With a total invested value of over $ 13 billion, decentralized finance has really shaken the crypto world over the past year. This provided a new way of making a profit in the cryptocurrency market. Meanwhile, DeFi is currently just a niche trend with huge potential to start a revolution in the corporate loan market. To grow out of diapers, DeFi desperately needs to be tied to real assets and exist in an environment that real companies, corporate clients, and more can use.
In theory, DeFi really looks like a win-win solution for those who already have cryptocurrency, as they finally get some passive income through incentive mechanisms and repayment coverage, and for borrowers where they can benefit from a loan on such terms. like no traditional place can offer.
Instability and excessive security
However, there are several problems with DeFi that require urgent treatment. The first major drawback for all parties involved is excessive guarantees to accommodate price fluctuations.
In most cases, the protocols require borrowers to guarantee their loans at least 150% of the value of the loan. Let’s say you borrow $ 100. This means that you must guarantee your loan at least $ 150. If your guarantee falls below 150 points, your loan will be charged a settlement penalty.
Over-security is a major obstacle to achieving one of Defi’s core goals: making financial services truly affordable. The same problem occurs with stablecoins issued under the DeFi protocols because it also requires increased security.
Oscillations in security have already resulted in Maker’s total losses of 6.65 million Dai (roughly $ 6.65 million) and may lead to more similar incidents in the future.
No connection with real values
This issue can be controversial, as many people in the cryptographic room will be isolated in their own court. However, cryptocurrency has become part of the global financial system, and in order to remain in it, the cryptocurrency must be connected to the outside world, and without it there would be no growth.
But beyond my personal opinions and beliefs, the lack of connection to real assets hurts the DeFi room in many ways. First, traditional companies are not allowed to borrow money as they have nothing to offer other than cryptocurrency as security. The second problem is the lack of real cash flows behind the protocol signs, which means price volatility for protocol signs, which are the most important incentive tool. Ultimately, all the problems mentioned limit the further growth of DeFi as a model, and, most importantly, they lead to the risk of protocol shrinkage due to the loss of token value.
With all the challenges in mind, a DeFi room requires an infrastructure that can bridge the gap between real assets and the DeFi ecosystem so that anyone can use real assets as collateral to borrow money from the protocols.
So, will any assets work in the real world? not really. The original must meet simple criteria to solve the above problems:
The asset must be stable to deal with volatility and over-security issues.
The asset must generate constant recurring income in order to achieve real cash flows.
The price of the additional item should be determined in a transparent manner based on several documented and recognized sources.
An asset that meets these criteria and solves the above problems is presented in the form of bonds or securities.
Why bonds will win in traditional and deFi markets
With over $ 5 billion set aside for DeFi lending alone and over $ 13 billion locked in total, this would be the perfect way for businesses to borrow money without doing anything with the book and marketing.
In addition, the transformation of traditional financial products into an open and decentralized world reduces the number of intermediaries required to raise funding and reduce costs. In the current system, issuance costs may include commissions paid to stock exchanges, paying agents, managers, banks, lawyers, and rating agencies.
If you look from the perspective of investors, they will get protocols with a level of stability that you have never seen in the market before. The use of bond protocols prevents over-collateralization and ensures asset stability even during periods of high volatility in the cryptocurrency market, thereby eliminating the risk of liquidation.
Most importantly, leveraging debt in the real world will allow the protocols to generate a stable recurring return that can be distributed to investors. Basically, this will allow Defi investors to benefit from guarantee income and interest payments from borrowers.
Obstacles to building such a system
In general, DeFi is isolated from the traditional economy. The first and most obvious problem is that a guarantee is required to qualify for a DeFi loan.