DeFi can breathe new life into traditional assets

In his monthly crypto column, Israeli serial entrepreneur Ariel Shapira covers emerging technologies in the fields of crypto, decentralized finance, and blockchain, and their role in shaping the 21st century economy.

Traditional financial pundits are warming to the concept of cryptocurrencies, but outlandish headlines like record-breaking hacks and over-hyped projects won't necessarily turn around the cryptocurrency's bad rap. Unfortunately, we’ve seen a slump in the total market capitalization of decentralized finance (DeFi) recently, and that hasn’t done much to change the minds of skeptics.

While cryptocurrency is well off its lows, those in the centralized finance (CeFi) space don’t necessarily take the idea at face value. To allay their misgivings, projects should combine proven, real CeFi qualities with more new practices. This will allow newbies to experiment with DeFi and take the usability of financial instruments to a whole new level.

Taking over the CeFi mess

Many people worry about the volatility of cryptocurrencies, especially that they are not backed by anything tangible like gold, and believe that cryptocurrencies will lose value over time. This may come from people's familiarity and comfort with fiat currency. But technically, since the end of the gold standard, fiat currencies are also not backed by anything tangible, but backed by a trusted centralized entity.

These concerns perfectly encapsulate how the respective strengths of DeFi and CeFi can ease investor uncertainty, thereby introducing a new class of people into the crypto space.

The tokenization of commodities enables blockchain-based ownership of physical assets. This is essentially just a decentralized version of the existing practice in traditional finance. Tokenized precious metals are somewhat similar in concept to shares in a gold exchange-traded fund (ETF), in that they represent an investor's stake in physical gold stored elsewhere, and serve essentially the same purpose. Projects like VNX offer digital ownership of tokenized commodities backed by physical assets, including gold, giving investors the same benefits as investing in physical gold, but with the versatility of crypto assets on top of it.

Stablecoins are also a viable option, allowing investors to reap the benefits of decentralization while maintaining the safety of traditional finance. Backing from fiat currencies and other real-world assets dispels the common fear that cryptocurrencies have no basis. Stablecoins like TrustToken (TUSD) give investors more certainty and flexibility, reducing the risk of any user easily redeeming their funds at any given moment. While no investor expects stablecoins to skyrocket like Bitcoin (BTC), the "stable" part of the name should suggest this, and they remain a viable option for storing funds. Investors can use on-chain fiat currency in various DeFi income agreements to obtain a higher annual interest rate (APR) than fixed deposits provided by banks. This again upgrades the most traditional asset of them all.

These types of programs essentially provide traditional financiers with a fixed-asset investment service, offering a novel packaging for a financial instrument they already trust. This is exactly what makes them perfect for those with doubts or uncertainties - they can get a feel for crypto products and see the benefits of decentralization firsthand without straying too far from the familiar Far. This will help them realize that cryptocurrencies are not as bad as the headlines make them out to be or as scary as they previously thought.

compromise choice

These projects demonstrate that the benefits of CeFi can be applied to blockchain-based solutions for a more holistic experience, especially for new users.

As Bitcoin's movements increasingly mirror those of the stock market, we can see that the differences between the two financial ecosystems are not as dramatic as many believe. This is worth noting, especially as it is argued that the nuances between cryptocurrencies and fiat currencies dissuade institutional investors from using cryptocurrencies and DeFi.

Many cases clearly outline why decentralized finance has its merits. For example, even with the recent Russian invasion of Ukraine, it is clear how cryptocurrencies can help ordinary citizens change the game. The EU delisted a number of Russian banks from SWIFT, essentially greatly complicating any overseas transactions by these banks. SWIFT is the global information system connecting financial institutions. However, many Russian citizens are still able to control their finances through digital assets, which are easy to transfer and highly liquid. Encryption can clearly come in handy when people least expect it, which is why skeptics should test the waters now.

The practical use of DeFi is becoming more and more apparent to the mainstream, which is good for the entire crypto industry. As people experience the benefits of crypto assets first-hand, negative reviews will slowly but surely disappear.

Projects that combine the characteristics of traditional finance and decentralized finance give investors the opportunity to easily enter DeFi. These products can steer DeFi on the path to full adoption. Investors can invest as much as they want without worrying about extreme market volatility and uncertainty.