How DeFi Solutions Redefine the Financial Market – Thought Leaders
Author: Gene Deyev, Co-founder & CEO at Stobox
The financial market, as we knew it before the advent of cryptocurrencies, had been formed over the past 200 years. The financial institutions are recognized not only as banks, which are centralized organizations but also as organizations that store, help exchange, and keep records of assets represented in the form of securities. That is why we know such financial players as brokers, stock exchanges, underwriters, depositories, and others. All these financial market participants are heavily regulated, which means that their activities require special licenses, and the state controls their processes and activities.
Financial assets include the companies' shares, both private and public, bonds, units of funds, and other financial instruments. In addition to the fact that each country has not only a number of its own regulatory features, all technical infrastructure systems are also built on the principles of centralized management. That is, users trust professional market participants to handle their assets. For example, an investor buys or sells shares through a broker, traders keep their balances in exchange accounts for trading, or a bank client trusts financial institutions to keep money in their accounts. In all cases, the asset owners trust the third organization. And that’s a huge problem in the modern world that DeFi solutions are aimed to solve.
What’s wrong with the traditional financial market?
There are thousands of examples when even regulated financial institutions deceived their clients, went bankrupt, were blocked, or completely lost all the assets they kept on their balance sheets. Many companies surreptitiously enrich themselves by owning assets other than their own, floundering on their balance sheets, and playing complex financial games that the asset owners do not directly understand in most cases. Problems also arise in the most stable companies, like Lehman Brothers, to say nothing of small companies in financially underdeveloped regions.
The problem is apparent – people cannot freely dispose of their assets and depend on a number of often non-transparent organizations. Many centralized organizations operate in an old-fashioned way, although they have long lost their credibility. Is there any chance to change the current situation?
Decentralized systems are the solution
The development and implementation of decentralized systems allow users to independently own their assets without resorting to custodians or other centralized institutions.
First, let's understand that decentralized networks are various blockchains that store data in distributed ledgers and do not need a central operator. Take the Bitcoin blockchain as an example. No authority could stop the system or hack the data stored in it. To date, not a single hacker has been able to break into this network to steal other people's assets. Blockchain is a database with utmost trust in the absence of even one system administrator.
The rapid development of the crypto industry over the past ten years has demonstrated a clear interest in decentralized technologies, and today cryptocurrencies are in circulation by 300 million users. Still, they are also regulated in most countries along with financial assets.
Only in the United States, 21 legal acts have been adopted that regulate operations with crypto assets and their derivatives over the past three years. The concept of Decentralized Finance has come into everyday use, including all financial transactions with crypto assets. Based on new technologies, decentralized exchanges, deposit and lending systems, complex programs of composite income by providing liquidity to other protocols, and much more have been created. Today, the DeFi market is estimated at $239 billion (defining market size as TVL in DeFi protocols) and is only gaining momentum.
But let me remind you that most transactions in DeFi occur with classic crypto assets that have no real value in the offline economy. The fundamental technological adoption will happen when tangible assets, such as real estate or corporate securities denominated in security tokens are freely stored and exchanged on blockchains. This can happen thanks to changing the notorious outdated systems, centralized depositories, and trading platforms. We are talking about the liberalization of capital and providing an opportunity for all people with a blockchain wallet to participate in the global capital market, remaining directly the holders of their assets and not transferring their ownership to third parties.
Tokenization and decentralized solutions are the next step for businesses
An overwhelming majority of the companies worldwide are not public and therefore aren't traded on the security exchanges. Instead, they remain private and are seldom traded anywhere, making them a lot less liquid than public companies' shares or even cash. Suppose you have a stake in such a business that you wish to sell as soon as possible. In that case, you won't accomplish this goal very quickly: even after an investor is found, it takes a couple of months to draft paperwork. Thankfully, such a status quo is finally changing thanks to tokenization technology and decentralized solutions.
Any business can be tokenized and represented in the form of liquid tokens, which opens a brave new world of opportunities for traditional private companies.
Firstly, liquid businesses attract more investors' attention. The possibility of selling the security tokens anytime on a decentralized platform that doesn't depend on brokers and intermediaries is a considerable advantage. Stobox DS Swap is one such platform our team is working on.
Secondly, attracting money to such a business is much simpler as the investor's geography is global and not limited to the owner's or local broker's inner circle. Fully-compliant online fundraising is an absolute advantage of tokenization.
Thirdly, the DeFi mechanics open up possibilities for creating new business models that would feature utility tokens or NFT. For instance, a real estate project in Tulum, Mexico, uses NFT and its own cryptocurrency to work with its community of investors and clients.
The last thing worth mentioning is that the entry threshold in tokenized assets for investors is as low as $100 or even less. Provided that 2 billion people worldwide are unbanked and the inflation rates are getting higher and higher, preserving personal funds in a real-estate-backed security token will be a reliable means of saving for millions of people worldwide. Imagine the world where multimillion commercial buildings belong not to financial groups but are represented as millions of security tokens preserved on Androids or the Indian fishers' wallets, bringing a stable 10%-12% annual income, as well as the possibility to sell an asset anytime.
Today, tokenization is one of the most important development vectors, and many countries already include it in their development plans. For example, an analytical group from the Stobox company participated in working groups on the development of laws regarding tokenization together with the Ministry of Digital Transformation of Ukraine.
In conclusion, it's worth noting that despite the relative novelty of tokenization, there already is a vast number of learning materials and many successful cases, while the market is beginning to take shape, growing its own leaders and unique approaches.