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Bridging the Great Divide: How Real-World Assets Are Combining TradFi and DeFiby@sergey-baloyan
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Bridging the Great Divide: How Real-World Assets Are Combining TradFi and DeFi

by Serge BaloyanFebruary 28th, 2024
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Real estate, commodities, loans, and more are now represented as cryptographic tokens thanks to innovative platforms disrupting the status quo. By unlocking trillions currently locked up in illiquid assets, a huge amount of new value is opening up for investors and economies worldwide. As more asset classes become tokenized, an entire new asset class is emerging where crypto and traditional holdings intersect.
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For decades, traditional finance and decentralized protocols have operated in separate spheres. But a new development is poised to break down the barriers between them: the rise of real-world asset tokenization.


By bringing tangible, "brick-and-mortar" assets onto blockchain networks, projects are literally bridging the gap between centralized and decentralized worlds. Real estate, commodities, loans, and more are now represented as cryptographic tokens thanks to innovative platforms disrupting the status quo.


TradFi vs DeFi. Source: Binance Research


The implications could reshape the entire financial landscape. By unlocking trillions currently locked up in illiquid assets, a huge amount of new value is opening up for investors and economies worldwide. Tokenizing real estate, commodities, loans, and more allows these large assets to be divided into affordable fractional pieces. Now, everyday investors can directly participate in markets usually reserved for big players. Welcome to the new world of inclusive investing.

Pioneers Blazing the Trail


Outlets like MakerDAO, whose stablecoin DAI is collateralized by real estate deeds, are leading the charge. Creditcoin puts private loans on-chain, while Maple Finance connects institutional lenders and crypto borrowers using tokenized real assets. Centrifuge and Goldfinch similarly securitize and fund everything from invoices to equipment on decentralized networks.


Centrifuge is leading the change. Source: rwa.xyz


Their success points to massive untapped potential. As more asset classes become tokenized - think carbon credits, intellectual property, and beyond - an entirely new asset class is emerging where crypto and traditional holdings intersect. Investment opportunities and wealth creation possibilities are multiplying at an exponential rate.


Mapping RWA ecosystem. Source: galaxy.com



For now, let's first explore the benefits of RWA in DeF. In our work with DeFi projects, we mostly see:


1. Liquidity enhancement

Tokenizing traditionally illiquid assets enables their conversion into divisible and tradable tokens, enhancing liquidity and facilitating more efficient transactions. This improved liquidity leads to more accurate price discovery and reduced transaction costs.


2. Fractional ownership

By breaking down high-value assets into smaller, affordable units, tokenization opens up investment opportunities to a broader audience. This democratization of access allows retail investors to participate in markets previously reserved for institutional players.


3. Diversification

Integrating RWAs into DeFi platforms enables users to diversify their investment portfolios by including real-world assets alongside cryptocurrencies. This diversification can help mitigate risk and optimize returns.


But Bridging Worlds Is No Easy Feat


For all its benefits, merging physical and digital finance comes with dilemmas to unravel. Chief among them is maintaining a clear, verifiable link between on- and off-chain assets - no easy task across disparate jurisdictions and compliance frameworks.


Regulation, too, poses knotty issues, as decentralized networks interact with regulated, "real world" assets in novel ways. Navigating rules sensitively will be paramount, requiring cooperation between authorities, firms, and communities. Technology alone won't solve governance challenges.


P.S. Check out some of my previous articles at HackerNoon: