Real-world Assets in DeFi

Karolina

12 Sep 2023
Real-world Assets in DeFi

In the ever-changing world of finance, Decentralized Finance, or DeFi, is quickly gaining popularity. With over $44 billion secured within its system, DeFi signifies not just numbers but an evolutionary shift in how cryptocurrency investors manage and grow their assets. This groundbreaking approach has introduced crypto enthusiasts to unique ways of increasing their wealth. However, although DeFi has made a significant impact in the crypto world, its presence remains relatively small within the broader global financial sector. For DeFi to fully realize its potential, it must establish a bridge to the traditional financial system, tapping into the immense opportunities presented by institutional investors and established businesses. Integrating real-world assets, specifically tokenized versions of well-established financial instruments, can pave the way for increased stability in DeFi.

DeFi's Present State

Accomplishments

The significance of DeFi's rapid ascent in the world of cryptocurrency cannot be downplayed. It serves as a shining example of success, providing crypto holders with chances to generate passive income through creative methods like yield farming. In contrast, borrowers are granted quick access to loans with favorable terms that outshine offerings from even the most experienced traditional financial institutions.

Challenges

However, DeFi isn't without its challenges. Although it represents a substantial presence in the crypto sphere, it faces numerous internal struggles that put its foundation at risk. One particularly problematic issue is over-collateralization, which results from strict requirements imposed on borrowers. To counter price instability, they're often mandated to provide collateral well above the loan's value. For instance, MakerDAO - a stablecoin issuer - demands a shocking $1,500 deposit as collateral for borrowing only $1,000. Should the collateral's worth fall below this amount, harsh liquidation penalties follow. This situation not only presents considerable risks for borrowers but also hinders DeFi's fundamental mission of democratizing financial access. As a result, numerous global businesses remain constrained and unable to utilize DeFi for funding due to the inflexible crypto-only collateral requirement.

Further exacerbating these issues is the problem of liquidity. The initial excitement that pushed DeFi's total value locked (TVL) to a record $236 billion in November 2021 didn't last. The following 'crypto winter' caused a steep decline, dragging TVL down to just $40 billion by mid-2022. This sharp drop significantly impacted most DeFi tokens, diminishing their value by a staggering 80%-90%. Such turmoil severely disrupted DeFi's incentive model, as yields – dependent on deposited funds and paid out in DeFi tokens – suffered a substantial depreciation.

While the DeFi landscape holds great potential, it is also riddled with these daunting obstacles. To fully unlock its possibilities, a strategic integration with traditional finance is necessary.

Uniting Traditional Finance with Decentralized Finance

The Prospects of Tokenizing Physical Assets

As decentralized finance (DeFi) continues to experience growing pains, the answer may lie in tapping into the strengths of traditional finance. Integrating real-world assets, specifically tokenized versions of well-established financial instruments, can pave the way for increased stability in DeFi. Envision tokenized bonds, equities, debt, and physical assets such as gold, real estate, and art incorporated into the DeFi realm. The inclusion of these more stable assets can serve as a protective barrier for user investments and broaden the reach of DeFi protocols.

What does this integration process entail? Tokenization revolves around creating digital replicas of physical assets on a transparent public blockchain. This revolutionary procedure ensures not only transparent transactions but also removes intermediaries from the equation. As a result, transactions become faster and more streamlined, with costs significantly lower than traditional methods.

DeFi Drawing Attention from Institutions

DeFi's potential has captured not only its supporters' interest but also that of major players within traditional finance. The increase in institutional engagement serves as evidence of this trend. Consider BlackRock's recent submission to the U.S. Securities Exchange Commission (SEC) for approval of a bitcoin exchange-traded fund (ETF). They're not alone – Fidelity, Invesco, Wisdom Tree, and Valkyrie have also filed ETF applications, demonstrating the growing institutional appetite for DeFi exposure. This interest extends beyond ETFs; Banco Santander's efforts to educate its user base on digital assets and the launch of EDX Exchange by giants like Charles Schwab, Fidelity, and Citadel Securities exemplify the strengthening relationship between DeFi and traditional finance.

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Integrating Real-world Assets into DeFi

Perks for Conventional Financial Institutions

Traditional financial institutions are undoubtedly drawn to DeFi. Introducing tokenized versions of traditional stocks, commodities, bonds, art, and real estate can revolutionize financial transactions. Present-day markets heavily rely on intermediaries like stockbrokers, who take a cut of the profits with each transaction. However, DeFi has the potential to change that scenario. Enter smart contracts: these self-executing agreements with coded terms automatically complete transactions as soon as pre-defined conditions are met. Faster transactions, decreased administrative expenses, and unparalleled transparency become realistic expectations under DeFi – a transparent, public ledger accessible to everyone fosters a more accountable financial future.

