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The DeFi market desperately needs to connect with real-world assets

The DeFi sector can significantly benefit from traditional financial market instruments, ensuring its further growth….

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With over $13 billion in total value locked, decentralized finance has truly shaken the crypto world in the last year. It has provided a new way to profit from the crypto market. Meanwhile, DeFi right now is only a niche trend with a gigantic potential to start a revolution in the business loan market. In order to grow out of diapers, DeFi desperately needs to be connected with real-world assets and exist in an environment where it can be used by real businesses, corporate clients, etc.

As a concept, DeFi truly looks like a win-win solution for those who already hold crypto, as they finally get to have some passive income from incentivization mechanisms and yield farming, and for borrowers, as they can benefit from a loan with terms that no traditional venue can offer.

However, there are several problems with DeFi that need to be addressed urgently. The first major drawback for all parties involved is over-collateralization to account for price volatility.

In most cases, protocols require borrowers to collateralize their loans at a minimum of 150% of the value of the loan. So, let’s say you want to borrow $100. That means you would have to collateralize your loan with a minimum of $150. Therefore, if your collateral drops below the $150 point in value, your loan would then be subject to a liquidation penalty.

Over-collateralization is a significant hurdle to reaching one of the main goals of DeFi: making financial services truly accessible. And the same problem occurs with stablecoins issued by DeFi protocols, as they require over-collateralization too.

Volatility of the collateral has caused losses totaling 6.65 million Dai (about $6.65 million) for Maker already and might cause more similar cases in the future.

This issue may be debatable, as a whole lot of people in the crypto space want to stay isolated in their own playground. However, crypto is becoming a part of a global financial system, and in order to stay there, crypto must be connected to the outside world, and there will be absolutely no growth without it.

But putting my personal views and beliefs aside, the lack of connection to real-world assets damages the DeFi space in a number of ways. First, it doesn’t allow traditional companies to borrow funds, as they can’t provide anything but crypto as collateral. The second issue is the lack of real cash flows behind protocol tokens, meaning an absence of stability in the price of protocol tokens, which are the main instrument of incentivization. In the long run, all of the above issues limit the further growth of DeFi as a paradigm and, most importantly, lead to the risk of protocols’ default due to loss of value of their tokens.

With all issues in mind, the DeFi space requires an infrastructure that can bridge the gap between real-world assets and the DeFi ecosystem, allowing anyone to use real-world assets as collateral to borrow money from protocols.

So, will any real-world asset work? Not exactly. The asset must meet simple criteria that will allow for solving the above issues:

  • The asset must be stable in order to solve volatility and over-collateralization issues.
  • The asset must generate periodical fixed income in order to bring real-world cash flows.
  • The price of a collateral asset must be determined in a transparent way based on several proven and recognized sources.

The asset that meets these criteria and solves the aforementioned issues comes in the form of bonds or fixed-income securities.

With over $5 billion locked in DeFi lending alone and over $13 billion locked overall, it will be a perfect way for corporates to borrow money with no book-building and marketing efforts at all.

Along with that, shifting traditional financial products to the open-source and decentralized world drastically reduces the number of intermediaries required to attract financing, minimizing its cost. While in the current system, bond issuance costs may include fees paid to exchanges, payment agents, trustees, banks, lawyers and rating agencies.

If you look from the investors’ perspective, they will receive protocols with a level of stability that has never been seen on the market before. The use of bonds prevents the protocol from over-collateralization and ensures the stability of the asset, even in times of high volatility in the crypto market, therefore eliminating the risk of liquidation.

Most importantly, the use of real-world debt obligations will allow protocols to earn fixed periodical income, which can be distributed among investors. Basically, it will allow DeFi investors to benefit both from income generated by the collateral and interest payments made by borrowers.

Generally speaking, DeFi is isolated from traditional finance. The first, most obvious problem is that DeFi borrowing requires collateral in the form of digital assets. Currently, there is no ready-to-go infrastructure to use real-world assets as collateral in DeFi protocols.

