Why tokenisation can revolutionise decentralised finance
by Claude Eguienta, CEO of Mimo Capital
Undoubtedly, investors and companies within DeFi are facing challenging times. The crypto winter batters portfolios, and high inflation plus rising interest rates for borrowers has been an onslaught for everything else.
A tried “old reliable” for recessions is the buying of fixed-income bonds, they provide reliable returns that appreciate with the declining interest rates that are usually associated with such periods. Over its short lifespan, blockchain technology has suffered a deficiency in provisioning stable investment alternatives such as this; however, with the growing development of tokenized products, this could be about to change.
To its credit, the cryptocurrency and DeFi industry has matured considerably. In just a few short years, the CEXs have become interwoven with protective regulations, and as of January 2023, the industry boasted over 420 million worldwide crypto users despite bear market conditions. The Oliver Wyman consultancy and JP Morgan’s recent endorsement of deposit tokens for the financial sector may have just heralded the start of a new DeFi industry that’s significantly more robust.
The Wild West days of blockchain may be behind us and making a fortune from just a hundred dollars is unlikely, but the industry can still provide value in new ways. Investors love blockchain in the bull market, but this only happens once every four years. How can investors make do in the remaining period?
It’s been possible for some time to gain a fixed income through depositing Stable Coins such as USDC into De-Fi products. They provide favourable interest rates for lending the deposited assets to borrowers and are an excellent way to weather the bear market. However, the next great DeFi innovation seeks to harness the $126.9 trillion bond market and bring it on-chain.
DeFi and much of the banking world have been exploring deposit tokens and tokenizing real-world assets such as securities, bonds, and commodities for a while. In a 2021 article from the Financial Times, RBC executive Sean Taor summarised: “If you can use blockchain from start to finish, you take out a lot of the costs, a lot of the risks in terms of counterparty and settlement risks.”
So the banking world is keen to implement blockchain technology for distributed ledgers to help markets become more liquid and transparent.
DeFi degen mentality is opposed to traditional banking. Ironically, through their success, DeFi has actually scaled competition as the legacy blockchain-admiring banks integrate blockchain technology at a break-neck speed. Basic economic theory dictates that a competitive market translates to better products, more choices, lower costs, and higher innovation. As the availability and demand for DeFi tokenised real-world assets rise, it wouldn’t be presumptuous to predict the likelihood of a resulting future economic boon.
As tokenised assets become more accessible, they are likely to draw in new demographics of investors. For example, the average age of crypto users ranges from 18 to 45, while those over 65 hold approximately half of all international bond assets. As fixed-income tokenized assets become increasingly more present on decentralised applications and exchanges, they would likely introduce a new generation of investors to such markets. Furthermore, the long-term credibility and trust gained through providing investors with reliable new income streams would be a fundamental milestone toward mass adoption.
It will take time for this new on-chain industry to mature fully, and while there’s risk involved, the gift of foresight could reward early investors well. Undoubtedly, the implications of tokenised traditional assets will be transformative and far-reaching. As the large banks move permanently into Web3, the lines will likely blur further between the worlds of DeFi and conventional banking.