If DeFi Wants to Grow, It Has to Embrace Real-World Assets

With greater than $44 billion in total value locked, there’s no denying decentralized finance (DeFi) has been a big hit among cryptocurrency investors, providing an innovative new way for them to grow their wealth.

The reason for DeFi’s success in crypto is it advantages everyone involved. Crypto holders get a way to earn passive income on their assets through mechanisms such as yield farming, while borrowers can obtain loans in seconds, with advantageous terms no traditional financial institution can match.

DeFi is big in the crypto world. But, if we look at the overall financial industry, it remains a tiny, almost minuscule niche market, albeit one with potential. DeFi is still taking its first baby steps, but, if it’s to stand tall on its own two feet, it desperately needs a way to connect with the traditional financial ecosystem, where it can tap into real businesses and institutional investors.

Enrico Rubboli is the CEO of Mintlayer, a layer 2 solution that allows users to build a decentralized finance ecosystem on the Bitcoin blockchain, opening Bitcoin to DeFi, smart contracts, atomic swaps, NFTs, apps and more.

The issue is that DeFi is plagued by crippling problems that cannot be solved by internal means. One of the biggest restrictions with DeFi is the requirement that borrowers must over-collateralize their loans to account for price volatility. Most DeFi protocols require collateralization above the value of the loan (stablecoin issuer MakerDAO, for example). If someone wants to borrow $1,000, they must put down $1,500. Should the value of that collateral fall below $1,500, they will be hit with a liquidation penalty.

This over-collateralization requirement presents a big risk to borrowers and seriously hinders accessibility. If DeFi is to live up to its promise of making financial services more accessible, it needs to find a way to cater to the millions of businesses globally that struggle to obtain funding elsewhere. At present, most businesses can’t use DeFi as a source of funding, because they’re not allowed to use anything but crypto as collateral.

Also holding back DeFi is the issue of incentivization, which is directly linked to the available liquidity in protocols. When DeFi hit an all-time total value locked (TVL) of $236 billion in November 2021, everyone…