Aave Takes Real World Assets As Collateral

Aave Takes Real World Assets As Collateral
Written by Publishing Team

Despite all the talk about DeFi changing the financial world forever, the truth is that decentralized finance is largely a closed system. For the most part, crypto owners put their cryptocurrency as collateral for loans in stablecoins pegged to the dollar, and then use them to invest in DeFi projects.

The closed loop opened a bit on Tuesday (December 28) when lending protocol Aave announced a deal with decentralized finance protocol Centrifuge that will allow small and medium enterprises (SMEs) to access the liquidity available in the cryptocurrency markets, by tokenizing real-world assets. Such as freight bills, temporary loans, trade debtors and the like, then use these codes as collateral.

See also: PYMNTS DeFi Chain: What is Yield Farming and Liquidity Mining?

“The RWA market connects the regulated world of TradFi with the unreliable world of DeFi,” said Lukas Vogelsang, one of the founders of the centrifuge developer. “It’s a big step for the Aave protocol.”

Investors have invested more than $12 billion in Aave’s lending pool, making it the third largest DeFi project by total closed value (TVA).

Building a bridge between real-world companies and DeFi capital, the new product will allow Aave depositors to earn a return in exchange for realistic non-linked collateral, and will allow centrifuge issuers to obtain collateral and borrow from the market…across a wide range of industries, said Jason Jones, CEO of End Labs, “Asset classes, ranging from bridging loans to inventory and revenue-based financing.” The company is also working with Maker, which is the largest DeFi protocol.

Real world, real complexity

While the new “TradFi” loans represent the first steps in what could be a massive expansion of DeFi’s impact, they also present much more complexity from the perspective of a cryptocurrency lender.

In a traditional DeFi loan, the collateral offered is cryptocurrency. And although it is highly volatile, the lender at least (in theory) understands the fundamentals of the cryptocurrency market and the particular cryptocurrency accepted as collateral.

A look at Centrifuge’s collateral classes makes it clear that a whole new skill set is needed to effectively judge risk.

Read more: PYMNTS DeFi Series: The Very Real DeFi Risk

There are seven classes of collateral that offer different interest rates:

Real Estate Bridge Loans 4%
Revenue based financing 5%
Brands Inventory Financing 5%
Shipping and forwarding bills 6%
Trade receivables 7%
Fintech Debt Financing 8.5%
Consumer loans for emerging markets 10%

Moreover, entering the real world brings with it a lot of institutions that crypto investors may not be familiar with, such as lawyers and judges. Debt comes in two large and small tranches, with the latter trading at greater risk for greater rewards.

DeFi is built on self-executing smart contracts in which funds are locked into the transaction when it is created. When certain conditions are met, the contract is paid. Due to the borrowed nature of cryptocurrency ownership – often all you know about the other party is the address of the digital wallet – there is no need to hold back, no change in terms, and rarely any recourse available to affected parties. “Code is Law” is the industry acronym.

Read more: PYMNTS DeFi Chain: What is a Smart Contract?

Another thing is that crypto transactions tend to have instant decisions – the 10-20 seconds it takes for the Ethereum blockchain to be considered too long to scale, let alone the 10 minutes of Bitcoin. On the other hand, lawyers work in months and years.


New PYMNTS data: Documenting identities in the digital economy – December 2021

on:More than half of American consumers believe biometric authentication methods are faster, more convenient, and trustworthy than passwords or PINs – so why do less than 10% use them? PYMNTS, in collaboration with Mitek, surveyed more than 2,200 consumers to better define this perception versus the usage gap and identify ways companies can boost usage.

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