How DeFi gives small investors access to private investment and exotic assets

The total value locked in DeFi protocols has skyrocketed to $53.7 billion, from just $2.5 billion a year ago. Most of this growth is due to retail investors and traders.

Most institutions have started dipping their toes into DeFi. The institutional money in the DeFi ecosystem would increase liquidity and yield better rates.

A strong reason why retail investors are attracted to crypto and DeFi is that there is no centralized authority with the power to monitor transactions. But DeFi offers much more than that.

DeFi protocols provide the same products and services as the traditional financial ecosystem, but in a fully digital, decentralized way. They make their offerings available to everyone, at a faster pace and at a lower cost. Without intermediaries, geographic or jurisdictional barriers.

Democratizing access to illiquid and exotic assets

One of DeFi’s strongest applications lies in democratizing access to illiquid, exotic and private assets. Assets that small investors never had access to in traditional financing are now within their reach in DeFi. In traditional finance, most high-value and exotic assets are not accessible or economical to the masses.

It is the tearing down of the walls erected by TradFi that made it nearly impossible for small investors to access such assets.

For example, Convergence Finance allows asset owners to symbolize their illiquid and private assets to enjoy the liquidity and instant transactions offered by DeFi. Retail investors can buy and trade tokens that represent real assets.

To help owners of real assets bring their assets into DeFi, the ConvO token wrapping layer creates Convergence Finance Wrapped Security Tokens (WSTs) that represent the assets. The wealth owners have the choice to sell fractional pieces to traders and investors from all over the world. The packaged security tokens are deposited into a liquidity pool on ConvX for trading.

The tokens give you price exposure without the hassle of holding the actual asset. It is similar to how derivatives such as options, futures and swaps represent an underlying asset in traditional financing.

Convergence Finance guarantees that the rights to the asset will be transferred to the future token buyers. As a result, token holders enjoy the benefits of real asset exposure from both the on-chain and off-chain perspectives.

Small investors can buy tokenized shares of private companies such as SpaceX on Convergence Finance’s ConvX platform. People who own tokens representing SpaceX stock are guaranteed to see the price difference in the stock between buy and sell transactions.

Not perfect yet

DeFi itself isn’t perfect yet. It is an emerging ecosystem with many shortcomings. Fortunately, DeFi protocols recognize the imperfections and address them.

Most people in the DeFi ecosystem are tech-savvy individuals. People, especially in emerging countries, don’t understand how it works and how to take advantage of it.

Another obstacle is the low liquidity. DeFi liquidity would improve dramatically if institutional investors, hedge funds and banks fully embrace it.

Recently, the European Central Bank issued $121 million in digital bonds on the Ethereum blockchain. It was the first-ever “multi-dealer-led primary issuance of digitally native tokens using public blockchain technology.”

DeFi aggregators also help increase liquidity. For example, Convergence Finance has a cooperation with the DeFi aggregator 1inch Network to increase liquidity on its ConvX platform. It also means that users from across the DeFi ecosystem can easily trade private and exotic assets on Convergence over 1inch Network.

Conclusion

There is still a long way to go for DeFi, particularly in improving liquidity, making it accessible to the masses and improving regulatory frameworks. But the pace at which DeFi protocols are bringing real, exotic assets into the chain, we wouldn’t be surprised to see an explosion of such assets on DeFi protocols like Convergence.

Image by Miloslav Hamrik from Pixabay

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