The next problem is heavily tied in with the whole structure of the DeFi market now: Borrowers are able to attract funds from DeFi protocols strictly in crypto, and the same occurs to interest payments. As corporates operate in the traditional system, borrowing funds and debt repayment must be set in fiat.

And the last problem is the absence of a traditional legal framework when borrowing from a protocol. There are no formal agreements in place, which raises difficulties for the accounting treatment of borrowed funds.

I believe that the DeFi market desperately needs to build a regulated bridge with the traditional financial market in order to ensure stable growth. Simultaneously, corporate institutions — both holders and issuers of debt securities — will be willing to take the best of DeFi infrastructure and benefit from a loan with terms that no traditional venue can offer.

Connection with fiat cash flows mixed with fixed periodic income will allow investors in DeFi to benefit both from income generated by the collateral that lies inside the protocol and interest payments paid by borrowers. At the same time, stable real-world collateral such as bonds reduces the risk of liquidation to a minimum, ensuring the stability of the protocol.

In order to achieve that, the DeFi market requires complex infrastructural solutions that will ensure compliance with current regulation for corporate institutions, allowing them to access funds and repay loans in fiat. At the same time, such infrastructure will need to be operated with the interest of the DeFi community in mind, therefore ensuring correct interaction between bonds and protocols.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Artem Tolkachev is the founder and CEO of Tokenomica. For over six years, Artem has been a key blockchain and tokenization opinion leader in the CIS region. Since 2011, he has been an intellectual property and information technology lawyer and entrepreneur. In 2016, Artem founded and headed Deloitte CIS Blockchain Lab. As part of that initiative, he led a range of innovative projects involving the implementation of enterprise blockchain solutions, tokenization of real-world assets, tax and legal structuring of security token offerings, development of cryptocurrency, and blockchain legislation.

Source: https://cointelegraph.com/news/the-defi-market-desperately-needs-to-connect-with-real-world-assets

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Cointelegraph

Massachusetts regulator seeks to revoke Robinhood’s broker-dealer license

Massachusetts’ securities regulator is seeking to revoke the broker-dealer license of cryptocurrency-friendly stock trading app Robinhood in the state.

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State regulators claim that Robinhood has targeted inexperienced investors.

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Massachusetts regulator seeks to revoke Robinhood's broker-dealer license

Massachusetts’ securities regulator is seeking to revoke the broker-dealer license of cryptocurrency-friendly stock trading app Robinhood in the state.

William Galvin, the head of the state’s securities division, said in a new administrative complaint that Robinhood has “continued a pattern of aggressively inducing and enticing trading among its customers — including Massachusetts customers with little or no investment experience,” Bloomberg reports Thursday.

The new filing is a follow-up to a complaint filed by Galvin’s office in December 2020, alleging that Robinhood’s marketing illegally targeted inexperienced investors.

The state pointed to Robinhood’s recent activity, including a promotion that provides customers with cash rewards based on new deposits, as proof of a “firm culture which has not changed.”

Robinhood responded to the new complaint, arguing that the action could prevent “millions of Bay Staters” from accessing their platform. In December, the company said that its platform had nearly 500,000 customers in Massachusetts.

The firm has filed a lawsuit seeking to invalidate a recently adopted fiduciary rule in Massachusetts that state regulators have accused it of violating. Adopted in 2020, the rule requires broker-dealers to act in their clients’ best interest.

“The Massachusetts Securities Division’s new Fiduciary Rule exceeds its authority under both Massachusetts state law and federal law,” Robinhood said. “Robinhood is a ‘self-directed’ brokerage firm that does not make investment recommendations or provide investment advice. By its own terms, the new rule does not apply to self-directed firms,” the firm noted in the lawsuit.

Robinhood has faced mounting pressure from regulators and users alike after it became involved in the controversial GameStop stop short-squeeze. Robinhood halted buying for GameStop stock in January 2021, drawing the ire of the trading community.

