The Web3 bull market cannot be separated from the DeFi track
As of April 2024, crypto market data aggregator CoinGecko lists more than 13,000 individual crypto assets with a total market cap of about $2.5 trillion and daily trading volume of more than $100 billion. Nearly half of this value is concentrated in Bitcoin, with the vast majority of the other half spread across the top 500 assets. The very long and growing tail of cryptocurrencies, especially with NFTs joining the mix, shows how much demand there is for blockchain as a digital asset ledger.
According to recent estimates, about 420 million people worldwide hold cryptocurrencies, many of whom may have never or rarely interacted with decentralized applications. Ledger reports that its Ledger Live software has about 1.5 million monthly active users, while software wallet providers MetaMask and Phantom claim about 30 million and 3.2 million monthly active users, respectively. Add to that the daily DEX volume of about $5-10 billion, the capital locked in the on-chain lending market worth about $30-35 billion, and the stablecoin market value of about $130 billion, which is still small relative to traditional finance and fintech, but still significant.
According to Electric Capital's latest crypto developer report, the number of developers with at least 2 years of cryptocurrency experience has increased for 5 consecutive years, the industry has multiple blockchain network ecosystems, each with more than 1,000 contributors, and has attracted more than $90 billion in venture capital in the past 6-7 years, and the vast majority of these funds are used to build underlying blockchain infrastructure and core decentralized finance (DeFi) services.
In the fourth quarter of 2023 alone, the total market value of cryptocurrencies rose 55%, from $1.1 trillion to $1.6 trillion, and the price of Bitcoin soared from $27,000 to $42,000. Throughout 2023, the total market value of cryptocurrencies more than doubled from $832 billion at the beginning of the year, with Bitcoin (2.6 times) recovering rapidly. After the drama and downturn in 2022, 2023 is a year of strong recovery for the industry. According to CoinGecko, the total market value of cryptocurrencies in the first quarter of 2024 has continued to rise by 64.5%, reaching a high of $2.9 trillion on March 13.
According to PANews data, there were 388 financing events in the DeFi track in 2021, accounting for about 28.72%, and the disclosed financing amount reached $2.09 billion.
In addition, another track in the DeFi field, RWA, has also emerged in recent years. RWA asset tokenization has improved the transaction speed and efficiency of the DeFi market, realized 24*7 transactions, and was not restricted by time windows, which improved transaction efficiency. Track blockchain gold flows through public ledgers. Users can fully evaluate the way to participate in the market fairly. And asset tokenization makes the minimum purchase unit smaller, reduces the investment threshold and risk, and attracts more retail investors to participate.
At present, the DeFi industry has a considerable amount of deposited funds and its own specific financial behavior characteristics. According to defillama data, the DeFi system has formed a relatively complete DeFi product matrix including lending, DEX (decentralized exchange), derivatives, etc. On this basis, some projects with a keen sense of smell combine opportunities in the real world (such as arbitrage) with DeFi (don’t forget that DeFi is different from traditional finance in terms of efficiency and complexity), further promoting the development of RWA.
Compared with traditional finance, the transmission mechanism in the DeFi ecosystem is more complex, more widely related, and faster:
When the mainstream currency price falls rapidly, the liquidation of collateral in the loan contract will be intensified, and the liquidation will further lead to market selling, which may push the price down further;
The rapid decline of mainstream currencies will also drive the price of DeFi project tokens down. On the one hand, it will lead to a decline in the TVL of the project (while reducing the project's yield), causing the outflow of user assets. On the other hand, the flow of user assets will cause leveraged loan funds to enter the centralized liquidation stage, which will put a negative pressure on the price. In addition, drastic price fluctuations may cause users to withdraw assets from the LP liquidity mining pool;
There is a feedback effect between the linkage mechanisms at the above two levels, which will strengthen each other and accelerate transmission in the stage of rapid price decline; especially the liquidation of loan collateral, leverage liquidation and LP liquidity withdrawal will have a negative impact on the DeFi ecosystem.
