Why Onboarding Traditional Investment Vehicles Is Integral to the Success of DeFi

To describe decentralized finance’s (DeFi) rise as anything other than meteoric would be a gross understatement. DeFi burst into the limelight in 2020 and has moved from strength to strength since then, seeing its total value locked (TVL) grow from around $600 million in 2020 to well over $40 billion at the time of writing.

DeFi initially emerged as an alternative to legacy investment markets, one that leverages blockchain technologies and crypto assets to provide investors with better experiences. So, for much of its existence, it has centred around cryptocurrencies and other native blockchain assets.

But while the crypto space remains a seat of invention and innovation, DeFi may stand to benefit more by opening up to include traditional investment vehicles.

Why Does That Need To Happen?

DeFi’s current environment can be accurately summed up as crypto-heavy. The scene is dominated by crypto-based financial services, which for a long time, has meant it correlates with crypto prices. This is where the problem lies.

Crypto prices are volatile, a volatility that given DeFi’s link to crypto assets, has created a seasonality upon which the success of the underlying idea and technologies is judged. DeFi is vibrant and promising during a crypto bull market, with lots of activity, growth, and investment opportunities, but quickly falls into a slump during bear markets.

But that need not be the case. Regardless of the performance of crypto assets, DeFi’s tools, protocols, and smart contracts are still revolutionary technologies. Their successes should, therefore, be independent of crypto price cycles.

This is where real-world assets (RWAs) come into the picture.

DeFi and Real-World Assets

Eliminating DeFi’s seasonality doesn’t mean abandoning cryptocurrencies. Instead, it involves the space expanding to include a broader range of financial applications and services, and in doing so, dilute its link to the crypto market.

The only way to do that is to bring RWA,s, like stocks, real estate, commodities, and bonds on-chain. Having this many financial products makes cryptocurrencies only one variable of a broad equation, ensuring DeFi will no longer be affected by seasonal changes in crypto prices.

This will bring some much-needed stability and consistency to DeFi. But that’s not the only benefit– RWAs on-chain create a much-needed avenue for hedging and risk management. Investors will have alternative opportunities to the risky and volatile opportunities, making the space more appealing to risk-averse investors while also allowing for more sophisticated investment strategies.

RWAs on-chain will also allow DeFi to bridge the gap between existing financial systems and the decentralized world, which will go a long way in securing the future of the space. How?

Well, for one, tokenizing products like stocks, bonds, and commodities allows DeFi to tap into already-established markets and reach a wider pool of investors and traders. If these assets are available on-chain, many of their existing investors will be drawn to DeFi platforms thanks to the efficiency that blockchain technology enjoys over legacy investment channels.

Such an inflow of new users will mean higher trading and investment activity in the space, which translates to more liquidity. This is important because a lack of liquidity has been one of the main things holding back the space.

Onboarding traditional investment vehicles will also help with regulatory compliance. Having a clearly defined regulatory framework plays a crucial part in the mainstream success of any market. Unfortunately, DeFi is a largely unregulated space. This is due to the fact that crypto assets remain in regulatory limbo in many parts of the world.

In comparison, traditional investment instruments are already subject to regulatory frameworks in pretty much every jurisdiction. So, incorporating these vehicles into DeFi in a compliant manner can help DeFi projects navigate the regulatory landscape more effectively, reducing legal risks and increasing its legitimacy as a financial market going forward.

All these factors combined will create a stable, liquid, and more compliant space with the added advantage of being built on blockchain technology. This will make DeFi appealing to all kinds of investors – not only the crypto-savvy ones – allowing the space to achieve mainstream adoption.

So who are the rising stars currently working to implement these types of use cases?

Projects bringing TradFi to DeFi

KUMA Protocol, is one project using RWAs to make DeFi investing less risky. The protocol accepts NFTs backed by traditional real world assets such as government bonds or corporate assets. Additionally, users will be able to mint composable interest-bearing stable tokens backed by these NFTs, providing users worldwide with accessible, low-risk investment opportunities.

There is another benefit to onboarding traditional investment vehicles– it provides an avenue for collaboration and synergy between the two sectors. This can lead to innovative financial products and services that leverage the strengths of both systems, creating a more efficient and comprehensive financial ecosystem.

TrueFi, a lending protocol that brings real-world debt infrastructure on-chain, is a good example of this. By bringing asset management on-chain, the project removes intermediaries. This has created capital markets that expose users to both crypto-native and real-world financial lending opportunities worldwide in a more efficient manner.

It's the same for Maple Finance. The protocol was founded by a team of former bankers and credit investment professionals that used blockchain technology to create a capital network that provides infrastructure for existing credit experts to run on-chain lending businesses and connect them to institutional borrowers and companies seeking capital on-chain.

Kwenta is another DeFi protocol that has leveraged RWA on-chain to offer more innovative financial products. The decentralized derivatives trading platform provides investors with exposure to cryptocurrencies, forex, and commodities with up to 50x leverage. And thanks to a proprietary margin engine, users can trade any market with a single account.

Where does it all go from here?

DeFi is often seen as competing with existing investment markets. However, the two don’t have to be entirely separate spaces. Through tokenization, traditional investment instruments can exist within DeFi, and to the great benefit of the space.

Onboarding traditional investment vehicles will make DeFi less vulnerable to crypto price cycles with the added benefits of being more liquid and more compliant with regulation. This makes it crucial to the space’s long-term success and broader adoption in the global financial landscape.

The good news is, the space is increasingly aware of this fact. This has made real-world asset (RWA) protocols a growing trend in DeFi. If you’re new to crypto, you’re getting in at a great time. If you’re already a crypto investor, hang on because new advances in blockchain technology are dropping every day.