Bessie Liu

Centrifuge — an on-chain ecosystem for structured credit — is looking to become the real-world asset facilitator for Aave’s new stablecoin, GHO.



In a governance <a href="https://governance.aave.com/t/a-discussion-on-a-gho-real-world-asset-facilitator/11908" target="_blank" rel="noreferrer noopener">discussion</a>, Asad Khan, DeFi politician at Centrifuge, noted that its backers had the relevant infrastructure and ecosystem to integrate GHO with the real world. 



The protocol is already preparing a draft so that once GHO facilitators are ready for onboarding, they will be ready to post a formal facilitator proposal.&nbsp;



“GHO has a great deal of potential. It represents an opportunity to iterate on the decentralized stablecoin mode, while benefiting from the strength of the existing Aave community and userbase,” Khan told Blockworks.



Centrifuge is currently an real-world asset (RWA) facilitator for <a href="https://blockworks.co/tag/makerdao" target="_blank" rel="noreferrer noopener">MakerDAO</a>’s DAI stablecoin.



Read more: <a href="https://blockworks.co/news/what-are-real-world-assets-defis-newest-yield">What Are Real-world Assets? DeFi’s Newest Yield</a>



“We&#8217;ve seen how critical real-world assets have been for stablecoins like <a href="https://blockworks.co/price/dai" target="_blank" rel="noreferrer noopener">DAI</a>, and given the state of the crypto market today, we think RWA will continue to play an increasingly larger role,” Khan said.



According to <a href="https://www.blockworksresearch.com/" target="_blank" rel="noreferrer noopener">Blockworks Research</a> analyst <a href="https://twitter.com/smyyguy" target="_blank" rel="noreferrer noopener">Dan Smith</a>, MakerDAO is currently the “leader in RWAs with over $600 million of off-chain collateral backing DAI.”



“A DeFi titan joining this market would likely increase the total amount of RWAs in crypto, further legitimizing DeFi in the eyes of traditional investors,” Smith said.&nbsp;



<h2 class="wp-block-heading">Why should DeFi onboard RWAs?</h2>



RWAs can be considered off-chain digital assets and are most often used to serve as collateral in DeFi.&nbsp;



These assets come in measurable forms such as cash, gold and <a href="https://blockworks.co/news/real-estate-investing-guide">real estate</a>. Unlike cryptocurrencies — RWAs can often be linked to real-world organizations.&nbsp;



“While onboarding RWA collateral can be challenging, we think our facilitator proposal offers a more scalable approach,” Khan said. “We are building on the lessons we&#8217;ve learned doing this previously, both with MakerDAO and the Aave RWA Market, and are leveraging our specialized ecosystem and infrastructure to do so.”



As of recent, the term RWA has been put into question.



Luca Prosperi, a prominent figure in the cryptocurrency space, and MakerDAO in particular, noted that using the term RWA can imply that digital native assets are not as valid.



“It is truly a logical insult and a counterintuitive definition that can do way more harm than good,” he tweeted.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">0/ I’m on a personal fight to remove the word Real-World Assets (or RWA) from the DeFi jargon It is truly a logical insult and a counterintuitive definition that can do way more harm than good *PLEASE* help &#8211; here is why 👇🏻&mdash; Luca Prosperi (@LucaProsperi) <a href="https://twitter.com/LucaProsperi/status/1625627183321415683?ref_src=twsrc%5Etfw">February 14, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The adoption of RWAs — or just “assets” — within DeFi will nevertheless give the industry access to larger debt markets — unlocking liquidity on-chain and accelerate mainstream cryptocurrency adoption.



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<hr class="wp-block-separator">

Centrifuge Wants To Back Aave’s GHO Stablecoin With Real-world Assets

John Gilbert

<div class="wp-block-group is-layout-flow"><div class="wp-block-group__inner-container">
In this <a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money, Stabilize the World</a> series, we have explained why we need a new monetary system and why it needs to be able to import the inflation resistance of hard assets into a useful, fungible stablecoin. But to achieve this grand objective, we need to tokenize real-world assets. Despite the challenges ahead, <a href="https://reserve.org/en/">Reserve</a>, the protocol for launching asset-backed stablecoins, believes this future is possible.&nbsp;



