Revolutionizing Africa’s Financial Landscape: Bridging DeFi and Real-World Assets Through Cardano
Currently, the DeFi and Web3 markets still lag behind traditional financial markets in terms of market cap. However, the emergence of Real World Assets (RWA) tokenization brings new hope for Web3 to become the next trillion-dollar market.
Geographically speaking, Africa undoubtedly stands out as one of the most promising grounds for RWA. In 2021, Axie Infinity rapidly made its reputation and captured the mass appeal of ordinary users in South Asia, such as the Philippines, where locals crave financial services, mining rights, and asset liquidity. In a similar vein, economically developing nations represent fertile soil where RWA can flourish.
Why do we need RWA?
Since Compound ushered in the DeFi summer in 2020, the entire DeFi world has experienced significant growth. Despite several black swan incidents in 2022 and the ensuing decreasing market size, as of June 9 2023, the Total Value Locked (TVL) has remained an impressive performance of as much as $45.5 billion (DefiLlama data).
Of this achievement, collateralized lending protocols represented by Aave, MakerDAO, and Lido not only contribute the majority of funds but also serve as crucial infrastructure for numerous composable DeFi protocols in the fields of trading, derivatives, synthetic assets, insurance, and other subcategories. They are built upon the foundation of lending protocols’ funds scale.
In the early stages of DeFi development, the circulation of credit expansion through on-chain practices, such as staking and lending native assets, can be understood as DeFi’s “cold start.” It addressed the need for seed funding in early-stage development and stimulated countless ground-breaking innovations. As a result, DeFi ecosystems have seen increased efficiency in funds utilization. In this sense, the “cold start” approach played a significant role in the early phase of DeFi.
However, as DeFi continues to evolve, the limitations of on-chain native assets have become evident. The most direct constraint is that the scale of high-quality on-chain assets sets the upper limit for DeFi’s potential. To resolve this issue of lending protocols heavily relies on staking.
Currently, the collateralized lending model primarily relies on over-collateralization to facilitate trustless loans. Borrowers must collateralize assets worth more than the loan amount. Therefore, collateralization types and ratios on various DeFi lending protocols ultimately determine the solution to this problem.
Regarding collateralization types, DeFi lending is still predominantly limited to the digital asset domain, with minimal connection to real-world assets. This leads to extremely limited choices, mostly restricted to a handful of mainstream cryptocurrencies such as Bitcoin and ETH. After all, the liquidity and trading depth of long-tail assets are poor, making them susceptible to the tragic fate of Venus.
As for collateralization ratios, inadequate collateralization has been the holy grail that DeFi has struggled to achieve since 2017. Currently, platforms like Aave are gradually exploring under-collateralization, i.e., mortgaging 100 USDT to lend 200 USDT. In this model, borrowers can borrow more than the collateral value, which is equivalent to an effective use of leverage. However, it can be seen as an auxiliary technical measure rather than a fundamental solution.
New pathways are continuously emerging, such as accepting real-world assets of real estate as collateral. This integration aims to facilitate better synergy between traditional finance and DeFi while bringing real-world assets onto the blockchain, effectively removing the limitations of DeFi’s volume ceiling.
For example, Empowa on Cardano is committed to solving the housing shortage problem plaguing 50 million people in Africa on Cardano. Through a creative “rent-to-own” model for affordable housing, it provides liquidity to housing ownership in the form of DeFi. This solution addresses the pain point of African populations: because they lack credit records, it is difficult for them to obtain traditional mortgage loans.
This approach not only tap into the strong lending demand in the African market but also hedges the risk of pure on-chain collateralized assets. It is a successful example of bringing real-world assets to the blockchain and solving real-world problems.
Overall, the key lies in “supporting RWA.” Integrating RWA from the traditional world is the bound trend for DeFi to make new breakthroughs and overcome existing development bottlenecks. The anticipated innovation in DeFi cannot be achieved without the exponential growth enabled by the introduction of RWA to the crypto world.
The rise of RWA on Cardano
The emergence and integration of RWA is not a recent development trend. Established lending giants like MakerDAO and Aave have been exploring this path. They allow asset initiators to convert RWA into tokens to secure loans.
