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Decentralized Finance: Exploring Tokenized Yields from Real World Assets

Real World Assets (RWAs) are currently offering an average 9.65% yield to DeFi credit protocols, generating over $579 million in active loans across the space. This significant figure underscores the growing importance of RWAs in the DeFi landscape, as illustrated in Figure 1.

Data from RWA.xyz, a leading analytics platform, reveals that approximately 1,800 loans facilitated through DeFi channels originate from emerging markets, primarily supporting sectors like small-medium enterprises (SMEs), fintech, carbon projects, and real estate.

But first, let’s take a brief moment to understand what Decentralized Finance and asset tokenization are.

Figure 1: Overview of the tokenized credit landscape (source: rwa.xyz)
  1. Introduction
    1. Understanding Tokenized Assets
    2. Advantages of Tokenized Assets in DeFi
  2. Exploring the Tokenized Assets Landscape
    1. Tokenized assets protocols in the DeFi ecosystem
    2. An overview of the average yield of Tokenized RWA in DeFi
    3. An overview of originating countries and deal size
  3. How Tokenized Credit is Revolutionizing Traditional Lending
    1. Challenges of traditional lending systems
    2. Efficiency, accessibility, and flexibility of tokenized credit
    3. Tokenized credit beyond traditional financial assets
    4. The role of smart contracts in automating lending processes
  4. Risks and Challenges in the Tokenized Credit Landscape
  5. Conclusion: The Future of Tokenized Credit in DeFi

 

Introduction

Decentralized finance (DeFi) has emerged as a revolutionary force in the financial world, aiming to disrupt traditional systems by providing open, permissionless access to financial services. At its core, DeFi leverages blockchain technology to create a decentralized ecosystem where individuals can trade, lend, borrow, and invest without relying on intermediary institutions.

Understanding Tokenized Assets

A key innovation in DeFi is the concept of tokenized assets. Tokenized assets are digital representations of real-world assets, such as real estate, stocks, commodities, or even intellectual property. By tokenizing these assets, DeFi platforms enable fractional ownership, liquidity, and tradability, opening up new investment opportunities for individuals around the world.

Tokenized credit, a specific type of tokenized asset, refers to the creation of digital tokens that represent ownership of a specific amount of credit or debt. These tokens can be freely traded and used as collateral for borrowing or lending purposes within the DeFi ecosystem.

Advantages of Tokenized Assets in DeFi

The use of tokenized assets in DeFi offers several advantages over traditional financial systems. We will lay down the reasons why DeFi needs tokenized real-world assets in another article, while below are some of the benefits of having tokenized assets on-chain:

  1. Financial Inclusion: DeFi enables individuals who are unbanked or underbanked to access credit markets by eliminating the need for traditional identity verification processes.

  2. Transparency and Security: All transactions in DeFi are recorded on a public blockchain, ensuring transparency and reducing the risk of fraud.

  3. Programmability: Smart contracts enable the creation of complex financial instruments and automated processes, reducing the need for intermediaries and costs.

 

Exploring the Tokenized Assets Landscape

Tokenized assets are aiding the expansion of the DeFi landscape. They are available for trading within the DeFi ecosystem, allowing individuals to gain exposure to traditional investments at scale in a cross-border manner. The top active Web3 protocols in the DeFi space are:

  1. Maple Finance: A DeFi protocol that facilitates institutional lending by connecting institutional borrowers with DeFi lenders.

  2. Centrifuge: A DeFi protocol that connects real-world businesses seeking financing with DeFi lenders, offering attractive yields for investors.

  3. Goldfinch: A DeFi protocol that focuses on providing credit to small and medium-sized enterprises (SMEs) in emerging markets.

  4. Clearpool: A DeFi protocol that enables tokenized credit to be used to purchase goods and services directly from merchants.

  5. Blocksquare: A DeFi protocol tokenizing real estate giving access to retail investors to diversify across this emerging sector.

 

An Overview of The Average Yield of Tokenized RWAs in DeFi

Tokenized real world assets (RWAs) offer attractive yields compared to traditional investment options:

  1. Double-digit APYs: Some tokenized RWAs have provided double-digit annual percentage yields (APYs), attracting investors seeking high returns.

