What comes to mind when you think about the word DeFi? Maybe it conjures images of wild swings and abstract projects that seem almost to exist over our current financial infrastructure as a dream. But, one that is slowly materializing… and slowing spreading its vines over what has traditionally been there. Our point is, if you’re anything like us, you find DeFi concepts and applications as a little bit dreamy, fringe… almost.
However, that’s slowly changing. Indeed, like the creeping vine of the English Ivy, DeFi is intertwining itself with our physical world more and more. DeFi, which utilizes tech to circumvent third parties and centralized institutions in financial transactions, is reaching across the aisle in the form of something knowns as Real-World Assets (RWAs). RWAs allow DeFi investors to access off-chain markets, and traditional institutions to tokenize and issue debt and assets, regardless of geography.
Real World Assets
Simply put, an RWA is a token, be it fungible or non-fungible, which can be traded on-chain and is representative of actual, real-world assets. We’ve talked a bit about this in smaller segments before, like when we talked about Mortgages as NFTs or smart contracts that could power Music and Movie NFTs. RWAs can apply to just about anything, but in this case, the super interesting use could be very high value items.
This is because RWAs remove conventional restraints, say… fundraising. An RWA would give firms the ability to issue tokenized bonds which could be packaged with similar bonds and sold. These actions are transparent, and since a smart contract is controlling the process, when costs and earnings fluctuate, so do token price, and appropriate changes to credit risk are reflected on loans immediately, accurately, and without human intervention.
The fact is, globally, our economic activity is shifting on-chain. Firms and policy makers have seen the light, and more of them are flocking to it. RWAs are a welcome addition to the financial toolkit mix. Transparent financials are the future, and RWAs could facilitate the establishment and restoration of faith in institutions that want to remain viable in a new world.
RWAs provide a wealth of opportunity, with one use case being fractional NFTs, which could act to reduce barriers to investing. As we’ve mentioned before, we don’t see much use in the trendy ape NFTs, and aren’t excited by celebrity-backed fluff projects, but we are very interested in the evolution of NFTs from the perspective of usefulness to the general population and society at large… this is where fractional NFTs could play in.
This newer concept is being born out of that need in the NFT space to prove the actual utility of the technology beyond fad, thank goodness… these NFTs would allow more than one investor to own a piece of a token. Much like the ability to buy a quantity of 0.01 Bitcoin, you could own a small chunk of this NFT and make profit from that fraction at a smaller scale. This is fantastic because it opens up the space to more play for everyone.
In this situation, smart contracts fractionalize the NFT (how is determined upon setup by issuers), then a minimum price is set. This spreads the cost around, allowing people to get in with smaller investments. Great for those with less capital or who are just more risk averse and prefer to keep their eggs in more basket. But there’s more… it could also go beyond investing.
Shaping The Future
In the future, you could decide to buy property or invest in a project with partners and a fractional NFT could be the vehicle to do that. Just imagine the possible added benefits of cutting out certain middlemen… snipped out are the management fees, gone are the pesky intermediaries. We’ve seen some bash this type of arrangement, but we’d like to point out that, sometimes, a bird in the hand really is worth two in the bush.
This means that when an individual is holding a fractional NFT of some sort, and they wish to transfer ownership… say of something huge in real life (a building, a company, a piece of land), the information is stored on the blockchain, and that immutable transfer is handled seamlessly. If you’re a fan of playing the market, this should feel familiar and comfortable to you.
While the legal issues are still being hammered out, we have no doubt something will come to fruition in that regard sooner rather than later. Everything from taxes to permanent versus short-term holdings and how that should look are being discussed. Once we get our footing, we can easily see this being how we rent a hotel room or rent a jet ski at the lake in the future. Stay tuned and look out for next week’s issue, where we’ll bring you the newest from the space, as always!