DeFi is “breaking the circle” by connecting real-world assets, and is rapidly emerging as a new track.
Written by: Kira Sun and Ruby Wu, partners of Incuba Alpha, a blockchain investment institution
We know that DeFi is developing very fast, but we didn’t expect it to be so fast.
We have about three months ago of the Imagination had DeFi balance sheet expanded table of “horizontal expansion” and bring the interest rate market, “vertical expansion”, after a short period of time less than a quarter, many have thought it was very bold Imagination And predictions are being quickly verified. Interest-bearing basic assets or synthetic asset products are becoming more and more abundant. More and more lending agreements begin to support the mortgage of various LP Tokens, and Iron Bank’s attempts at incomplete mortgage lending between DeFi agreements , And even an endless stream of algorithmic stable coin innovations, a diversified and multi-level DeFi credit system is becoming systematic and three-dimensional.
The development of DeFi is always inseparable from assets. In DeFi, a financial market with similar fixed income characteristics, if you want to obtain excess returns, there are basically only three ways: one is to increase leverage, the other is to lengthen the cycle, and three. It is credit sinking.
DeFi users are generally proficient in using lending tools and are no strangers to the operation of increasing leverage; lengthening the cycle requires the completion of the corresponding interest rate market tools; at present, the current fastest growing trend is the sinking trend of credit in the DeFi market, which is also We study and judge the core context of the horizontal expansion of the DeFi market-introduce more types of credit into the blockchain as assets on the chain, and include these assets in the category of qualified collateral, and release credit and currency liquidity by introducing more collateral. So as to realize the expansion of DeFi balance sheet.
In addition to the above-mentioned innovation of blockchain-native encrypted assets as qualified collateral, along this context, we are pleasantly surprised to observe that DeFi is “breaking the circle” by connecting real-world assets, and MakerDAO accepts reality. Assets (Real World Assets) as collateral marks the rise of a brand new track.
DeFi rookies such as Centrifuge, Naos Finance, ShuttleOne, Persistence, Convergence, etc. are committed to serve as a bridge connecting DeFi and CeFi, bringing various real income assets such as consumer finance, supply chain finance, corporate credit, and real estate rental income rights to The chain greatly extends the boundaries of the DeFi world. Incorporating real-world assets into the DeFi world will make the current stock of DeFi assets seem extremely insignificant.
From the perspective of financial logic, the business model of these projects is not complicated. In the real world, many financial technology companies are providing financing services based on assets based on specific asset income rights in a centralized manner. The essence of their business is to mirror the traditional The business logic of “Structured Finance” in the financial market.
In the traditional structured financing business, we need the financier to package the underlying assets with future cash flow income into SPV (a trust or asset management product), and issue priority shares and inferior shares, and investors subscribe The corresponding share pays the loan to the financier, and the inferior share provides a safety mat for the principal payment for the priority share. If the priority or inferior shares are listed on the exchange, these shares will become relatively familiar “asset-backed securities.” Fintech companies will be responsible for customer acquisition due diligence, financial advisory, asset management, process management, information disclosure, risk control and liquidation in this process.
From the perspective of business nature, DeFi protocols such as Centrifuge and Naos Finance mirror the positioning of financial technology companies in the traditional structured financing business on the blockchain, and replace offline financial services with the technical design of “NFT + DeFi” The process has been “asset tokenization”. The agreement will tokenize offline income right assets (such as accounts receivable, etc.) to generate NFT, and over-collateralize NFT (such as 30% off face value financing) to loan agreements such as Compound or Maker to borrow stable currency, and then the acceptor Convert stablecoins into U.S. dollars to lend to real offline borrowers, and investors can invest in corresponding assets through loan agreements to obtain interest income.
The business logic of Centrifuge and Naos Finance is to use DeFi to replace the entire cumbersome business chain of packaged SPV, asset management channels, structured stratification and capital docking, etc., and achieve structured financing in a decentralized way, and fully Using Defi’s fund pool feature, the peer-to-peer P2P transaction is transformed into a peer-to-peer pool, which changes the risk management structure and improves the efficiency of fund matching.
This business model does not seem to sound very unfamiliar. From the perspective of underlying assets and business logic, it is very close to the Internet finance model that was popular a few years ago. Putting aside the colored glasses that demonize “mutual gold”, DeFi connecting real-world assets should be the closest financing model to the original idea of Internet finance. It is expected that the next short-term development will quickly replicate the early barbaric growth of mutual gold. While there are significant business opportunities, it will also bring unfamiliar risk points to DeFi users.
Breakthrough opportunities are very obvious
For the native DeFi market, the physical assets on the chain essentially introduce a new type of credit products that are completely different from the current native blockchain asset attributes, and also create a new type of asset product that can provide DeFi users with more abundant The selection of assets on the chain drives the expansion of DeFi’s liability side and realizes the expansion of the entire DeFi balance sheet.
In the traditional financial market, similar underlying high-quality assets have the threshold requirements for qualified investors for structured investors. By means of NFT+DeFi, investors can obtain the income dividend of the structured financing market in a no-threshold way. This kind of investment opportunity will also further enhance the market penetration level of DeFi and attract more users to participate in the DeFi market.