  2. Efficient DeFi Ecosystem: Eliminating intermediaries and automated processes contribute to competitive interest rates in DeFi.

 

Delving deeper into the RWA Credit Landscape

The rwa.xyz statistics dashboard offers valuable insights into the tokenized credit landscape.

Active Loans:

  • Over $579 million in active loans, primarily originating from established protocols like Centrifuge, Maple, Goldfinch, Clearpool, and TrueFi.

  • These loans are actively generating interest, representing a part of the total issued value of $4.5 billion.

  • This figure represents only around 1% of the total value locked (TVL) in DeFi, highlighting the significant growth potential of the RWA sector within the broader DeFi ecosystem.

Figure 2: Sectors contributing to tokenized credit (source: rwa.xyz)

Average Yield:

  • Six main sectors contribute to the total loan value, originating from over 15 countries with individual risk/reward profiles.
  • The average combined yield stands at 9.65% per year, significantly exceeding the median DeFi yield across all protocols and chains which sits at around 4% according to DeFi Llama.
  • Real estate-backed loans offer varying yields, with short-term loans ranging from 5.35% to 10% for medium-term loans (around three years).
  • Platforms like Goldfinch utilize risk-based structured products, where real estate loans can reach 19.54% for junior tranches (riskier deals with higher default possibilities).
  • For real estate tokenized loans, we count 423 deals, including repaid or defaulted ones. The average loan size sits at $334k, while the largest loan recorded is $2.4 million.

Originating Countries

Figure 3: Overview of the end borrowers (source: rwa.xyz)

Analyzing the rwa.xyz statistics, we identify 19 countries contributing to the total active loan amount. The following table compares the top 10 countries based on the average interest rate and average deal size.

Here is an overview of tokenized assets statistics sorted by the total sum of loans issued
Country
Average Deal Size
Average Interest Rate
Total Loan Amounts

Kenya

$ 6,151,936

12.21%

$73,823,233

Nigeria

$ 5,019,517

12.75%

$70,273,233

Philippines

$ 4,843,687

12.14%

$53,280,559

Mexico

$ 5,642,284

12.50%

$50,780,559

Uganda

$ 5,694,445

12.19%

$45,555,559

Peru

$ 5,811,508

12.50%

$40,680,559

India

$ 5,811,508

12.50%

$40,680,559

Panama

$ 5,811,508

12.50%

$40,680,559

Ghana

$ 6,603,535

11.20%

$33,017,674

USA

$ 20,000,000

11.00%

$20,000,000

The predominance of loans originating from emerging economies is truly remarkable, as it showcases DeFi’s transformative potential in democratizing access to finance for individuals and businesses historically excluded from traditional financial systems.

This trend not only empowers economic development within these regions but also contributes to global financial inclusion.

In an upcoming article, we’ll be exploring specific case studies and delving deeper into the impact of DeFi on emerging economies. Be sure to follow T-Blocks on social media to stay updated on our latest analysis.

How Tokenized Credit is Revolutionizing Traditional Lending

Traditional lending systems have long been criticized for their inefficiencies, lack of accessibility, and inflexibility. These limitations have often excluded individuals and businesses from accessing the credit they need to grow and thrive. However, the advent of tokenization has the potential to revolutionize traditional lending, especially on emerging economies by addressing these shortcomings and creating a more inclusive, efficient, and flexible financial system.

Challenges of Traditional Lending Systems

Traditional lending systems are often characterized by:

  1. Lengthy Application Processes: Borrowers often face lengthy and complex application processes that require extensive documentation, credit checks, and approval from intermediaries.
  2. Limited Accessibility: Traditional lenders often have strict credit requirements that exclude individuals with poor credit histories or those who lack traditional forms of collateral.
  3. High Interest Rates: Traditional lenders may charge high-interest rates, particularly for borrowers with perceived higher risk profiles.
  4. Limited Transparency: Traditional lending transactions may lack transparency, making it difficult for borrowers to understand the terms and conditions of their loans.