Advantages for DeFi Protocols

Incorporating real-world assets may be the key to resolving DeFi's issues. These assets are generally more stable than the often volatile DeFi tokens, allowing protocols to aspire toward reduced volatility. Decreased liquidations, minimized fluctuations, and overall ecosystem stability become achievable goals. The real game-changer? DeFi becomes accessible to businesses worldwide. Picture a company tokenizing outstanding invoices for quick credit access or assets like art and real estate becoming fractionalized among numerous investors. Such tokenization efforts introduce exclusive DeFi services like staking and yield farming, revolutionizing market accessibility.

Traditional Finance and DeFi Synergy

Mutual Advantages

Traditional finance and DeFi are not in a rivalry for replacement, but instead, they work together to address deficiencies and capitalize on their distinct strengths. Conventionally, the financial markets demonstrate resilience and consistent growth despite global economic uncertainties, while DeFi brings the potential of democratization, transparency, and efficiency which tend to be insufficient in the traditional system.

During the 'crypto winter,' the DeFi market experienced downturns that revealed its susceptibility to volatility. Nonetheless, with extensive expertise, diverse portfolios, and established risk management approaches, traditional markets offer a stabilizing influence against such drastic fluctuations for DeFi.

Integrated Financial Ecosystem

Merging DeFi and TradFi entails developing a financial ecosystem where assets, digital or physical, circulate seamlessly without the existing cumbersome obstacles. This amalgamation may facilitate the creation of hybrid financial products combining the best features of both domains. Envision a situation where traditional real estate investment, backed by tangible property, is effortlessly tokenized, segmented, and traded on a DeFi platform. Alternatively, consider a conventional bank adopting DeFi protocols for immediate loan approvals with fluctuating interest rates determined by real-time market data.

Conclusion

DeFi's progression from its early stages to its present-day prominence signifies its potential for transformation. To genuinely alter the global financial landscape, it must establish a balanced relationship with traditional finance. By incorporating real-world assets and adopting time-tested methods of conventional finance without sacrificing its fundamental principles of decentralization and transparency, DeFi can pave a way towards an innovative, stable, and inclusive future. This partnership doesn't only signify evolution but also indicates a potential revolution that lays groundwork for a financial world with indistinct boundaries, democratized opportunities, and collectively embraced growth.

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Authorization and Identity: Chainlink Use Cases

Karolina

14 Feb 2024
Authorization and Identity: Chainlink Use Cases

Chainlink stands at the forefront of enhancing security and compliance within smart contract-enabled blockchain networks. By enabling direct access to real-world data, Chainlink ensures that blockchain applications can operate with the same level of trust and verification as traditional systems. This integration is crucial for a wide range of applications, from financial services requiring Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance to any form of digital agreement that needs to securely verify the identity of parties involved.

Overview

Chainlink is a decentralized oracle network that plays a critical role in bridging the gap between smart contracts on blockchain networks and real-world data. It enables smart contracts to securely interact with external data.

  • Decentralized Data Oracles. Chainlink's network of decentralized oracles ensures that data fed into smart contracts is accurate and tamper-proof, mitigating risks associated with relying on a single data source.
  • Smart Contract Connectivity to Real-World Data. It facilitates the seamless integration of external data sources, such as financial market data, weather information, and much more, enabling smart contracts to execute based on inputs from the real world.
  • Chainlink VRF (Verifiable Random Function). This feature provides a secure and provably fair source of randomness for blockchain applications, crucial for gaming, NFTs, and any application requiring random number generation.

READ: "What is Chainlink"

When it comes to authorization and identity verification, Chainlink's role becomes even more crucial. By connecting smart contracts with external data sources, such as governmental identity databases or digital identity verification services, Chainlink enables the creation of blockchain applications that require verified human identities. This capability is essential for applications that must adhere to regulatory standards or for those seeking to mitigate the risk of fraud.

Moreover, Chainlink's decentralized nature ensures that the process of identity verification is not only secure but also resistant to manipulation. By leveraging multiple independent oracles to fetch and validate data before it's provided to a smart contract, Chainlink ensures a level of reliability and trustworthiness that centralized data sources cannot match. This decentralized approach to authorization and identity verification opens up new possibilities for blockchain applications, making them more accessible, compliant, and secure for users around the globe.

The integration of Chainlink's decentralized oracle network into the domain of authorization and identity verification heralds a new era of security, efficiency, and compliance for blockchain applications. By leveraging real-world data and external verification services, Chainlink enables smart contracts to perform functions that were previously unthinkable in the blockchain space. Here, we explore several key use cases where Chainlink's technology significantly impacts authorization and identity verification processes.