Secondly, similar underlying assets have fixed financing terms and interest rates. With the introduction of real-world income rights assets, the DeFi interest rate market we have been expecting will have a basis for taking off. Users need to use various interest rate agreements to participate in new asset product categories. The interest rate agreement will usher in a catalyst for the simultaneous increase in penetration rate and TVL. The outbreak of the DeFi fixed income market is only a matter of time.
The biggest innovative significance lies in the combination of protocols such as Centrifuge and Naos with Maker and other stable currency protocols. Maker accepts real asset mapping NFT over-collateralization to put more Dai stable coins, and this part of the stable coins will truly enter the real economy. Circulation, embracing real payment, lending, and commercial circulation scenarios. This is a surprising currency creation and release path for all stablecoin protocols. The circulation of stablecoins is naturally cross-border, and the tokenization of physical assets becomes After NFT, it will also circulate freely on the blockchain. We look forward to seeing various financial assets around the world exchange value in the same borderless network.
At the risk level, the risk of connecting real-world assets through DeFi will pose a huge challenge to the DeFi world.
Due to the relatively long overall business chain and the large gap between the risk-return characteristics of basic assets and the original assets on the current chain, many investors still have lingering fears about the chaos of the previous mutual gold industry, including self-financing, capital pools, maturity mismatches, Frequent thunderstorm defaults, etc., investing in real-world assets in the DeFi market will inevitably face the same similar risks.
In the early stage of barbaric growth, mutual gold companies often raised short-term funds into an integrated capital pool, and used “black boxes” to opaquely invest in long-term financial assets with high credit risks. This kind of fund pool makes the user’s investment and the underlying specific single asset no one-to-one correspondence. Instead, the user’s risk has changed from the default risk of a single basic asset to the overall default risk of the mutual fund platform. In addition, this mismatch of long-term and short-term investment leads to mismatches in the duration of the asset side and the liability side, and it is easy to accumulate the vulnerability of the platform’s own capital turnover. Once the underlying assets have a large default, there will be thunderous liquidity crisis.
However, unlike P2P in CeFi, DeFi runs on a public ledger. In the design of protocols such as Centrifuge and Naos, a user’s single investment can correspond to a specific single NFT of the underlying asset, which can reduce funds at both ends of assets and liabilities. The occurrence of mismatches between pools and maturities greatly reduces the possibility of an overall liquidity crisis in the agreement.
In addition, since the business involves real-world assets, it will inevitably face the credit risk of the underlying asset itself and the moral hazard of the asset manager. This is also the biggest risk of thunderstorms across the mutual gold industry. The risk and return characteristics of various types of income rights assets are extremely different from each other. For example, supply chain assets have very complicated rights and verification risks, and unsecured credit income rights themselves have the highest default rate of all financial assets. Some small and micro-credit loans may face a default rate of 50%, and may even face the complex risks that some underlying assets cannot be liquidated and cannot be disposed of, resulting in unrecoverable claims. The general DeFi users have difficulty distinguishing this and are easy to suffer. Large losses.
In extreme circumstances, traditional mutual gold platforms will also incorporate junk assets into asset packages, fabricate non-existent underlying assets, and even set up a guarantee company for false credit enhancement while setting up a shell company for self-financing or fraudulent acquisition. User financing, opening false contract agreements, embezzlement of funds by platform founders, etc., this series of behaviors themselves are financial frauds. However, due to the asymmetry of online and offline natural information, the industry lacks legal compliance constraints and regulatory jurisdiction, investors basically have no control over basic assets and offline business links. DeFi cannot fundamentally and technically eliminate these cores. The existence of risk.
In the final analysis, in the off-chain links, especially in the early stages of industry development, we need to rely heavily on the professionalism of the teams such as Centrifuge, Naos, ShuttleOne, Persistence, and Convergence to restrain moral hazard and control the authenticity and quality of basic assets. Secondly, in dealing with the default of a risk event, investors can only rely on the DeFi agreement and its partners for offline asset disposal and liquidation of collateral.
Users should carefully consider the nature and risk-return characteristics of the underlying assets when choosing such real-world assets to invest in DeFi protocols. The platform may advertise the low default or non-performing rate of their assets, but this statement is difficult to provide effective proof and insufficient As an effective reference, we should pay more attention to the risk control measures introduced by the DeFi protocol for these risks.
Regarding risk control measures, currently seen better designs include Centrifuge’s introduction of over-collateralization of NFT value, and prioritization and subsequent stratification of the capital side, which mitigates the credit risk of priority investors through a structured approach ; And Naos introduced the design of the Insurance Mining risk protection fund on the chain, introduced offline real insurance companies under the chain to insure the basic assets, carried out credit enhancement, and obtained compliant lending business in various countries in Southeast Asia License to meet the compliance and regulatory requirements of the exhibition industry. These risk measures can help DeFi agreements and investors control certain risks in the early stages of development.
On the whole, the competition of these DeFi rookies will be a complex and three-dimensional dimension. In addition to the level of technology, products and experience, it is necessary to compare the scenarios and capabilities of acquiring assets, the quality and credit risks of the assets themselves, and the response to supervision Compliance and risk management capabilities. We firmly believe that it is imperative for DeFi to break the circle and embrace real-world assets. When DeFi and CeFi collide in the field of financial technology, it will be the next-generation mobile financial infrastructure explosion Big Bang.
Disclaimer: Incuba Alpha is an early investor in NAOs.Finance and holds the equity of NAOS.Finance
