How DeFi Enables Small Investors To Access Private Investments And Exotic Assets
The total value locked in DeFi protocols has skyrocketed to $53.7 billion from just $2.5 billion a year ago. Most of this growth has been driven by retail investors and traders.
Most institutions have started dipping their toes in DeFi. The institutional money into the DeFi ecosystem would boost liquidity and provide better rates.
A strong reason retail investors are attracted to crypto and DeFi is that there is no centralized authority with the power to control transactions. But DeFi offers much more than that.
DeFi protocols are offering the same products and services as the traditional financial ecosystem but in a fully digital, decentralized way. They are making their offerings available to everyone, everyone at a faster pace and lower cost. Without any intermediaries, geographical, or jurisdictional barriers.
Democratizing Access To Illiquid And Exotic Assets
One of DeFi’s strongest applications lies in democratizing access to illiquid, exotic, and privately-held assets. Assets that small investors never had access to in traditional finance are now within their reach in DeFi. In traditional finance, most of the high-value and exotic assets are not accessible or economical for the masses.
It is demolishing the walls erected by TradFi that made it nearly impossible for small investors to access such assets.
For example, Convergence Finance is enabling asset owners to tokenize their illiquid and private assets to enjoy the liquidity and instantaneous trades offered by DeFi. Small investors can buy and trade tokens representing real-world assets.
To help real-world asset owners bring their assets into DeFi, the ConvO token wrapping layer of Convergence Finance creates Wrapped Security Tokens (WSTs) representing the asset. The asset owners have the choice to sell fractional pieces to traders and investors from around the world. The Wrapped Security Tokens are deposited in a liquidity pool on ConvX for trading.
The tokens give you price exposure without the hassles of holding the actual asset. It is similar to how derivative products such as options, futures, and swaps in traditional finance represent an underlying asset.
Convergence Finance guarantees that the rights to the asset are transferred to the future token buyers. As a result, token holders enjoy the benefits of real-world asset exposure from both the on-chain and off-chain perspectives.
Small investors can buy tokenized shares of privately-held companies like SpaceX on Convergence Finance’s ConvX platform. People who own tokens representing SpaceX shares are guaranteed the price difference in the stock between buy and sell transactions.
Not Perfect Yet
DeFi itself is not perfect yet. It’s an emerging ecosystem with a lot of shortcomings. Thankfully, DeFi protocols acknowledge the imperfections and are addressing them.
Most of the people in the DeFi ecosystem are tech-savvy individuals. People, especially in emerging countries, don’t understand how it works and how they can benefit from it.
Another hindrance is the low liquidity. DeFi liquidity would improve dramatically when institutional investors, hedge funds, and banks fully embrace it.
Recently, the European Central Bank issued $121 million worth of digital bonds on the Ethereum blockchain. It was the first-ever “multi-dealer led, primary issuance of digitally native tokens using public blockchain technology.”
DeFi aggregators also help boost liquidity. For example, Convergence Finance has entered a collaboration with the DeFi aggregator 1inch Network to boost liquidity on its ConvX platform. It also means that users from across the DeFi ecosystem can easily trade private and exotic assets on Convergence via 1inch Network.
Conclusion
There is still a long way to go for DeFi, particularly in improving liquidity, making it accessible to the masses, and improving the regulatory frameworks. But the pace at which DeFi protocols are bringing real-world, exotic assets on the chain, we wouldn’t be surprised to see an explosion of such assets on DeFi protocols like Convergence.
Image by Miloslav Hamřík from Pixabay
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