Introduction
We’ve been writing a lot about decentralized finance lately. Decentralized Finance, or DeFi, is an umbrella term for financial services on public blockchains. With DeFi, you can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it’s faster and doesn’t require paperwork or a third party.
Recently, there has been one new innovation in the field of DeFi, that can revolutionize the way traditional lending/borrowing is undertaken and propel the adoption for DeFi across the globe with all businesses, small and large. This innovation is called — Real World Assets.
Real World Assets (RWAs)
RWAs allow DeFi protocols to gain stability and to access another asset class. The integration of non-crypto-related assets has substantial implications for the whole industry.
A now $300+ billion sector, DeFi sees RWAs as the next opportunity to increase its market size exponentially.
Unlocking the lending potential of trillions of dollars of real-world assets puts DeFi in direct competition with banks and traditional lenders.
To top it off, introducing tangible assets and dynamics that are similar to the traditional finance sector’s (whilst removing its limitations) provides peace of mind to the risk-averse players that, until now, have been watching and waiting for more secure investment avenues.
In essence it will unlock liquidity for real world assets by bridging assets like invoices, royalties, real estate to DeFi allowing borrowers to finance their real world assets without banks or other intermediaries.
Meet AAVE
Aave, a DeFi protocol that lets people lend and borrow cryptocurrency without having to go through a centralized intermediary. When they lend, they earn interest; when they borrow, they pay interest.
Aave also happens to be the largest DeFi protocol as of today with over $27 Billion in TVL (total value locked). On December 28, 2021 Aave added a new market using real world assets (RWAs).
Side note: although Aave was not the first to introduce RWAs on DeFi, it is certainly the most prominent one due to its size and influence.
How Does It Work?
Source: centrifuge.io
The principal feature of these markets is the tokenization, which can also be understood as securitization in traditional finance, of a business’s operations.
Built on Centrifuge, Tinlake is the platform that helps businesses do exactly this.
Tinlake pools are backed by tangible assets such as invoices, real estate, loans, and trade receivables. Financing those assets on Tinlake necessitates a legal framework that provides investors with a legal claim on the assets. To assure this recourse, each asset originator establishes a legal entity typical in the traditional financial system — a special purpose vehicle, or SPV.
Individual asset collateral is allocated to this legal entity to guarantee that investors have a legal claim to the underlying assets and that the assets are held separately from the asset originator — also known as bankruptcy remote.
Tinlake earns interest every second; like with all DeFi protocols, you earn yield every moment you are invested.
Size & Opportunity
There are currently 11 different RWAs markets on Tinlake and range from tokenized real estate, cargo and freight invoices, to payment advances. Once tokenized, investors can then purchase these tokens, which behave similar to bonds and earn a yield on their holdings. This yield can range from 3% all the way up to 10% depending on the market. Pools on Tinlake are priced in DAI stablecoin (1 DAI being equal to $1).
Source: centrifuge.io
With the ongoing expansion and adoption of DeFi, it’s possible to envision these marketplaces expanding and rising in value, maybe reaching billions of dollars one day.
This arrangement is beneficial for the businesses involved because it gives them access to financing that would otherwise be impossible or prohibitively expensive.
Pool Example: Asset Originator & Asset Type
Say you are interested in Real Estate Bridge Loans. See below
Source: centrifuge.io
The asset type, asset maturity, APY, and pool value of this pool can all be found here. Asset maturity indicates how liquid your investment is, and the maturity date of any financing indicates when the asset originator is required to repay the loan. Upon repayment, investors will always have the option to redeem their money before the asset originator may utilize them for fresh funding. Asset maturity may be thought of as a “soft lock up” period during which you can potentially withdraw cash from your pool reserve.
Summary
According to Savills World Research, the global value of all real estate alone was assessed at $217 trillion in 2016 (334% increase in six years), and there are various benefits to investing in the sector.
Given the clear need for liquidity, trust, and transparency, decentralized finance may hold the solution by allowing individuals/companies to borrow and lend money freely and cost-effectively throughout the world, without the use of rent-seeking middlemen or traditional finance’s inefficiencies.
It’s an entirely new, more equitable economy being built without borders, middlemen, or government controlled currencies, allowing anyone to launch an on-chain credit fund creating collateral-backed pools of loans.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.