Last year, 20-year-old Robinhood user Alex Kearns committed suicide after seeing a $730,000 negative balance on his Robinhood app. A note on his computer reportedly posed the question, “How was a 20 year old with no income able to get assigned almost a million dollars worth of leverage?” In February 2021, Kearns’ parents filed a lawsuit against Robinhood over his death.

Robinhood has been also experiencing a number of technical issues, reportedly causing major losses for traders and triggering further legal action against the company.

The most recent such event occurred on Thursday when Robinhood’s crypto trading platform ran into technical issues as Dogecoin (DOGE) hit a new all-time high of $0.27.

Source: https://cointelegraph.com/news/massachusetts-regulator-seeks-to-revoke-robinhood-s-broker-dealer-license

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Binance Coin reaches 37% of Ethereum’s market cap: 3 reasons why BNB is soaring

Binance Coin (BNB), the native cryptocurrency of Binance Smart Chain, has been rallying after seeing an uptick in transaction volume.

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Binance Coin, the native cryptocurrency of Binance Smart Chain, has been surging with a massive uptick in transaction volume.

Binance Coin reaches 37% of Ethereum’s market cap: 3 reasons why BNB is soaring

Binance Coin (BNB), the native cryptocurrency of Binance Smart Chain and top digital asset exchange Binance, is starting to close in on Ethereum (ETH) in market capitalization.

As of April 12, BNB is valued at $87 billion at the price of just under $600. The valuation of Ethereum is hovering at around $246 billion, which is 2.8 fold larger than that of Binance Coin.

— Joe Grech (@JoeBGrech) April 12, 2021

The technical momentum of BNB has been so strong that it briefly surpassed the volume of the BTC/USDT pair on Binance.

This trend is significant because USDT is the biggest stablecoin in the global market and the BTC/USDT pair is one of the most liquid trading pairs in crypto.

Why is Binance Coin surging so hard?

Binance Coin has been rising due to the three key reasons: an overall uptick in the popularity of Binance Smart Chain, strong technical momentum, and the gap between BSC and Ethereum projects.

Binance Smart Chain transaction volume. Source: BSCScan.io

In recent weeks, the transaction volume on Binance Smart Chain has tripled the volume of the Ethereum blockchain.

Particularly in Southeast Asia, the usage of Binance Smart Chain has been rising, according to Coin98, the biggest venture capital firm in Vietnam that is building a DeFi ecosystem targeted at Asia.

Considering that the price of BNB was much lower than Ethereum until late March, this discrepancy between BNB and ETH likely made BNB a compelling trade.

There is also a big gap in valuations between the Ethereum DeFi ecosystem and Binance Smart Chain, which has been fueling a large portion of the demand for BSC projects.

This has caused the value of BNB to rapidly rise over the past two weeks while ETH has been relatively stable at just over $2,000.

A journalist who covers crypto in China known as “Wu Blockchain” explained:

“BNB broke through an astonishing $600, but Ethereum’s Fees fell to its lowest point in a month. Although the transaction volume of BSC is 3x that of Ethereum, the two are not in a competitive relationship. The top 10 addresses of BNB hold more than 88%, and Eth is 20%. The future of Ethereum depends on the upgrade of EIP-1559 and 2.0. The only two things Binance needs to worry about are the government suppression and hackers.”

Traders foresee BNB to undergo a more explosive rally in the foreseeable future if it breaks out against Bitcoin.

Kaleo, a pseudonymous cryptocurrency trader, said:

“$BNB breaking above this level on the $BTC pair could lead to the type of explosive momentum needed to actually close in on $1,000.”BSC/BTC 1-day price chart (Binance). Source: TradingView.com, KaleoWill the capital rotate back into Ethereum?

However, Kelvin Koh, the managing partner at Spartan Group, one of the largest DeFi-focused funds in Asia, said that for now, he expects the capital to rotate back into Ethereum as BSC projects near the valuation of ETH equivalents.