<h3 class="wp-block-heading" id="series-table-of-contents"><a href="https://blockworks.co/news/stabilize-money-stabilize-the-world/">Stabilize Money Stabilize the World</a> </h3>



Part 1:&nbsp;<a href="https://blockworks.co/news/how-broken-monetary-policy-fuels-instability">What’s broken</a> Why unstable money isn’t safe for the world and how to understand monetary policy Part 2:&nbsp;<a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are people doing today about it?</a> A dive deep into the types of monetary policy alternatives that stablecoins offer Part 3:&nbsp;<a href="https://blockworks.co/news/what-is-an-inflation-hedge-finding-stability-in-todays-market">What is the right way forward?</a> A guide to the various inflation hedging tactics and how they can be used in stablecoins Part 4:&nbsp;<a href="https://blockworks.co/news/what-it-takes-to-tokenize-the-world">What will the future look like?</a> A look at how tokenization will change the stablecoin ecosystem About our sponsor:&nbsp;<a href="https://blockworks.co/news/about-our-sponsor-reserve">Reserve</a> A video explaining the Reserve Protocol



Assets like <a href="https://www.flowcarbon.com/">carbon credits</a> and <a href="https://www.parcl.co/">real estate</a> are already moving on-chain. Even <a href="https://credix.finance/">car loans</a> now exist on the blockchain. As this ecosystem matures and finds some regulatory harmony, these tokens may provide the portability and stability needed in backing stablecoins that can retain greater purchasing power than fiat currency.&nbsp;&nbsp;&nbsp;



But this technology has central points of failure. Like fiat-based stablecoins, tokenized assets need a third-party intermediary to guarantee one-to-one backing and price equivalence. For example, the Venezualen government attempted to create an oil-backed currency called the Petro. But it failed to match the price of oil because the government had no redemption policy or market mechanism that would allow them to maintain a peg.&nbsp;



Despite these obstacles, the number of innovative solutions is endless — from using Chainlink price oracles to make synthetic assets, to tokenizing fractional ownership of real assets, and even issuing tokenized securities and treasuries. The number of potential approaches makes predicting the future of asset-backed stablecoins hard to predict. 



The future can go one of two ways. In this article, we will explore the different approaches to tokenization and how they could fit into a monetary system of <a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">asset-backed stablecoins</a>.&nbsp;



Read more: <a href="https://blockworks.co/news/the-investors-guide-to-stablecoins">What are Stablecoins? The Full Investors Guide </a>



<h2 class="wp-block-heading">Tokenized property</h2>



The real estate market is an industry primed for tokenization. Historically, buying real estate is one of the best financial decisions anyone can make. The problem is that <a href="https://www.cnbc.com/2021/11/10/home-prices-are-now-rising-much-faster-than-incomes-studies-show.html">rising house prices have outpaced wages</a> and subsequently put buying a house out of reach for many people across age and demographic spectrums.



<a href="https://cointelegraph.com/nonfungible-tokens-for-beginners/what-is-tokenized-real-estate">Tokenized real estate</a> can allow people to own a share of a piece of real estate for as little as $1. As the price of that piece of real estate rises and falls, owners of the token are free to buy and sell as they please. A buyer may even, overtime and on their own schedule, purchase all the shares of a home and own it outright.



There is, however, a downside to this. It can further exacerbate the over-financialization of the real estate market by inviting more speculation from both retail and institutions. It is still in a nascent stage, so it could prove the opposite by providing greater price discovery.



How it works



Fractional ownership and synthetic assets are two popular approaches to real estate tokenization. In the first approach, companies like RealT fractionalize property entities into tokens on the Ethereum blockchain. Those tokens then entitle the owner to a share in revenue generated from that property. The fractionalization requires a formal legal process that employs a property manager to maintain properties on behalf of investors. They are responsible for finding tenants, collecting rent and paying the investors.&nbsp;



Synthetic assets, on the other hand, have no real world collateral backing. Platforms like Synthetix combine decentralized price oracles like ChainLink with a system of overcollateralization to imitate the value of physical products on digital exchanges.&nbsp;Even though the collateralization is different, protocols like <a href="https://www.parcl.co/">Parcl</a> use their secure price feeds to track the real world value of real estate. 



