Aave takes real world assets as collateral

Despite all the talk that DeFi is forever changing the financial world, the reality is that decentralized finance is largely a closed system. For the most part, cryptocurrency owners put their crypto as collateral for dollar-pegged stablecoin loans and then use them to invest in DeFi projects.

The closed loop opened a little on Tuesday (December 28) when the Aave loan protocol announced an agreement with the Centrifuge decentralized financing protocol that will allow small and medium-sized enterprises (SMEs) to access the liquidity available on the markets. crypto-currencies, symbolizing real-world assets. like freight bills, bridging loans, trade receivables and others, then use these tokens as collateral.

See also: PYMNTS DeFi Series: What is Yield Farming and Cash Extraction?

“The RWA Marketplace connects the regulated world of TradFi with the trustless world of DeFi,” said Lucas Vogelsang, co-founder of the developer of Centrifuge End Labs. “This is a big step for the Aave protocol.

Investors have blocked more than $ 12 billion in Aave loan pools, making it the third DeFi project in terms of total blocked value (VAT).

Building a bridge between real-world companies and DeFi capital, the new product “will allow Aave’s depositors to earn a return against stable, uncorrelated real-world collateral and allow Centrifuge issuers to pledge and borrow in the market… asset classes, ranging from bridge loans to inventory and income-based finance, ”said Jason Jones, CEO of End Labs. The company also works with Maker, the largest DeFi protocol.

Real world, real complexity

While the new “TradFi” loans represent the first steps in what could be a huge expansion of DeFi’s influence, they also offer a lot more complexity from a crypto lender’s perspective.

In a traditional DeFi loan, the collateral offered is a cryptocurrency. And although they are very volatile, at least the lender (in theory) understands the basics of the crypto market and the particular cryptocurrency accepted as collateral.

A review of the categories of collateral offered by Centrifuge makes it very clear that a whole new set of skills is required to effectively assess risk.

Read more: PYMNTS DeFi series: the very real risks of DeFi

There are seven categories of guarantees, offering different interest rates:

Real estate bridging loans 4%
Income Based Funding 5%
Financing of branded stocks 5%
Freight and freight forwarding invoices 6%
Trade receivables 7%
Fintech debt financing 8.5%
Emerging market consumer credit 10%

Beyond that, entering the real world brings with it many institutions that crypto investors may not be familiar with, such as lawyers and judges. And the debt comes in senior and junior installments, the latter trading more risk for greater rewards.

DeFi is built on self-executing smart contracts in which funds for a transaction are locked in when it is created. When certain conditions are met, the contract pays. Given the pseudonymous nature of cryptocurrency ownership – often all you know about the other party is a digital wallet address – there is no withdrawal, no change in terms, and rarely any. remedy available to injured parties. “Code rules” is the industry’s shortcut.

Read more: PYMNTS DeFi series: what is a smart contract?

Another thing is that crypto transactions tend to have instant resolutions – the 10-20 seconds the Ethereum blockchain takes between blocks of information added to the chain is considered far too long to scale, let alone the 10. minutes of Bitcoin. Lawyers, on the other hand, work in months and years.

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