Efficiency, Accessibility, and Flexibility of Tokenized Credit

Tokenization offers several advantages over traditional lending systems, including:

  1. Instantaneous Access: DeFi platforms enable borrowers to access credit almost instantaneously, without the need for lengthy application processes or intermediary approvals.
  2. Global Accessibility: DeFi platforms operate on a global scale, providing access to credit for individuals and businesses worldwide, regardless of their location or traditional credit history.
  3. Competitive Interest Rates: DeFi platforms can offer competitive interest rates due to the elimination of intermediaries and the automation of lending processes.
  4. Increased Transparency: All transactions on DeFi platforms are recorded on a public blockchain, providing transparency and ensuring that the terms of loans are clearly defined.

Tokenized Credit Beyond Traditional Financial Assets

Tokenized credit is not limited to traditional financial assets. In the DeFi ecosystem, borrowers can collateralize a wide range of digital assets, including cryptocurrencies, non-fungible tokens (NFTs), or even future revenue streams. This opens up new possibilities for individuals and businesses to leverage their digital assets and access credit markets.

The Role of Smart Contracts in Automating Lending Processes

Smart contracts play a crucial role in automating lending processes in DeFi. These self-executing contracts can manage the entire lending process, from origination to repayment, without the need for manual intervention. This automation reduces costs, increases efficiency, and ensures that loans are executed according to the agreed-upon terms.

Risks and Challenges in the Tokenized Credit Landscape

Despite its transformative potential, the tokenization landscape faces several challenges that need to be addressed for sustainable growth:

  • Credit Risk Assessment: DeFi platforms need to develop robust credit risk assessment mechanisms to evaluate the creditworthiness of borrowers and mitigate potential defaults. This involves analyzing financial data, assessing business models, and utilizing innovative risk-scoring techniques. Traditional credit scoring models may not be suitable for the unique characteristics of DeFi borrowers, so developing novel approaches tailored to the tokenized landscape is crucial.
  • Price Oracles: Accurate and reliable price oracles are essential for determining the value of collateralized assets and preventing liquidation triggers based on inaccurate price data. Oracles provide real-time market data to DeFi protocols, allowing for automated smart contract execution based on pre-defined parameters. However, oracle manipulation and data inconsistencies remain significant concerns within the DeFi space. Implementing decentralized oracles and exploring alternative data sources can enhance the reliability and tamper-proof nature of price feeds.
  • Legal and Regulatory Frameworks: Clear and consistent legal and regulatory frameworks are needed to address concerns about fraud, market manipulation, and consumer protection in the DeFi space. Currently, the regulatory landscape for DeFi is fragmented and evolving rapidly, creating uncertainty and hindering innovation. Establishing clear guidelines for token offerings, trading activities, and consumer protection measures is crucial to fostering a thriving and compliant DeFi ecosystem.

Additional Challenges:

  • Scalability: As the volume of tokenized assets and transactions increases, scalability becomes a major concern. Existing blockchain technologies may not be able to handle the increased load efficiently, leading to network congestion and high transaction fees. Exploring Layer 2 solutions and exploring new blockchain technologies with greater scalability capabilities is essential for long-term growth.
  • Security: DeFi protocols are vulnerable to cyberattacks due to their reliance on smart contracts and digital assets. Implementing robust security measures, conducting regular audits, and promoting best practices within the community are crucial to mitigating security risks and protecting user funds.
  • Interoperability: The lack of interoperability between different DeFi protocols can hinder user experience and restrict the flow of capital within the ecosystem. Developing standardized protocols and communication methods can facilitate seamless interaction between various DeFi applications and promote the growth of a more interconnected ecosystem.

By addressing these challenges collaboratively, the tokenization landscape can reach its full potential and revolutionize the way financial assets are created, managed, and traded.

Conclusion: The Future of Tokenized Credit in DeFi

The tokenized real-world asset industry holds immense potential to reshape the financial landscape, a statement also supported by Larry Fink, CEO of Blackrock, who said that “the next generation for markets will be tokenization”. Tokenized credit can democratize access to financial services for individuals and businesses globally, while DeFi platforms can streamline lending processes, reduce transaction costs, and increase asset liquidity.

As the DeFi ecosystem continues to mature, we can expect further advancements in the tokenization landscape, expanding its role in the global financial system. Real-world assets on DLT systems have the potential to revolutionize the way we access, manage, and invest, creating a more inclusive and efficient financial landscape for all.

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