Pros and cons&nbsp;



Fractional ownership and synthetic assets have their advantages and disadvantages when it comes to their utility as stablecoin collateral. Fractionalized ownership requires more counterparty risk. And if a stablecoin commits to using these assets in a portion of the collateral basket, the stablecoin issuer needs to rely on companies like RealT to enforce contracts between multiple parties.&nbsp;



Synthetic assets have less counterparty risk; however, they are not backed by hard assets and have their own set of smart contract and platform incentive challenges. Synthetic assets use yield farming incentive mechanisms and gamification to provide stabilized value. These assets may work well in bull markets because there is less sell pressure on the crypto being used as collateral. In bear markets, liquidity providers face greater risk of liquidation and possibly impermanent loss. So if platforms become illiquid, their synthetic assets may lose value.&nbsp;



Another example of real estate assets might also include land in the metaverse. Similar to synthetic assets, and the 1990s explosion of dot-com real estate valuations, metaverse land value would be inherent to incentive mechanisms and network effects of the digital world they inhabit. A big unknown is the price stability of metaverse land in the future.



If price speculation is the fundamental force driving demand of a tokenized asset, then it will pose greater risk to stablecoins. Ideally, the issuer of an asset backed stablecoin would be able to collateralize tokens that have ample liquidity and direct utility in the real world. Tokenized energy may offer the best of both worlds.&nbsp;&nbsp;



<h2 class="wp-block-heading">Tokenized energy</h2>



Gas and energy has proven to be one of the greatest inflationary hedges post-pandemic lockdowns. As of <a href="https://www.tradingview.com/chart/Dvauw0KB/?symbol=AMEX%3ABNO">Nov. 18, 2022</a>, the United States Brent Oil Fund LP (BNO) is up 36% over one year. In comparison, the Nasdaq Index 100 (NDX), is down 29%.&nbsp;



This inverse relationship to the stock market could provide great stability to a basket of diverse assets. But as previous attempts such as Venezuela&#8217;s oil backed Petro has shown, tokenizing oil is very difficult. The market is more restricted than gold and real estate.&nbsp;



Tokenized energy could offer a more portable alternative that not only offers an inflationary hedge, but also incentivizes green energy. Powerledger.io is working on a way to tokenize green energy into granular <a href="https://cointelegraph.com/news/power-ledger-launches-renewable-energy-credit-marketplace-in-se-asia">credits that can be exchanged across the energy grid</a>. For example, someone with a private solar panel would earn these credits for contributing green energy to the power grid. In return, the owner could use the credits to pay for their own energy usage and then sell any excess tokens back to the grid or another exchange.&nbsp;



If the energy grid was properly decentralized across many public and private energy producers, this type of tokenization could offer the least counterparty risk to any of the alternatives. However, in a future where energy is monopolized, this type of tokenization could provide centralization risks.&nbsp;



For a stablecoin to capture the inflationary hedge of a diverse investment strategy like the dragon portfolio, it needs access to tokenized assets like securities, bonds and loans. All of these require centralized issuing mechanisms like fiat-backed stablecoins and tokenized commodities, but they vary in their degree of centralization and risk.



<h2 class="wp-block-heading">Tokenized securities and Treasurys</h2>



Tokenized securities, for example, are dependent on companies using them to raise funds. And unlike ICOs, they are done in a regulatory environment. A few popular security token platforms are <a href="https://www.inx.co/">INX</a> and <a href="https://www.oasispromarkets.com/">Oasis Pro Markets</a>. Companies can use these platforms to access liquidity and raise funds in a similar way to how they issue shares in a public offering.&nbsp;



The risks associated with the investment are similar to purchasing shares from a stock exchange.&nbsp;



In addition to tokenized securities, companies like <a href="https://backed.fi/">Backed Finance</a> have started tokenizing Treasurys. Their approach does add risk because they tokenize the Treasurys through purchasing them and promising to hold a one-to-one backing. The tokens are only sold to participants who pass full know-your-customer (KYC) and anti-money laundering (ALM) checks and will have the ability to mint and redeem token securities for the underlying asset. Backed’s method of tokenization enables an asset-backed stablecoin protocol to allocate a portion of its collateral to short-term bonds.&nbsp;



In addition, <a href="https://www.frigg.eco/">Frigg.eco </a>is tokenizing green bonds. They also require KYC/AML for purchases and have created the ability to buy and sell tokens in a liquid secondary market. They are working with Norwegian-government-backed developer Malthe Winje to refinance the <a href="https://www.agatobwe.eco/">Agatobwe</a> hydroelectric plant in Rwanda, with debt on Ethereum.



