How DeFi Liquidity Merges with Real World Assets to Forge a New Economic Era

2022 and 2023 were great times to make gains in the bear market but even greater for accumulating all sorts of tokens. Perhaps the year's biggest highlight, however, was a much-publicized fight for investors' attention.

It was a battle to define the way forward in crypto development, and it hinged on the real-world use case. In the midst of this battle for the “next big thing in crypto,” two distinct trends have arisen - NFTs and Memecoins - which have garnered some attention and also signalized a few things:

• Sentiments have shifted from a bear market to a sense of relief.
• Excess capital is present in the system.
• Early founders and adopters mixed with investors are preparing for an influx of retail.

In most respects, nevertheless, the battle is already over - especially for investors with a good sense of market sentiments and research.

The victors in this crypto competition are not NFTs or Memecoins, however, but rather decentralized finance (DeFi) and Real-World Assets (RWA). Both are a part of the biggest and fastest-growing sectors in crypto and all finance and define, so far, the only proven real-world use cases for crypto.

Although the first name already rings a bell if you are at all familiar with crypto, the second one is of greater importance since it denotes a catalyst for crypto market cap enlargement.

Even though this has not yet entered public knowledge, more and more industry leaders are starting to cooperate with RWA and DeFi projects, which are the only aspects of today's crypto with proven practical applications. In addition, institutional money is getting involved in these areas. The institutional interest combined with retail enthusiasm caused by entering a bullish crypto cycle, the existence of which is even more probable due to the Bitcoin halving, will cause the crypto market cap to soar. In addition, rising RWA blockchain-based projects will attract serious capital since the use case for RWA is significant and growing.

What is RWA, actually, and is the current crypto market mature enough for it?

RWA is a digital representation or tokenized version of anything that has value in the real world, and this tokenization makes these assets infinitely more usable and composable within the crypto and DEFI ecosystems.

With RWAs, the main feature is the ability to hold and act upon your property on a secure blockchain, which could revolutionize many industries. Previously, there was little institutional interest in blockchain solutions, and the market still needed maturation.

But you know what? We are beginning to witness the onset of just that turning.

Tokenization allows for the free movement of self-custodial assets/funds between various yield- or capital-gain-generating assets and protocols with minimal need for trusted intermediaries.

In addition to the above-mentioned RWA real use case, crypto, in general, continued its technological evolution in 2022 and 2023.

Kaspa, to name at least one milestone, is the fastest and most secure PoW, created by seasoned academics and solving the infamous blockchain trilemma. A project of such importance occurs once every seven years and heralds new horizons for many aspects of blockchain technology.

This is proof that the crypto space is maturing, and I am glad that these pioneer developers have raised the bar for the next evolutionary step in crypto; the Bitcoin ETF's approval just seals the deal for it.

But back to the real-world use cases, the bread and butter of this article will be a project that combines RWA and DeFi, and I will showcase why their respectable historic on-chain precedence records should make you interested.

The essence of blockchain and cryptocurrency has always been about opening up new opportunities. We were simply waiting for the technology and the general sentiment towards crypto to mature. Now, we're at a point where opportunities previously exclusive to corporations or accessible only through intermediaries are being democratized. This shift allows retail market participants to gain access to markets and advantages that were once out of reach, marking a significant leap forward in financial inclusivity and empowerment.

Why does RWA matter?

Just a few years back, the crypto world was buzzing with talks about adoption, tackling challenges, and scaling up blockchains, with a keen focus on crafting stellar Layer 1 solutions. These elements are still key, but there's been a noticeable shift in focus. Nowadays, the buzz in the crypto sphere is all about DeFi (Decentralized Finance) and RWA (Real World Asset) solutions. We're seeing real-world applications being built on these secure, swift foundational layers, topped with versatile application layers that open up a myriad of possibilities.

This evolution marks an exciting turn, signaling a move towards practical, impactful uses of blockchain technology.

Historical trends show that such shifts and speculations by early adopters often lead to significant developments in the industry. One could say that history may not always repeat, but damn, It sure does tend to rhyme. That’s why you should be interested in a blockchain-based project that connects DeFi and RWA.

