Why Go Bearish with Real-World Assets in DeFi Lending Protocols

I'm sure you are acquainted with Decentralized Finance, more commonly known as DeFi. Within the crypto industry, this term is used to refer to all the financial services and institutions which are operating on public blockchains. 

Thanks to DeFi, users like us are able to execute things that are hard to imagine doing using the services of conventional banks. For instance, it is probably the most convenient way to borrow and lend funds, trade derivatives, and assets, as well as earn interest. 

Millions of users around the world have been captivated by the versatility and wide range of benefits offered by decentralized finance. What I love most about  DeFi activities is that they are much faster, free of overwhelming paperwork, and provide you with a smooth overall user experience.

Aside from that, this branch is not stagnating in its development, and not that long ago a major novelty was implemented, which according to numerous analysts holds major potential to change traditional lending and borrowing, stimulating the adoption of DeFi in various spheres including all kinds of businesses. Have you ever heard of Real World Assets (RWAs)? If not, let me clue you in on a controversial topic, because this is definitely something you should be aware of. 

Essentially, RWAs enable DeFi protocols to achieve extra stability by accessing an additional class of assets that has nothing to do with cryptocurrencies – real ones. This innovation substantially expands implications for the whole industry, opening up opportunities to skyrocket  DeFi capitalization as well as attract new investors.

The introduction of palpable assets to DeFi lending protocols is superior to the traditional financial sector in terms of various limitations to it and is a real godsend for market users who prefer safe-play strategies. From now on, these groups of DeFi residents are able to pour their capital into decentralized finance with greater confidence.  

Additionally, unleashing the possibility of lending real-world assets also allows DeFi to occupy a competitive position against the banking system and customary lenders.

To sum it up, this novelty serves as a bridge between DeFi and real-world assets such as real estate, royalties, etc, unlocking untapped liquidity. Even though all previously discussed advantages are true, everything is not as clear-cut as we would like it to be. 

In our recent discussion with one of my team members, Angelika Erhan, we came to the conclusion that going bearish on real-world assets in DeFi lending protocols is the best option out there, and here is why. 

Essentially, integrating with RWAs implies close cooperation with legal entities, since in order to use RWAs as collateral there is a necessity to have an opportunity to acquire ownership rights over assets in the event of liquidation, which can’t be done using the blockchain technology chain. 

To state the obvious, setting up a legal entity is not an easy task and requires a considerable initial investment as well as additional regulatory costs. Every issuance of a particular real-world asset is an extremely time-consuming and complex process with many pitfalls.

This complicated process involves risk assessment, and the liquidation process is expensive, slow, and in some cases unreliable.

No one can guarantee that you will sell the asset at a profit since liquid RWAs can’t boast transparent markets and price ranges. You can say that DeFi was supposed to become a universal solution to these issues, but it is important to understand that when dealing with tangible assets, DeFi lending protocols tend to lose their advantages and become similar to old-fashioned TradeFi with the same problems. 

The major reason why DeFi is perfectly suited for interacting with crypto assets is due to their scalability, while RWAs do not have this property and will not acquire it anytime soon. Perhaps the Metaverse concept can somehow solve this issue,  but in this case we are talking about a long-term prospect. As for now, the fact remains – real-world assets in DeFi lending protocols is quite a dubious venture. 

I personally can’t grasp the fact that the market wants to return to the roots of TradeFi, bringing back the same downsides we have been deliberately trying to get rid of. 

“I’m convinced that DeFi lending protocols should shift their focus and develop their natural strong side, evolving crypto-native economy rather than making attempts of integrating real-world-assets” – gives his comment Uladzimir Hryneuski, FinTech specialist and Lead PM in Platinum Software Development.

In conclusion, the DeFi space is an amazing thing that has quite literally changed the lives of many people, but from my standpoint, it will only see prosperity and bigger success by serving the growing economy of cryptocurrency assets. That is why I currently stay bearish with RWAs in DeFi lending protocols. 

Perhaps as time passes the situation will get better, but currently, it seems like we are returning to the old side of the system, and that does not align with my vision of the future decentralized finance market. 

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