<h2 class="wp-block-heading">Tokenized credit</h2>



Real-world credit can also be tokenized through lending platforms such as <a href="https://goldfinch.finance/">Goldfinch</a> and <a href="https://truefi.io/">TrueFi</a>. These platforms can offer access to yields from real companies that are vetted at rates meaningfully higher than in core DeFi. This could offer yields uncorrelated with the crypto industry and potentially offer the fixed income needed to make up a dragon portfolio.&nbsp;&nbsp;&nbsp;



Property, energy, Treasurys, securities and credit are a few of the possibilities that could complement core DeFi assets in diversified, asset-backed stablecoins.&nbsp;



While the <a href="https://twitter.com/jackchong_jc/status/1574745695654797312">tokenization of global assets is only beginning</a>, the potential to return safe asset backing to the global monetary system is promising.&nbsp;



In a future where stable currencies compete in the open market, participants will be able to choose their preferred monetary policy regime. The future could host lots of different stablecoins, pegged to dollars, euros or an index like the CPI or the S&amp;P, with unique features targeting different “jobs to be done” and maybe eventually a global reserve currency that retains its value indefinitely and isn’t too volatile.&nbsp;



The permissionless <a href="https://reserve.org/en/">Reserve Protocol</a> enables this asset-backed currency revolution, for idealists, heroes and capitalists.



This content is sponsored by <a href="https://reserve.org/en/">Reserve</a>
</div></div>

What It Takes To Tokenize the World

John Lee Quigley

<div id="highlights-block_48c2921c5c0807c63d03943f134a44e5" class="highlights">
 <ul>
 <li>Real-world assets (RWAs) are tangible assets or financial primitives with the potential to serve as collateral in the DeFi industry</li>
 <li>Real-world lending brings vast opportunities from emerging markets on-chain</li>
 </ul>
 
</div>



The<a href="https://defillama.com/" target="_blank" rel="noreferrer noopener"> $50 billion</a> decentralized finance industry has been at the forefront of financial innovation in the past few years. Decentralized finance — or DeFi — primitives such as stablecoins, swaps, lending, derivatives, insurance and prediction markets have been democratizing access to financial products. Nonetheless, DeFi returns have been hard hit by recent bearish conditions. Yields have hit rock bottom with investor participation also <a href="https://ambcrypto.com/defi-activity-on-ethereum-network-continues-to-drop-heres-why/" target="_blank" rel="noreferrer noopener">at an all-time low</a>.



The reasons for DeFi&#8217;s rapid decline in assets under management are not overly complex. Aside from the industry&#8217;s nascent nature, yields typically come from a recursive on-chain activity tied to crypto assets. Investors earn yield by providing liquidity to borrowers and traders on decentralized exchanges (DEXes) or overcollateralized lending platforms, and they are rewarded for doing so with inflationary tokens or one-time treasury boosts. These chains of activities generate yield in a bull run but quickly turn into a death spiral when asset prices crumble and on-chain activity drops.



The DeFi landscape has struggled to scale because the underlying yield generation mechanism only works when prices are going up. The unsustainable yield model is best reflected by the cumulative total value locked (TVL) in DeFi protocols dropping from nearly $180 billion to nearly $50 billion since the market peak.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/Lr6k4khk5TyhbDvRC2ignglNVAxB5dHLHSiiU8ILA6nFmjIvMkunuygizBgeLxUQ7X7eqV546E6hH5KGFSia1rDt6nQ2tWpsphQ63mYKttOpyJUgrZ5nik0k2Lj36EuFFpTZTlggH2A-5yqtzwP74tz8BC262Iim95WxHxXTmC4l6t33ZUMWO5x5Aw" alt=""/><figcaption class="wp-element-caption">Source: <a href="https://defillama.com/" target="_blank" rel="noreferrer noopener">DeFiLlama</a></figcaption></figure>



The pressing need for sustainable income in DeFi has ignited the growth of protocols that generate a yield from real-world assets (RWAs). While many protocols were created to tokenize RWAs, only a few integrated this technology to provide investors across DeFi and TradFi yields that tap into some of the world&#8217;s biggest financial credit markets.&nbsp;



For example, <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch’s lending protocol</a> uses RWAs in a way that demonstrates higher stability and growth. According to LoanScan, its USDC yields outperformed Aave and Compound over the past year.



