With more than $13 billion locked, decentralized finance (DeFi) has undeniably shaken the cryptocurrency world this year. It has created new wealth generation channels, like lending and borrowing. In the meantime, DeFi is just a niche trend with a vast potential to ignite a revolution in the lending and borrowing business. To a great extent, DeFi needs to be connected with real-world assets and exist in an environment where it is easily applicable to real businesses, corporate clients, and others.
As a new idea, DeFi looks like a win-win solution for crypto users since they can generate passive income from incentivization methods and yield farming. Besides, borrowers benefit from DeFi lending platforms with previously impossible terms.
Volatility and Over-Collateralization
Nevertheless, there are some major issues with DeFi that must be solved urgently for it to thrive. The first one is the over-collateralization of an asset to cater to price volatility.
Most protocols require borrowers to collateralize their loans at a minimum of 150% of the loan value. Assuming you want to borrow $1000, you have to collateralize your loan with a minimum of $1500. If your collateral drops below the $1500 value, your loan would be subjected to a liquidation penalty.
Over-collateralization is a major barrier to making financial services genuinely accessible to everybody. Statistics show that collaterals’ volatility has resulted in losses amounting to $6.65 million for Maker alone.
Lack of Connection to Real-world Assets
The poor connection of DeFi to real-world assets causes numerous problems to the DeFi landscape. First, it limits traditional companies from borrowing funds since they cannot offer anything apart from crypto as collateral. The second problem is insufficient real cash flows for protocol tokens. This destabilizes the prices of these tokens, which act as the primary tools of incentivization.
Generally, these two issues hinder the further growth of DeFi. They also lead to the risk of the protocol’s default because of the loss of protocol tokens’ value.
The Tokenizer Solution for DeFi
With the above issues in mind, the DeFi landscape needs a solution that bridges the gap between real-world assets and the DeFi ecosystem, enabling anyone to use real-world assets as collateral to borrow funds from protocols.
However, it is essential to note that not all real-world assets will work. The asset must meet these simple criteria to solve the above problems:
- The asset must be stable to solve volatility and over-collateralization issues.
- It must have a regular fixed income to generate real-world cash flows.
- The price of the collateral must be established transparently by various reputable and recognized platforms.
The asset that meets the above criteria and addresses the problems above comes in bonds or fixed-income securities. Generally, the DeFi market is disconnected from traditional finance. Luckily, the Tokenizer ecosystem offers a regulated bridge with the traditional financial market, ensuring stable growth of the DeFi landscape.
Tokenizer Blockchain Banking Platform
Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.
Are you in need of raising funds or investing in security tokens? Apply to raise funds through Tokenizer by filling this application form. If you want to invest in security tokens, sign up for a Tokenizer Investment Account today, and if you want to liquidate and trade-in Asset-Backed Tokens, we have a decentralized exchange designed for you!
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