DeFi securitization of real-world assets poses credit risks, opportunities: S&P

DeFi’s usage lawsuit successful accepted concern could turn successful the coming years arsenic caller protocols effort to enactment the securitization of real-world assets, according to a caller probe study from recognition standing bureau S&P Global Ratings. 

The financing of real-world assets, oregon RWAs, volition apt beryllium a cardinal absorption country for DeFi protocols moving forward, S&P said successful a study titled "DeFi Protocols For Securitization: A Credit Risk Perspective." Although the manufacture is inactive successful its nascent stages, S&P highlighted respective benefits DeFi could bring to securitization, including reducing transaction costs, improving transparency connected plus pools, reducing counterparty risks and enabling faster outgo colony for investors.

“The aboriginal improvement of DeFi focused chiefly connected applications providing fiscal services wrong the crypto ecosystem, specified arsenic lending collateralized by crypto assets, concern tools for crypto assets, and crypto trading platforms,” analysts Andrew O’Neill, Alexandre Birry, Lapo Guadagnuolo and Vanessa Purwin wrote, adding:

“These archetypal usage cases were broadly disconnected from the existent economy. The financing of RWAs has emerged arsenic a taxable successful the DeFi space, with lending protocols offering loans originated successful the accepted way, based connected borrower underwriting alternatively than backed by crypto assets pledged arsenic collateral.”

DeFi securitizations aren’t without risks, however. S&P identified ineligible and operational risks associated with their issuance, arsenic good arsenic the imaginable for a mismatch betwixt fiat currency-denominated assets and integer currency liabilities. Addressing these risks could beryllium the quality betwixt a robust DeFi securitization manufacture and 1 failing to pull involvement from accepted finance.

S&P Global Ratings is 1 of the big-three standing agencies connected Wall Street. While the institution is researching DeFi protocols, it does not presently complaint immoderate projects.

The DeFi manufacture roseate to prominence successful mid-2020 arsenic the committedness of higher yields and easier entree to recognition markets attracted crypto-native investors. According to astir metrics, DeFi enactment peaked successful the 3rd 4th of 2021 — successful November of that year, the full worth locked (TVL) connected DeFi platforms eclipsed $180 billion.

The DeFi manufacture has further country to turn beyond crypto TVL measures, according to S&P Global Ratings. Source: DeFi Llama.

Related: Fractional NFTs and what they mean for investing successful real-world assets

Asset tokenization, oregon the process of issuing information tokens representing existent tradeable assets, has agelong been viewed arsenic a viable usage lawsuit for blockchain technology. According to Ernst & Young, tokenization creates a span betwixt real-world assets and their accessibility successful a integer satellite without intermediaries. The consulting bureau believes tokenization tin “provide liquidity to different illiquid and non-fractional markets.”