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/Hu4YeoG0dEwYiGtnhGnUexlIQzxmZ0jPyma5tn292MDW49xVYAtrEsWluSHCbon4_zOCBWo0-o-utQscaUlC8ZaLgYRl9hLHZTf8o3aRZ5v5j8dTF2c7M3xByccei8litPIPS_YoLbCPYUQTp57BYFi0PUB-KONbWADHqdvLd1w49m77KJYHw2jAbA" alt=""/></figure>



And when comparing Goldfinch’s revenue model to Aave’s, it is clear that the source of yield is fundamentally different:



<figure class="wp-block-image"><img decoding="async" src="https://lh3.googleusercontent.com/JbdbXQ__zsjxDW2OIXhnKBadIBZzcGbOlmP9upOJ8Y7WEgGeVFeZRyKcQPNEviPYtCtrO2GnjGkBhK1VoSOzDrgM4m-eJb22jkmnvrT6xQzgGkjazt8sOR0Iy4_Fu2neuVfNNLwekSt5-NsWZJmmkCNgCWX2fhx9ESiW5TM8ODwStFiHVcixAEoQuA" alt=""/></figure>



To understand how this strategy is a fundamental shift in DeFi, we need to explain the evolution of RWAs.



<h3 class="wp-block-heading">What are real-world assets (RWAs)?</h3>



Real-world assets are tangible assets or financial primitives with the potential to serve as collateral in the DeFi industry. Here are the most popular examples of RWAs:



<ul>
<li>Cash</li>



<li>Metal (gold, silver, etc.)</li>



<li>Real estate&nbsp;</li>



<li>Corporate debt</li>



<li>Insurance&nbsp;</li>



<li>Salaries and invoices</li>



<li>Consumer goods</li>



<li>Credit notes</li>



<li>Royalties, etc.&nbsp;</li>
</ul>



RWAs compose the majority of global financial value. For instance, the fixed income debt market is worth an <a href="https://www.sifma.org/resources/research/fact-book/" target="_blank" rel="noreferrer noopener">estimated $127 trillion</a>, the total value of global real estate is <a href="https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate.html" target="_blank" rel="noreferrer noopener">approximately $362 trillion</a>, and gold has an <a href="https://companiesmarketcap.com/gold/marketcap/" target="_blank" rel="noreferrer noopener">$11 trillion market capitalization</a>.&nbsp;



RWAs already underpin lending and yield generation activities in the traditional finance world. However, they&#8217;re relatively untapped in DeFi. Unlocking the considerable value attached to RWAs, and to the off-chain financial system in general, is the key to sustainable yield DeFi models without the vast volatility that has historically been associated with the relatively nascent DeFi world.



<h3 class="wp-block-heading">How are real-world assets used in DeFi?&nbsp;&nbsp;</h3>



The term &#8220;real-world assets&#8221; emerged in recent years to differentiate cryptocurrencies from traditional financial holdings. Unlike cryptocurrencies that only exist in digital form, RWAs are usually tangible and tied to real-world organizations.&nbsp;



However, blockchain technology has unlocked the possibility of bridging real-world assets to DeFi. Developers typically use smart contracts to create a token representing an RWA while providing an off-chain guarantee that the issued token is always redeemable for the underlying asset.



<h3 class="wp-block-heading">Stablecoins</h3>



Stablecoins are a perfect example of successful real-world asset use in DeFi, with three of the top seven crypto tokens by market capitalization being stablecoins (a combined $136 billion). Issuing companies such as Circle maintain an audited reserve of USD assets and mint USDC tokens for use across DeFi protocols.



