Editor's Note: This article comes fromChain reference (ID: lianneican), Author: Internal Reference Jun, reprinted by Odaily with authorization.
Editor's Note: This article comes from
Chain reference (ID: lianneican)
, Author: Internal Reference Jun, reprinted by Odaily with authorization.
Interest in cryptocurrencies is always strong during times of economic uncertainty. Since the 2008 financial crisis, Brexit, hyperinflation in Venezuela, etc., the use of cryptocurrencies has skyrocketed in times of economic instability. We all know we are living in one of the most uncertain times in modern history.
Between the Covid-19 pandemic, international power shifts and disruptive innovations, the future has become more unpredictable than ever. This volatility has led to intense interest in alternative, fiat-led alternatives to financial instruments, which represents a huge opportunity for cryptocurrencies and DeFi adoption.
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Objective demand: the tokenization of real world assets will be a major trend
In previous years, we have seen many attempts to bring real-world assets into the crypto market. However, none of them have proven to have seen mass adoption among crypto retail investors or traditional financial players.
The main reasons come down to regulation (tokenized assets are governed by traditional rules) and the lack of a secondary market. Retail crypto investors cannot benefit from these two problems, and there is basically no need for them to adapt to new things, especially now that DeFi protocols have emerged.
Yes, there is currently no ready-made legal model in the market for corporate institutions to attract or borrow funds from DeFi protocols. However, DeFi may provide corporate institutions with well-conditioned loans, which may make corporate institutions consider entering this market. At the same time, corporate institutions will also be willing to provide several types of stable assets as collateral for loans.
However, in the DeFi protocol, real assets are indeed required as collateral to prevent more market declines in the future and to solve the problem of over-collateralization by the way.
Currently, there are several attempts to bring real-world assets into the DeFi market. Most of them seem to accept a wide range of assets, mostly tokenized invoices.
The main problem associated with using these assets in the protocol is the lack of public pricing sources. This is related to the lack of transparency and the need to rely on a centralized party (valuation firm, underwriter, etc.) to determine the price of the collateralized asset. Also, there is no mechanism to monitor pricing in real time (as would be done, for example, when using cryptocurrencies as collateral). These assets are generally illiquid; they are not traded on any market or digital over-the-counter platform; and there is no source of regularly updated pricing information for them—a key point in determining which collateral will be liquidated.
Furthermore, current solutions only allow borrowing in cryptocurrencies, which is not suitable for everyone. That's not a bad thing, but it reduces the chances of attracting large institutions that need financing in fiat currency, which is used for their day-to-day operations.
A perfect solution that enables the tokenization of traditional stable assets and is suitable for the DeFi market must meet several criteria.
Real-world assets used by the protocol must have a transparent pricing source that can be claimed by any user of the protocol. This requires not only selecting assets that can meet this requirement, but also building a price oracle that relays information about the collateral. Such oracles should be connected to transparent and trusted pricing sources such as the Bloomberg Terminal, rather than receiving proprietary data from a centralized party.
The volatility of the real-world assets used by the protocol should be as low as possible, generate fixed income, provide real cash flow for the liquidity pool, and have certain liquidity and markets in the real world so that they can be traded when liquidation events occur. deal with.
Real-world assets used by the protocol should be in digital form, for example, kept on a secure accounting system. In order for this to happen, there needs to be a middleman to operate such systems connected to the protocol.
In order to preserve the decentralized nature of the protocol and maintain trust at the highest achievable level, intermediaries associated with the protocol must be managed, insured, selected, and supervised by the protocol community according to established requirements. In addition, the community will decide on any other key matters for protocol development and economic sustainability, including the selection of assets that can be used as collateral.
In 2021, we will see some initiatives to build new, real-world, asset-backed protocols that hopefully will be the ultimate solution to finally connect traditional financial and crypto markets. Existing protocols are more likely to adopt new protocols in their existing ecosystems after they will be proven operational.
It would be naive to believe that many crypto investors would be willing to make long-term investments in unfamiliar markets. Especially in the DeFi field there are great investment opportunities. Until a new system of issuance of tokenized instruments is established (without any bright signs in this direction), I believe that real-world asset tokenization in the form of STOs will still be limited to closed offerings rather than will receive the attention of the global market.
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Unlike some of the more isolated instances of economic uncertainty experienced in recent history, we are currently in a period of global anxiety bred by health, political and technological change.
The Covid-19 pandemic has ensured that health is the single biggest force driving government action as well as business and personal decisions. The International Monetary Fund has warned that while a vaccine could spur some industries to return to pre-crisis levels, most economies will suffer lasting damage and extreme poverty could emerge for the first time in 20 years. While some 55% of executives expect the economy to improve over the next six months, the impact of Covid-19 is far from being equal across business areas. Big tech companies like Amazon, Google and Facebook have benefited from a growing emphasis on e-commerce, remote work and digital services. Meanwhile, here and there are ghost towns that once thrived with tourism and hospitality.
The shift of international powers compounds the dangers ahead. While the U.S. still tops the Asia Power Index, its lead over China has halved since 2018. The U.S. dollar has held a special place as an international reserve currency since the creation of the United Nations system after World War II, but China's Belt and Road Initiative (BRI) threatens trade relations and links between Asia and Europe. If China required all 138 countries participating in the BRI to use its fast-growing central bank digital currency (CBDC) — the digital yuan — the country with the greatest economic impact would be China.
The growing wealth gap between the world's richest 1% and everyone else is another factor contributing to financial instability. In the United States, the wealth gap between the richest and poorest households more than doubled from 1989 to 2016. The acceleration of technological innovation will only widen these gaps. Artificial intelligence and automation now threaten the jobs of truck drivers, customer service representatives, retail clerks, market research analysts and even doctors. The idea of a universal basic income to support those whose jobs have been replaced by algorithms is but a Band-Aid for a larger problem — the reality that the fiat economy no longer works for ordinary people.
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In 2021, mass adoption of crypto and DeFi will take place
If all this economic anxiety and global confusion is anything to go by, it's that people, businesses and governments are showing remarkable resilience. Innovation takes off in times of transition, and we have already witnessed how goods and services that provide solutions can meet the current challenges posed by the Covid-19 pandemic. For example, Robinhood, an online stock trading platform, generated $180 million in revenue in the second quarter of 2020, a 198% increase from $91 million in the first quarter. The growth of contactless payments has ensured that more people join the cashless economy. Rising interest in online investing and digital payments is a sign of growing comfort with online transactions, paving the way for the adoption of cryptocurrencies.
Given the economic uncertainty exacerbated by the global health crisis, evolving international power dynamics, and growing income and wealth inequalities exacerbated by automation and technological change, it is natural to look for alternatives to the centralized systems that are causing this disruption. And then decentralized finance and peer-to-peer transactions using cryptocurrencies. When economic uncertainty increases, so does interest in cryptocurrencies, and surging cryptocurrency prices and DeFi participation suggest that this period of economic uncertainty is no different than other periods, just on a larger scale. big.
