Connecting DeFi with real world assets: the next horizon

By October 30, 2020Ethereum
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Decentralised Finance (DeFi) is a term used to refer to innovations in capital markets that rely on blockchains, and enable capital market activities across an open network, where trust is automated in the software.

Instead of using conventional financial rails such as banks or credit transfer APIs, DeFi based projects work entirely on blockchains without the requirement of central clearing houses or banking personnel checking transactions. This makes it possible for DeFi based ventures to be internet-scale, global ventures without having a presence in countries around the world.

Among the most prominent among this class of digital first, blockchain native ventures is MakerDAO. It has over a billion dollars in collateral in the form of digital assets such as Ethereum tied in it for lending – which is then used for trading or day-to-day purchases.

Similarly, KyberDAO has enabled digital assets worth over a billion dollars to be traded. This growing, digital native infrastructure is empowering the next wave of financial applications to be built.

DeFi limitation: how to escape the digital realm

There is a catch though. The current generation of DeFi ventures are restricted to using digital assets when it comes to trading and lending.

This means traditional instruments such as commodities swaps, futures or even lending against real life assets such as a house is not possible. This restricts the ability of the ecosystem to scale meaningfully enough to meet the needs of global financial markets today.

For a scale comparison, the total value locked in DeFi ventures today is around $11.2 billion according to DeFi Pulse. In contrast, the size of the global commodities market is hard to measure accurately, but could be as high as $20 trillion annually.

The race to plug off-chain assets such as physical goods to on-chain finance is at the crux of what will enable the next generation of DeFi applications.

Building an effective bridge between the physical realm of actual assets, and their physical trade and delivery, and the rapidly growing “digital reality” will enable huge value to be unlocked. This is trickier than it sounds, if we wish to achieve it in a genuinely ‘trustless’ way, without recourse to legal frameworks is a significant challenge.

A Market Ripe for Disruption

With decentralised technology the cost of creating markets and onboarding stakeholders is reduced dramatically. For example, with our project Mettalex, we are bringing decentralised finance innovation to the traditional commodities market where the process of creating a new market is marred with roadblocks. We believe this new way of doing things is a game changer.

Trillions of dollars of trading and new markets can be unlocked solving existing liquidity and access problems for a huge market, and building value for all stakeholders.

Beyond Blockchain Based Assets

Synthetic instruments on blockchain networks is one approach to representing real-life assets on these networks. How does that work? The equivalent of the asset’s value is tied up in a smart contract and another token is issued to represent that asset. Instruments like gold, foreign currencies and digital asset indices can be purchased on a project named Synthetix. The risk here is if the underlying asset (ie – the asset used as collateral) fluctuates greatly in value, the synthetic instrument can be liquidated.

Another approach to doing this is what UMA Protocol is currently doing. Instead of tying up the value of the entire asset itself, a small fraction of the asset’s fluctuations are tied up in a smart contract. The parties involved in buying the asset are responsible for seeing if the new synthetic instrument is backed by sufficient collateral or not. The challenge here is that it requires constant monitoring of the asset’s price.

Others are attempting to manage “off chain” items via crypto-economic ‘games’. An interesting example of this is with Boson Protocol, pioneering a new field called “D-commerce” – the delivery of real goods, via a decentralised protocol. This is achieved by managing incentives to encourage positive behaviour among all the participants in a transaction, so that trade can occur within a decentralised market.

Our own project Mettalex is focused on a decentralised solution to the real world commodities market, by tokenising derivative products of commonly traded commodities, and other less liquid ones, and enabling short and long positions to be taken by either holding, or trading Position Tokens. Liquidity providers enable a deep and liquid market to exist without counterparties for every trade.

A Market For the digital Commodities of The Future

Beyond the markets of today, is focused on creating economic activity in new markets which do not exist yet, but will be enabled by decentralised markets empowered by multi-agent systems.

One place this is needed greatly today is for data-based assets such as pricing for hotels in a region or car rentals. This information does not have a ready repository third parties can plug into and use today. At the same time, businesses incur huge legal and operational costs due to the legal challenges of storing that data in a compliant enough fashion.’s agents will make it possible to create a market for these assets in the future.

As commerce becomes more global, and barriers in trade are reduced with the web and faster air travel, the need to create benchmarks to compare regional service offerings becomes more predominant.

Agent-based curation for travel will be possible only if price discovery is made possible. In order to kick-start this, we will also be creating a market for individuals to be able to contribute regional pricing data for commodities such as car rentals and hotel bookings among many others. This will help create an economy where our agents will be able to act upon price data that is fed in real time and create new economic opportunities for stakeholders within our network.

The financial world went from analog to digital in the past twenty years, the next twenty will see this digitisation spreading across real world assets and infrastructure.

Humayun Sheikh / Founder & CEO

Humayun is an entrepreneur with a track record of success and is his fourth major venture. His first brought an entirely new way of thinking to the steel recycling sector, transforming his start-up company, Metallis, into a £40m business within six years. He was an early investor in DeepMind, having the vision to provide early-stage support to artificial intelligence and deep neural network technology. DeepMind was ultimately acquired by Google for $500m in 2014.

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