An example of a project that bridges the DeFi liquidity to RWA

Out of several RWA projects, Maple Finance and Florence Finance (FF), let's use Florence Finance as an example of utilizing blockchain, cryptocurrencies, real-world assets, and DeFi liquidity.

FF is a project on the Arbitrum blockchain, focusing on bridging Real World Assets (RWA) and Decentralized Finance (DeFi). The platform facilitates access to financial tools and markets, traditionally available mainly to those with substantial portfolios and connections.

Chiel Ruiter, with his background as the former Managing Director at UBS Netherlands and experience at Goldman Sachs, leads the project. Alongside him is Leo Greve, who brings his extensive experience from his time at ING Bank UK and Citigroup.

While having team members with established careers and connections is beneficial, FF seeks to transcend the need for corporate affiliations. The project aims to democratize access to the RWA ecosystem for both large and small crypto investors, eliminating the reliance on institutional intermediaries.

The platform’s integration with the EURS & agEUR stablecoins, issued by STASIS and Angle Protocol, respectively, marks a significant step in its evolution. This integration enhances transparency and adds stability, leveraging EURS’s Angle’s status as the widely used and successful Euro-pegged stablecoins in the DeFi space, backed by a 1:1 Euro ratio.

The primary objective is to efficiently and transparently convert users’ excess stablecoin balances into Euro-denominated, yield-generating loans for European SMEs, fostering a collaborative platform between users and SME lenders. The protocol’s design ensures that it never loans out more than the raised funds, operating without leverage or fractional reserves. This means that while users may temporarily face liquidity constraints in converting FLR to stablecoins, the solidity of FF and the underlying loan portfolio remain unaffected.

Focus

• Address global Small and Medium-sized Enterprises (SMEs) funding gap with crypto-agnostic yields.
• Co-operate with established SME lenders for diverse credit exposure.
• Prioritize efficiency and transparency in funding, using real-world loans as collateral without leverage or fractional reserves.

Combining blockchain and finance

Florence Finance, a project based on Arbitrum (Ethereum Layer 2), uses LTO Network’s blockchain solutions to address funding shortages for SMEs and improve lending in the crypto space.

This partnership, leveraging LTO Network's technological expertise and Florence Finance's decentralized approach, focuses on enhancing financial accessibility. A key element of this collaboration is using LTO Network's Proofi software, which manages KYC and AML processes for DeFi wallets, ensuring data security and user privacy.

Why is Blockchain a good solution?

In electronic security, traditional methods primarily focus on authorization, authentication, and access control, aiming to prevent unauthorized data access or modification. However, these methods often fall short of safeguarding against authorized access at the application or system level. This is where blockchain technology steps in, revolutionizing data protection.

Blockchain's strength lies in its tamper-resistant architecture. It distributes data across numerous systems managed by independent entities, making unauthorized alterations exceedingly difficult. Each data segment within a blockchain is replicated in thousands of copies and distributed globally. This widespread distribution means that an attacker must simultaneously compromise a majority of these systems to breach the data. Achieving this feat is extremely challenging, costly, and nearly impossible with a well-structured blockchain. This robust security mechanism inherent in blockchain makes it a groundbreaking tool for enhancing data integrity and security in financial transactions and beyond.

Outro: The potential for Real World Assets (RWA) and Decentralized Finance (DeFi) to become the next big thing in the crypto

Here is the list of several statements based on which I believe that RWA can attract serious attention during 2024 and 2025.

1. Bridging Traditional Finance with Crypto: RWA and DeFi represent a convergence of traditional financial assets with the innovative technology of blockchain. This blending can unlock new efficiencies, reduce barriers to entry, and potentially democratize access to investment opportunities that were previously exclusive to large institutions or high-net-worth individuals.

   
   

2. Increasing Accessibility and Liquidity: By tokenizing real-world assets, such as real estate, art, or commodities, these assets can be divided into smaller, more affordable units. This process increases their liquidity and makes them accessible to a wider range of investors, not just those with significant capital.