<h3 class="wp-block-heading">Synthetic tokens</h3>



Synthetic tokens represent another use case involving the bridging of RWAs to DeFi. Synthetic tokens allow on-chain trading of derivatives linked to currencies, stocks and commodities. Leading synthetic token trading platform Synthetix had <a href="https://defillama.com/protocol/synthetix" target="_blank" rel="noreferrer noopener">$3 billion worth of assets</a> locked in its protocol at the peak of the 2021 bull run.



<h3 class="wp-block-heading">Lending protocols</h3>



Another exciting adoption of RWA in DeFi involves lending protocols. Unlike primitive lending protocols that rely on crypto-native borrowing, RWA-focused DeFi platforms service borrowers with real-world businesses. This model offers relatively stable returns insulated from crypto volatility.



<h3 class="wp-block-heading">How lending protocols leverage RWA to generate actual yield</h3>



The DeFi lending business model provides the most cost-effective way to pool and distribute capital between a vast group of lenders and borrowers. It cuts out intermediaries and automates money movement while offering users relative anonymity.&nbsp;



However, the focus on serving crypto-native investors creates significant limitations. The pool of capital in DeFi is underutilized, especially during bear markets. The funds are also inaccessible to the world’s biggest borrowers — real-world businesses with no crypto assets to post as collateral.



Lending protocols such as <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch</a> address these limitations by building a robust model for making DeFi capital accessible to businesses with real-world economic activity. These audited firms with millions of dollars tied in RWAs enter into a legally binding agreement to obtain loans issued with these assets as collateral. The DeFi protocol generates yield from interest paid on issued loans, along with yield enhancements from the treasury, which collects platform fees, and additional token incentives.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/i-mvdX85T4s3KuNV6bNoWSE_H5Cf2zRbrQn1FypeSYtLz1eUpWxUQEQnLXa3MWtTJ0HVVkHNzf2R60BDWAjTvfo4itfkrVfqDfweHnDMtovlJFsfD3eSIwCL4qCCGOII7lVy9lHQYbCLpdxuUKhfMyK9EitKstqsTFbAie2PmVqAiphpmRDYXmhDuQ" alt=""/><figcaption class="wp-element-caption">Active loans on Goldfinch | Source: <a href="https://dune.com/queries/15148/83023" target="_blank" rel="noreferrer noopener">Goldfinch dashboard on Dune</a></figcaption></figure>



Most importantly, Goldfinch&#8217;s yield is insulated from crypto volatility as borrowers deploy funds in real-world ventures. With the average borrower pool loan term on Goldfinch lasting 3-4 years with a set interest rate, the protocol’s interest-sourced USDC yields remain stable despite volatility in the crypto markets. There is also sustainable capital demand, ensuring the lenders get the best rates for deposited assets. Let’s take a closer look at how this works under the hood.



<h3 class="wp-block-heading">How Goldfinch works</h3>



Goldfinch is pioneering an efficient DeFi lending model that supplies on-chain financing to offline businesses. These borrowers propose debt capital raises to the Goldfinch protocol. Once approved, they enter a legally binding agreement to post off-chain assets as collateral for the loan.&nbsp;



Goldfinch operates with a novel “trust through consensus” mechanism which allows borrowers to show creditworthiness based on the collective assessment of other participants, combining the trust of its tiered deposit model for investors, robust due diligence documentation, and a credit specialist community to verify that a borrower is creditworthy.&nbsp;



A common misconception is that approved borrowers can immediately access a pre-funded pool. In reality, a borrower proposes the terms it wants for its loan to the protocol, and the protocol&#8217;s participants actively choose whether or not to fund that specific deal.&nbsp;



First, borrowers propose the loan amount and terms they are seeking in the form of a borrower pool smart contract and provide due diligence information to the community of investors. There are two ways to invest: as a backer or as a senior pool liquidity provider. Backers actively evaluate individual borrower pools, and choose whether or not to invest USDC into a specific deal. Backers are incentivized to effectively evaluate loan terms by providing first-loss capital.&nbsp;



When backers invest, the protocol’s senior pool automatically allocates funds to the pool according to the protocol’s governance-set leverage model. Currently, that means the senior pool automatically supplies USDC at a 4:1 ratio to the USDC actively supplied by backers. While their investment is automatically diversified across the protocol’s loans, senior pool liquidity providers are protected by supplying second-loss capital, and 20% of the senior pool’s interest is reallocated to backers to reward their work evaluating pools.&nbsp;



So, while a borrower could be qualified to participate on the platform based on their proven track record of business success, history of repayments, or real-world assets to provide as collateral, their proposed loan could still not be funded if they are proposing terms that no backers deem a worthy investment.



