may be subject to legal restrictions or may not be available worldwide on an unrestricted basis. The information and analysis contained herein are based on sources considered as reliable. Sygnum Group uses its best efforts to ensure the timeliness, accuracy, and comprehensiveness of the information contained in this document. Nevertheless, all information indicated herein may change without notice.

Mandatory fields

Security alert

Stay alert to fraudulent communications. Sygnum will never post messages on social media or private messaging applications regarding e-banking access or logins. If you have concerns, contact us.

Close