He emphasized that there is a huge valuation gap between BSC and ETH projects. This gap could be making BSC projects compelling to the market. He said:

“BSC is having its own DeFi summer….so much alpha to be discovered in BSC ($XVS, $CAKE). If you are wondering why Ethereum DeFi coins are lacklustre, its because of the huge valuation gap that still exists between the BSC coins and ETH equivalents. Until this gap closes, money isn’t rotating back to ETH DeFi coins.”

Source: https://cointelegraph.com/news/binance-coin-reaches-37-of-ethereum-s-market-cap-3-reasons-why-bnb-is-soaring

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Our Man in Shanghai: Scandal as $45M of stolen government funds lost using 100X leverage

A blockchain security company’s future is in doubt after its CMO allegedly lost $45M betting on Bitcoin; Chinese netizens turn the other cheek to Peter Thiel’s warnings, and more

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The Chief Marketing Officer a blockchain security company has been charged with embezzlement; Peter Thiel calls Bitcoin a ‘weapon’ of China (but no one cares), and CZ’s net worth rises to $1.9 billion.

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Our Man in Shanghai: Scandal as $45M of stolen government funds lost using 100X leverage

Blockchain security company Beosin has been the focus of a major scandal after its Chief Marketing Officer Gao Ziyang was taken into custody and charged with embezzlement of state-owned assets. He is alleged to have been using government funds to unsuccessfully short BTC, resulting in a massive liquidation of over 300 million renminbi, or $45 million dollars.

Beosin, also known as Lianan Tech, had a working relationship with Chinese authorities and was helping them investigate fraudulent fundraising schemes. After the seizure of funds back in 2020, Beosin was tasked with storing and selling the assets, to be later returned to the state treasury. Instead of selling the assets, CMO Gao Ziyang allegedly opened a short position in late August, hoping to increase the size of the positions for personal gain. At the time, BTC was trading around $12,000.

Authorities say that records obtained from OKEx show the position began using 10x leverage, before increasing to 100x, and eventually ended up in liquidation. They began to ask about the whereabouts of the funds, before finally realizing that the assets were no longer in the wallet. Online, people have marveled at the age of Gao Ziyang, who was described as in his twenties. The future of Beosin, which was once regarded as a credible blockchain security company in China, is now in serious doubt.

Peter Thiel’s Bitcoin claims ignored

On Wednesday, PayPal co-founder and venture capitalist, Peter Thiel warned that the Chinese government may be using Bitcoin as a “financial weapon” to undermine the stability of the U.S. Dollar. The reaction was quite muted, as only 30 comments responded to the story on Sina Finance, a social media account with over 23 million followers. One of the top comments simply pointed out that “Bitcoin wasn’t invented by China” while another comment simply stated “Impossible”.

Binance billionaire

On Thursday, Binance founder Zhao Changpeng, better known as CZ, appeared as #1664 on Forbes’s annual billionaire list. His net worth is now listed at $1.9 billion, an increase of $700 million from the last list in 2020.

Nanjing Ribensi bought by US company

US Company Future FinTech announced earlier this week that they had agreed to a deal to acquire China-based mining company Nanjing Ribensi Electronic Technology Co. Nanjing Ribensi operates a mining farm that can handle up to 30,000 Bitcoin mining machines. The deal was worth approximately $9.1 million dollars and stipulates that the mining company must generate no less than approximately $2.3 million dollars in 2021.

Blockchain standards accelerated

China’s National Development and Reform Commission called for the accelerated implementation of blockchain standards in a new plan released on April 1. The plan was jointly issued by 28 government departments and also included technologies such as cloud computing, IoT, and big data.

This weekly roundup of news from Mainland China, Taiwan, and Hong Kong attempts to curate the industry’s most important news, including influential projects, changes in the regulatory landscape, and enterprise blockchain integrations.

Source: https://cointelegraph.com/news/our-man-in-shanghai-scandal-as-45m-of-stolen-government-funds-lost-using-100x-leverage

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