This month, Goldfinch also announced the launch of a novel <a href="http://goldfinch.finance/membership" target="_blank" rel="noreferrer noopener">Membership Vault system</a>. They stated that it is designed to enhance protocol participation and is the first step of a broader tokenomics redesign. The membership offers an opportunity to further align and incentivize Goldfinch investors’ interest in the long-term success of the protocol. And secondly, it rewards the global community of Goldfinch participants who continue to contribute to Goldfinch’s growth and resilience.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



Goldfinch taps into blockchain’s immutability to incentivize borrowers to repay their loans. Borrowers must maintain a reputable on-chain credit history to qualify for future loans. Blockchain smart contracts also provide automated settlements, delivering superior efficiency to TradFi lending.



Goldfinch’s model is efficient for DeFi lenders and provides global access to capital for businesses. The two-sided marketplace gives DeFi lenders access to stable crypto yields backed by RWAs, while providing borrowers with faster, cheaper, and more efficient access to financing than traditional outlets can offer. It also unlocks lucrative lending opportunities in emerging markets that were initially only available to institutions and insiders.&nbsp;



<h2 class="wp-block-heading">Opportunities in emerging markets&nbsp;</h2>



Goldfinch&#8217;s approach to real-world lending brings vast opportunities from emerging markets on-chain. For instance, Africa is currently the world&#8217;s <a href="https://partechpartners.com/2021-africa-tech-venture-capital-report/" target="_blank" rel="noreferrer noopener">fastest-growing financial technology market</a> with an explosion in the adoption of internet-connected devices. Yet, African tech startups <a href="https://qz.com/africa/1861034/what-covid-19-is-doing-to-africas-tech-startups/" target="_blank" rel="noreferrer noopener">lack access to requisite capital</a> or pay extremely high interest rates to do so. They face international barriers, compete with government bonds, infrastructure,&nbsp;and&nbsp;wealthier enterprises.



DeFi lending allows these borrowers to access on-chain capital while using off-chain assets as collateral. In turn, lenders enjoy lucrative yields that are historically unavailable in developed markets.&nbsp;



There are more benefits. According to the <a href="https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report-april-2022#Chapter-3:-The-Rapid-Growth-of-Fintech:-Vulnerabilities-and-Challenges-for-Financial-Stability" target="_blank" rel="noreferrer noopener">IMF 2022 Global Financial Stability Report</a>, the IMF estimates DeFi could provide up to 12% in annual savings to emerging market businesses.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/dTvnOQilx4_cA4nvReWE7-jn3lhlGyj7KCpnDStTgv_rZ1Z5rz7P0KhYwg8jKfIYAa_lbq6nEUACeeXtypF5CzDVZmaAP-KwLhli5iX2rmNLt3FBZpjDDsdjO0z69h-PEWdAosetDPP_E2BpvLzDqjQmKhBZaQvc9uHg6AbfMTGFu6Id-nXEDrQFxg" alt=""/></figure>



Blockchain&#8217;s efficiency allows network participants to enjoy near-instant loan settlements, as opposed to the lengthy waiting times associated with moving funds through the traditional banking system. Furthermore, the entire system democratizes access as individuals can become business financers on Goldfinch, while businesses globally can tap into an exhaustive capital marketplace.&nbsp;



The adoption of RWAs within DeFi opens up the industry to the world&#8217;s largest debt markets. It also provides greater capital efficiency for lenders and unlocks a huge capital pool to borrowers in emerging markets. Over time, this approach will accelerate mainstream cryptocurrency adoption and provide a stepping stone for DeFi to reach its $100 trillion potential.



This content is sponsored by <a href="https://goldfinch.finance/" target="_blank" rel="noreferrer noopener">Goldfinch</a>.



Disclaimer:&nbsp;Nothing in this sponsored article and site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockworks is not a fiduciary by virtue of any person’s use of or access to the site or content.



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