E-Signatures

In the digital age, e-signatures have become the norm for legally binding agreements, eliminating the need for physical presence or paper-based documents. Chainlink oracles facilitate the integration of blockchain applications with leading e-signature providers like DocuSign. This integration ensures that e-signatures can be verified and recorded on the blockchain, providing immutable evidence of agreement and authorization. Furthermore, by enabling smart contracts to interact with e-signature solutions, Chainlink opens the door to automated contract execution based on the completion of digitally signed agreements, thereby streamlining business processes and reducing the time and cost associated with manual verification.

Biometrics for Smart Contract Authorization

Unstoppable Domains uses Chainlink oracles to enable users to tie their off-chain Twitter identity to their on-chain Ethereum domain name (Source: chain.link)

Biometric verification offers a high level of security and convenience for identity verification, leveraging unique physical characteristics such as fingerprints or retinal patterns. Chainlink enables smart contracts to securely access and verify biometric data, ensuring that only authorized individuals can trigger certain actions on the blockchain. This use case is particularly relevant for access control systems, secure transactions, and identity verification processes that require a high degree of trust and security. By connecting smart contracts with biometric databases and verification services through Chainlink oracles, blockchain applications can achieve a new level of security and fraud prevention.

Credential Verification

Credential verification is crucial in numerous applications, from financial transactions requiring proof of funds to access systems demanding specific security clearances. Chainlink oracles play a pivotal role by securely relaying credential verifications from external systems to the blockchain. This capability allows smart contracts to automatically verify users' credentials in real-time, facilitating seamless transactions and interactions that require verified identity or authorization credentials. For example, a decentralized finance (DeFi) platform can use Chainlink to verify a user's creditworthiness or asset ownership before allowing them to participate in lending or borrowing services.

Social Media Identity and Domain Names

The integration of social media identities with blockchain applications enhances user experience by providing more intuitive and human-readable identifiers, such as domain names or social media handles. Chainlink oracles facilitate this by securely linking off-chain social media identities to on-chain addresses or domain names. This use case not only improves the usability of blockchain applications but also adds an extra layer of verification, as users can easily confirm the authenticity of the parties they are interacting with.

Intellectual Property Management

Chainlink's decentralized oracle network enables smart contracts to interact with external IP databases for verifying ownership and facilitating transactions related to intellectual property (IP). This application is particularly useful for copyright and trademark management, patent licensing, and royalty distribution. By automating IP verification and transactions through Chainlink, creators and owners can more efficiently manage their rights and receive payments, while users gain access to verified IP assets.

Contribution Bounties in Open Source Projects

Open-source projects can leverage Chainlink oracles to automate the verification of contributions and the distribution of bounties. By connecting smart contracts with public code repositories like GitHub, Chainlink allows projects to automatically track contributions, verify the fulfillment of predefined conditions, and release payments to contributors. This application streamlines the contribution process, incentivizes open-source development, and ensures that contributors are fairly compensated for their work.

Conclusion

Chainlink significantly impacts blockchain, enhancing security and compliance, especially in authorization and identity. It bridges real-world data with blockchain, ensuring trust and wider adoption. As blockchain evolves, Chainlink's innovations promise a more inclusive digital future. Its key role in securing and streamlining blockchain applications marks a crucial step forward for digital interactions. Chainlink is pivotal for a secure, compliant, and efficient blockchain ecosystem, shaping the future of digital transactions.

If you are interested in utilizing Chainlink or other blockchain-based solutions for your project, please reach out to contact@nextrope.com

Chainlink vs. Avalanche: Exploring the Blockchain Frontier

Karolina

13 Feb 2024
Chainlink vs. Avalanche: Exploring the Blockchain Frontier

Chainlink emerges as the bridge between the real world and the blockchain. On the other side, Avalanche flashes through the blockchain space with a lightning speed platform that promises scalability without compromise. Both are revolutionaries in their own right, yet their paths are markedly different. Chainlink's quest to secure the integrity of off-chain data in a decentralized manner contrasts with Avalanche's mission to redefine blockchain's scalability and usability. But what happens when these paths intersect?

Overview

Chainlink is a decentralized oracle network that plays a critical role in bridging the gap between smart contracts on blockchain networks and real-world data. It enables smart contracts to securely interact with external data.

  • Decentralized Data Oracles. Chainlink's network of decentralized oracles ensures that data fed into smart contracts is accurate and tamper-proof, mitigating risks associated with relying on a single data source.
  • Smart Contract Connectivity to Real-World Data. It facilitates the seamless integration of external data sources, such as financial market data, weather information, and much more, enabling smart contracts to execute based on inputs from the real world.
  • Chainlink VRF (Verifiable Random Function). This feature provides a secure and provably fair source of randomness for blockchain applications, crucial for gaming, NFTs, and any application requiring random number generation.