   
   

3. Enhanced Security and Transparency: Blockchain's inherent characteristics of transparency and security can instill greater trust in financial transactions. This can be especially valuable in managing and tracking the ownership and transfer of real-world assets, reducing fraud, and enhancing regulatory compliance.

   
   

4. Innovative Financial Products and Services: DeFi platforms create innovative financial products and services that challenge traditional banking and finance models. These include lending, borrowing, yield farming, and more, often with higher efficiency and lower costs due to the decentralized nature of blockchain.

   
   

5. Growing Interest and Investment: There's a growing interest from both retail and institutional investors in RWA and DeFi. This is partly due to the diversification opportunities they offer, being somewhat uncorrelated with traditional financial markets and even other segments of the crypto market.

   
   

6. Regulatory Evolution: As governments and regulatory bodies start to understand and adapt to the blockchain and crypto space, it's likely that clearer regulations will emerge. This could lead to increased adoption of RWA and DeFi as legitimate, regulated investment avenues.

   
   

7. Technological Advancements: Continuous advancements in blockchain technology are making it more scalable, efficient, and user-friendly, which can further fuel the adoption of RWA and DeFi solutions.

   
   

Integrating traditional asset classes with the benefits of blockchain technology, coupled with a growing appetite for innovative financial solutions, positions RWA and DeFi as potentially transformative forces in the crypto space.

It could take a few months before the RWA narrative kicks in, but you should definitively do your research and make sure you buy a ticket for the next possible crypto ride, heavily based on real-world use cases.

The end.

Mentioning the Florence Finance competitors

Maple Finance

Maple Finance is a platform that focuses on providing decentralized corporate debt markets, allowing institutional borrowers to obtain efficient, transparent, and fair access to liquidity. It caters to established crypto businesses and institutional borrowers, offering undercollateralized loans. Maple combines the principles of traditional finance with the benefits of blockchain technology, aiming to streamline the lending process and enhance access to capital. The platform is characterized by its use of smart contracts to manage loan agreements, ensuring security and trust in transactions.

Aave

A project that offers similar decentralized finance (DeFi) services as Maple, particularly in corporate debt markets. Aave provides a range of lending and borrowing services and has been recognized for its innovation in the DeFi sector.

Goldfinch Finance

Goldfinch is a decentralized finance protocol that extends credit to borrowers without requiring traditional crypto collateral. It allows investors to supply capital to borrower pools, which is then lent out. The project aims to expand access to capital, especially in emerging markets, by leveraging off-chain credit assessments to make loans. This approach differs from typical DeFi models, as it does not solely rely on over-collateralization and crypto-economic incentives. Goldfinch focuses on creating a more inclusive finance model by bridging DeFi and traditional credit markets.

Clearpool

Clearpool is a decentralized capital markets ecosystem focused on institutional-grade uncollateralized lending in the DeFi space. It allows institutional borrowers to obtain liquidity directly from the decentralized finance market without needing traditional collateral. Lenders can earn interest by providing liquidity to these uncollateralized loan pools. Clearpool's innovation lies in facilitating institutional access to DeFi, aiming to bridge the gap between decentralized finance and traditional financial institutions. This project represents a shift towards more sophisticated financial instruments within the blockchain environment.

Centrifuge

Centrifuge is a decentralized finance protocol specializing in bridging real-world assets with the blockchain. It enables users to tokenize real-world assets, such as invoices or real estate, and use these as collateral to access liquidity in DeFi markets. This approach allows for the financing of real-world assets through decentralized pools, offering both liquidity providers and asset originators new opportunities for investment and funding. Centrifuge aims to create a more inclusive financial system by connecting traditional financial markets with decentralized finance.

Ondo Finance

Ondo Finance is a DeFi platform that offers structured investment products, combining fixed-income and variable-yield strategies within the cryptocurrency market. It aims to bridge traditional finance and decentralized finance by providing users with a range of diversified investment options. Ondo allows investors to choose between stable, lower-risk returns and higher-risk, variable returns, catering to different risk appetites. This approach makes DeFi more accessible to a broader range of investors, particularly those seeking structured and diversified investment strategies in the crypto space.