The price of the external market fell rapidly, and the panic sentiment and price transmission mechanism were multi-line and layered. The nested characteristics of the DeFi contract mechanism and the fast liquidation characteristics of the blockchain will make its internal risk transmission mechanism complex. However, from a macro perspective, the mainstream collateral of the current DeFi system (related assets such as Bitcoin and ETH) determines that it is highly correlated with the price fluctuations of mainstream assets in the cryptocurrency market. The cryptocurrency market in June 2021 experienced a large short-term decline. During this period of rapid and substantial adjustments, the TVL of the DeFi system showed a strong positive correlation with the price trend of Bitcoin. However, this is not surprising, because the correlation between various assets in the current cryptocurrency market is high, and the asset types need to be expanded, so real-world assets are very attractive to the Web3.0 economic system.
Therefore, the introduction of real-world assets, especially real estate, bonds and other assets that are more stable and less correlated with the native cryptocurrency market, can achieve a certain degree of hedging, enrich the asset types and investment strategies of the DeFi system, and help the overall Web3.0 economic ecology to become healthier. This is a very realistic side of the demand for RWA.
The introduction of RWA makes it an inevitable trend for DeFi to integrate with the real world, and RWA and DeFi will promote each other's development. On the one hand, compared with DeFi native assets, RWA injects asset diversity into the DeFi ecosystem. The high homogeneity, high correlation and high volatility of on-chain native assets cannot meet the development needs of DeFi protocols, while the diversity of real-world assets injects assets with low correlation with on-chain assets, stable and considerable returns and good liquidity into DeFi. Therefore, the injection of rich income sources by RWA can not only build a richer portfolio strategy, but also provide diversified collateral, improve the security and effectiveness of the DeFi ecosystem, and meet the needs of on-chain asset management. On the other hand, RWA on the chain provides investors of real-world assets with investment options with fragmented thresholds and fees, higher security, higher information transparency and higher asset liquidity. The optimization brought by DeFi to the financial market will be achieved by tokenizing real-world assets - that is, RWA is a trend of DeFi "swallowing" the traditional economic world.
For real-world assets to be tokenized, it is first necessary to standardize and clarify external information from the off-chain, including external information such as the economic value, ownership and legal protection of asset rights of RWA. After the standardized external information is digitized, it is introduced into the blockchain through the oracle, becoming on-chain data that can be directly accessed by the DeFi protocol, and generating corresponding digital tokens. After external data is uploaded to the chain, it is stored in the distributed ledger as metadata of the digital token to ensure data transparency and accessibility. Different categories of RWA are incorporated into DeFi in a legal and compliant manner, corresponding to different DeFi protocol standards. Finally, the generated RWA tokens can be used as the underlying assets of the DeFi protocol and integrated with the DeFi protocol, enabling it to participate in the activities of the DeFi ecosystem and promote investors' demand for RWA.
The tokenization process of RWA reveals that the improvement in asset transparency is due to the fact that all off-chain information and transaction history are stored in the distributed ledger for access. The increase in asset security due to RWA on the chain is not only due to this, but also to the fragmented allocation of risk exposure, decentralized management and smart contract protection. Finally, the improvement in asset liquidity is not only due to the successful fragmentation of the cost and threshold of asset investment by tokenization, attracting more on-chain and even off-chain investors, but also due to the automatic market maker mechanism (AMM) in the DeFi protocol, which allows asset holders to complete transactions in a timely manner and obtain liquidity. As the feasibility of the DeFi protocol introduced by RWA is proven, the value depression of the RWA market will attract a large number of investors to enter.
As early as 2023, the popularity of tokenized US Treasuries surged, with its market value increasing 7.82 times from $104 million in January 2023 to $917 million at the end of the year. Franklin Templeton, the largest listed fund management company, is also one of them, and has become the largest on-chain US government money fund issuer with its strong fund size.
Since the approval of the US spot ETF in January 2024, the total AUM of these ETFs has almost doubled to a total of $55.1 billion as of April 2, 2024.
Grayscale converted all of its GBTC into ETFs, with an asset management scale of $28.6 billion.
BlackRock's IBIT has become the second largest ETF and has the largest trading volume to date.
Therefore, the integration of Web3 with the real economic world is an inevitable trend.
Last updated