DeFi’s Future is in Real World Assets
Over collateralizing is not sustainable. Future DeFi projects need to start planning for the future.
The use of real world assets is the future of DeFi.
Lending is the most popular activity in DeFi comprising nearly 82% of all TVL amongst all DeFi protocols. With sky high APYs the rush to jump into the latest and greatest has contributed to one of the biggest gold rush we’ve seen in recent memory. As of this writing, I’m seeing a 406.66% APY yield on a XTZ(Tezos) to BNB(Binance) taking place on PancakeSwap which is further dwarf by a mind blowing 10,445.42% APY for a DAI to BNB exchange also taking place on PancakeSwap. Imma just say it as it is — THE BLOCK IS HOT.
Lil Wayne — Tha Block Is Hot — YouTube
Despite all this hotness, there are few borrower protections that are associated with lending, and its cousin on steroids, yield farming, basically strategies to increase yield from lending upon lending upon lending. On the horizon we have decentralized insurance platforms such as Opium Insurance and Nexus Mutual that look to stabilize potential default risks that are inherent in DeFi. Taking out a loan on Compound or MakerDAO requires the borrower to over-collateralize on the loan. For MakerDAO, users must provide at a minimum, 150% of the loan that they are borrowing. So for every $100 worth of DAI, the borrower must supply $150 in BNB. This is done to combat the volatile nature of crypto assets. Therefore, when that $150 worth of BNB drops, this triggers a liquidation event in which the borrower would be subjected to a 13% liquidation penalty, thereby incentivizing the user to take out less DAI or collateralize even more than the 150% needed. It is not uncommon for users to simply put in 200% of their borrowed amount just to hedge their risks a bit. The purpose of this explanation isn’t to give a primer on why over-collateralization exists, but more so to acknowledge that its place is grounded in the fact that liquidation is a different beast when it takes place on the blockchain.
Truth be told, a 200% collateral ratio simply doesn’t (or shouldn’t) exist in the real world, and maybe shouldn’t exist in the crypto world either (stay with me on this one). As an example, let’s say an individual is looking to purchase property but they simply don’t have enough money to pay for it outright. In this case, the lender could ask the bank to put up the money while using the underlying property as the collateralized asset. Typically, the lender puts down 10%-30% of the property value in cash, and the bank puts down the rest. In other words, mortgages are collateralized between 70–90% of the property value. Therefore, in the case of lender default, the bank takes back the property and liquidates it as quickly as possible. Essentially, the physical property becomes the backstop in case of extreme circumstances.
In crypto, the need for over-collateralization is to ensure that there is enough liquidity in case volatility wipes out an entire investment. But for DeFi to become more mainstream, we need to consider the fact the real world is less likely to embrace the practice of over-collateralizing. Instead we need to start considering the usage of real world assets as a peg to lessen the risk and to equalize the volatility for both investors and borrowers, so that investors no longer require over-collateralization to protect themselves in extreme circumstances (currently way more extreme in crypto than the real world), and borrowers no longer have to put up more collateral than necessary and can put their BNB to use elsewhere.
The real world assets that Coffee Shop DAO is onboarding to the chain include corporate debt, supply chain financing and inventory financing as well as many other types. The organizations that we work with are either publicly traded companies with healthy balance sheets or private institutions who have been in business for decades and hold sterling track records of 0% default on their loans. Therefore any loan requests that these institutions put out have a very low risk factor and are unlikely to default. Even if they do, the fact that these institutions are insured (so are we) in the countries that they operate in lends additional layers of protection that crypto only assets do not have. In addition, the terms for these loan requests can be in perpetuity as well as a few years. Therefore, the returns are not only going to be very consistent but also very stable.
This presents a very appetizing scenario for crypto investors who are looking to diversify their crypto holdings. COFFEE is working together with these institutions to make their loan requests available through the COFFEE ecosystem (called Galaxy) in order for the lenders to generate stable and consistent yields. Whereas volatility in DeFi lends to amazing upside (and high interest), there is just as much risk involved in taking an impermanent loss when all of your assets are invested in purely crypto backed assets.
This has been an incredible bull run in DeFi and many pundits have said that this is just the beginning. More and more projects are primed to crop up, many of them rehashing the same concept. Our goal at Coffee Shop DAO is to create a project that is sustainable with a sound business model while also providing immense value for the DeFi community.
If you are curious about Coffee Shop DAO, be sure to visit the following resources. We are brand new DeFi project with a team that is diverse and highly experienced from all around the globe.