The most classic approach is to enable cryptocurrency investors to borrow digital currencies and earn interest income and to allow borrowers to obtain short-term loans in cryptocurrencies by using their RWA as collateral.
It can be said that the innovations of leading DeFi projects often serve as a compass. They make decentralized credit markets more convenient for a wider range of use cases, propeling DeFi into the mainstream. However, most of these efforts have revolved around Ethereum. There is little attention given to RWA experiments by other public blockchains.
It should be noted that Web3 user base extends beyond financial markets. Blockchain technology has significant potential in non-financial sectors on the African continent. Apart from the aforementioned technological infrastructure gaps, another major issue in the African region is the lack of reliable and verifiable land ownership records, which leads to frequent disputes and conflicts.
From this perspective, with a total population exceeding 1.2 billion, a lack of financial services, and a pressing need for the development of real-world asset systems, Africa presents a vast untapped potential for RWA.
Taking HouseAfrica and Seso Global, both dedicated to the RWA track on Cardano, as examples. They are currently leveraging blockchain technology to create transparent and immutable records that establish clear land ownership.
Seso Global, in particular, is a blockchain-based secure real estate management, documentation, and transaction platform targeting the African real estate market. It unlocks the financing of real estate assets through DeFi, thereby opening the doors for Africa’s real economy to access DeFi liquidity.
This approach attracts assets worth trillions of dollars from traditional finance to meet the development needs of African countries while activating new application paradigms for real-world assets.
Tokenized physical assets also enable fragmented or shared ownership and provide excellent liquidity (liquidity being one of the key factors influencing the valuation of real-world assets).
Besides, although RWA primarily focuses on bringing real-world assets such as gold, real estate, debt, bonds, artwork, and carbon credits onto the blockchain. Crucial prerequisites for the flourishing development of RWA lie in the fundamental volume of on-chain assets, an active user base on the public blockchain, and a developed on-chain DApp ecosystem.
Cardano, as a well-established public blockchain that has withstood the test of time and market challenges, has surpassed Solana, Terra, Fantom, and new blockchains like Aptos and Sui in terms of performance. At present, it remains among the top 10 cryptocurrencies with a total market capitalization of $11.2 billion and a total locked value of over $160 million. Its DApps are as many as 500. This signifies that Cardano, as the underlying asset, provides sufficient volume and innovative support for the subsequent ecosystem of RWA.
Overcome the bottleneck of scale and bring DeFi into the mainstream
Rune Christensen, the founder of MakerDAO, previously referred to real-world assets as a “paradigm shift”, that is, an open door for scalable DeFi supported by real-world assets and protected by the strongest legal structures in the world.
For DeFi, this is indeed an anticipated “paradigm shift,” especially at a crucial turning point in regulation. Finding a legitimate way to combine DeFi and real-world assets will be the next “tipping point” for DeFi.
In short, tokenizing RWA is not only crucial for the mainstream adoption of DeFi and Web3, but also has the potential to revolutionize certain financial sectors.
Essentially, it is about bridging DeFi with real-world assets, where one side provides the play and the other side provides the capital. This is precisely the solution that the African continent is currently lacking and craving.
It is important to note that the African countries possess vast untapped resources, be it land or minerals, which can be introduced onto chains through the form of RWA to unlock the inherent liquidity.
Efforts such as the recent tokenization of national mineral resources in countries like Central Africa Republic are just a glimpse of what is happening. For the blockchain world, this will greatly expand the volume and variety of crypto assets, potentially becoming one of the catalysts for a new round of DeFi trends.
After all, once the crypto industry exceeds the trillion-dollar market cap, the entire industry becomes more specialized. Numerous innovative projects are emerging at a rapid pace. The competition among public chains also increasingly focuses on ecosystem development and their independent innovation capability.
Adaverse’s strategic focus on the RWA track lies precisely here — embracing the African continent, a fertile ground in urgent need of development. This further solidifies and expands Cardano’s position as a smart contract public chain beyond Ethereum. Setting foot in Africa, Cardano is laying the foundation for the growth of new DApps, more users, and ultimately higher TVL.
As of now, we have confidence in anticipating our success in the near future.