READ: "What is Chainlink"

What is Avalanche?

Overview

Avalanche is a highly scalable blockchain platform designed for decentralized applications (dApps) and custom blockchain networks. It distinguishes itself with its emphasis on scalability, speed, and eco-friendliness.

Key Features of Avalanche

  • High Throughput and Low Latency. Avalanche boasts a high transaction output rate with low latency, making it an ideal platform for scaling dApps and financial solutions.
  • Eco-friendly Consensus Mechanism. Unlike proof-of-work (PoW) systems that require significant energy expenditure, Avalanche uses a novel consensus mechanism that is energy-efficient, contributing to a more sustainable blockchain ecosystem.
  • Scalability and Interoperability. The platform supports the creation of multiple custom blockchains that can interoperate seamlessly, facilitating a diverse and scalable ecosystem of applications.

READ: "Avalanche’s Investment in Real-World Assets Tokenization"

As blockchain technology continues to evolve, understanding the nuances between different platforms and solutions like Chainlink and Avalanche becomes increasingly important. Here's how these two blockchain giants stack up against each other:

Underlying Technologies and Architectures:

  • Avalanche utilizes a unique consensus protocol known as Avalanche consensus, combining the benefits of classical consensus algorithms with the decentralized nature of blockchains. This protocol allows for high throughput, quick finality, and energy efficiency.
  • Chainlink, on the other hand, is not a blockchain but a decentralized network of nodes that provide data to blockchain networks. It uses a network of independent node operators who are incentivized to provide accurate data to smart contracts.

Consensus Mechanisms:

  • Avalanche employs a Proof of Stake (PoS) model designed to be lightweight and energy-efficient. Validators participate in reaching consensus by staking AVAX tokens, contributing to the network's security and governance.
  • Chainlink does not use a consensus mechanism in the same way a blockchain network like Avalanche does. Instead, it relies on a decentralized network of oracles to validate and relay data, ensuring the integrity of information provided to smart contracts.

Chainlink is best suited for applications that require secure, reliable, and tamper-proof data inputs from the real world. This includes:

Avalanche is optimized for a wide range of blockchain applications needing high throughput, quick finality, and scalable infrastructure, such as:

  • Scalable DeFi platforms and DEXes.
  • Enterprise blockchain solutions.
  • Custom blockchain networks (subnets).

Examples of Real-World Applications and Partnerships:

  • Chainlink has partnered with Google Cloud for cloud data integration and with numerous DeFi platforms like Synthetix and Aave for price feeds and randomness.
  • Avalanche has formed partnerships with Deloitte for enhancing security and speed in disaster relief platforms and with top DeFi protocols to build on its highly scalable network.

Ecosystem and Community

Development Community and Ecosystem Support:

  • Both Chainlink and Avalanche boast robust and active communities. Chainlink's community is highly engaged in developing external adapters and securing data for smart contracts. Avalanche's community focuses on developing dApps and custom blockchain networks.

Tools, Resources, and Support:

  • Chainlink offers extensive documentation, a vibrant developer community, and grants for projects integrating Chainlink's technology.
  • Avalanche provides developers with comprehensive resources, including tutorials, technical documentation, and funding for ecosystem growth through the Avalanche Foundation.

Tokenomics and Market Performance

  • LINK (Chainlink's token) is used to pay for services within the Chainlink network, including data requests to oracles. It incentivizes node operators to provide accurate data.
  • AVAX (Avalanche's token) serves as the native currency within the Avalanche network, used for transaction fees, staking, and governance.
  • In terms of market performance, both LINK and AVAX have shown significant growth and adoption, reflecting their utility and the demand for their respective network's services. However, their performance can vary based on overall market trends, technological advancements, and adoption rates in their specific use cases.

LINK vs AVAX

Potential for Integration

The potential for integration between Chainlink oracles and Avalanche’s blockchain platform is substantial. Chainlink’s decentralized oracles can provide Avalanche-based applications with secure and reliable real-world data, enhancing the functionality and scope of Avalanche’s already fast and scalable blockchain. This integration can benefit a wide range of applications, from DeFi and insurance to gaming and prediction markets, by providing them with the essential data needed to operate effectively and transparently.

Conclusion

Chainlink and Avalanche, while serving distinct purposes within the blockchain ecosystem, demonstrate a powerful synergy when combined. Chainlink’s ability to provide secure, reliable, and decentralized data complements Avalanche’s high-throughput, scalable blockchain platform, enabling developers to build more complex, useful, and transparent applications.

READ ALSO: "Chainlink vs Polkadot"

If you are interested in utilizing Chainlink or other blockchain-based solutions for your project, please reach out to contact@nextrope.com