DeFi and traditional finance could converge thanks to tokenization

Published at: May 26, 2021

Nonfungible tokens could become a bridge to connect the legacy financial system to the emerging fintech world in the near future. During a recent interview, Adrian Lai, CEO of Liquefy — an investment firm and an incubator for decentralized finance platforms — told Cointelegraph China that synthetic assets, NFTs and digital securities are redefining the way capital markets operate. 

Lai especially believes that the value of synthetic assets could give each individual in decentralized finance access to essentially any asset, as long as there is a reliable data feed. This emerging trend between traditional finance and DeFi is inevitable.

Lai also pointed out that as the convergence between security tokens and digital currencies grows greater, we will see increased activity between traditional finance and cryptocurrencies. He added that:

“We are seeing a merger of security tokens, utility tokens and NFTs. NFTs can also now represent real assets, which was not considered several years ago. The convergence of traditional finance and the crypto space is increasing more and more.”

Lai gave centralized exchanges as an example, saying that some of them have been moving beyond the traditional understanding of being simply a trading venue. Platforms like BlockFi and Coinbase offer retail-focused services like savings accounts and crypto payment options — services that make these platforms function like traditional financial institutions, at least partially.

Lai explained that synthetic assets are meant to imitate other investment products. They can combine various derivatives products such as futures, options or swaps to simulate an underlying asset. These underlying assets can include stocks, bonds, indexes, commodities, currencies or interest rates.

Challenges ahead

Although the convergence of traditional finance and the crypto industry is inevitable, Lai believes the current crypto industry still faces challenges such as liquidity exposure and reliable data oracles: “There is simply not enough information in the crypto space. When someone in crypto wants to trade illiquid assets, in many cases, there's no adequate pricing data and other supportive information on the blockchain to facilitate the trade.”

Lai also pointed out that even though there is a lot of hype around NFTs, the current NFT market is only a digital collectible market, which does not require much liquidity. While Lai believes this collectible market is likely here to stay in the long run, several changes have to be made to help the broader NFT market grow further.

He thinks that breaking down an NFT into several parts for investment purposes could become a new trend for the digital collectible market:

“NFTs could also represent real assets, and creating a fraction of an NFT out of a real asset is a good way to offer traditional finance exposure to crypto. In this case, liquidity is important because you want to trade a fraction of the real asset.”

Tokenizing DeFi

According to Lai, tokenization has previously been primarily done via security token offerings. However, he believes that this will change due to DeFi, as tokenizing assets with DeFi could make tokenization more accessible for everyone:

“While security tokens are backed by real-world assets and their ownership is legally recognized, the liquidity of security tokens can vary, and we’ve seen in many cases that when security token owners want to sell their holdings, they may not be able to execute the trade at the best price.”

Lai believes that the maturation of DeFi and tokenization of real-world assets via DeFi protocols will have more potential than using the traditional security token offering model: “Tokenizing assets in a decentralized fashion opens up much greater liquidity for asset owners. At the same time, it gives real-world assets exposure to all of DeFi’s users.”

As Cointelegraph previously reported, 2021 will likely be a pivotal year for DeFi that will transform the way financial services are used. So, could tokenization also play a part in this?

Tags
Technology
Blockchain
Nft
Defi
Finance
Related Posts
Supply chain tokens see triple-digit gains as the global economy recovers
Over the last few weeks, blockchain projects focused on supply chains and logistics have seen tremendous growth as the coronavirus-induced economic gridlock begins to loosen and future concerns related to the global pandemic subside. Three logistics projects that have benefited from the improving economic outlook are OriginTrail, Waltonchain and Wabi. Since early February, each has seen its token price increase by up to 300%. TRAC/USD OriginTrail is a self-described “ecosystem dedicated to making global supply chains work together by enabling a universal, collaborative and trusted data exchange.” The project was established in 2011 with the goal of providing enterprise users …
Technology / March 15, 2021
Crypto banks are going to swallow fiat banks in 3 years — or even less
Within a few years, a younger generation of financial services customers are going to be able to walk into a bank and gain access to credit products, savings accounts and investments that can host both crypto and fiat assets. In fact, the inroads that will allow for all of this to happen are already breaking ground. You probably already know that Kraken, a cryptocurrency exchange based out of San Francisco, is now the first-ever cryptocurrency business in the United States to become a bank. For now, being an officially chartered bank means that Kraken will be able to offer more …
Technology / Oct. 10, 2020
Mark Cuban issues burn notice on offensive ENS domain
Someone sent Mark Cuban a profane Ethereum Name Service domain a few days ago. After observant Twitter users recently tracked down his ether address, it was only a matter of time before a wave of unwanted spam transactions made their way into his account. This is, after all, the internet. Here there be monsters. While it isn’t entirely clear what the presumed troll’s endgame was, the word was nonetheless offensive enough to raise some eyebrows at Cointelegraph, and we don’t intend to reprint it here. Suffice to say, a decent person would not want to be known as the owner …
Technology / Feb. 3, 2021
3 things the crypto sector must offer to truly mainstream with TradFi
In the past year, we’ve seen the crypto economy undergo exponential expansion as heaps of money poured into various cryptocurrencies, decentralized finance (DeFi), nonfungible tokens (NFT), crypto indices, insurance products and decentralized options markets. The total value locked (TVL) in the DeFi sector across all chains has grown from $18 billion at the beginning of 2021 to $240 billion in January 2022. With so much liquidity in the ecosystem, the crypto lending space has also grown a significant amount, from $60 million at the beginning of 2021 to over $400 million by January 2022. Despite the exponential growth and the …
Technology / Feb. 5, 2022
Demystifying the business imperatives of the Metaverse
In a previous article, I discussed the evolution of Web3 economies and current volatility, focusing on the participatory nature of Web3, which is the foundational technology enabling the creator economy. The term “metaverse” — meta and universe — often describes the anticipated future iteration or evolution of the internet powered by Web3 technologies like blockchain and decentralized resource distribution and consumption principles. Although the focus has often been on metaverse modalities such as augmented reality (AR), virtual reality (VR), gaming, Second Life, avatars and so forth, in my view, these modalities represent an interesting evolution or shift from the digital …
Adoption / April 30, 2022