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Over the last year, the growth trajectory of DeFi has been remarkable by any measure, increasing from under $1 billion to a peak above $85 billion in May 2021. Furthermore, the increasing levels of innovation, investment, and interest in DeFi show significant promise to revolutionize the financial markets as a whole. Writing in the Financial Times in January, Brian Brooks, then-acting comptroller of the currency and now Binance US CEO, stated his belief that “self-driving banks” will be here in less time than we think.
However, if this is ever to become a reality, there are several critical barriers to overcome first. One of the most significant is the wall that currently exists between crypto and real-world assets. Despite the impressive growth, DeFi is focused almost entirely on the cryptocurrency markets, representing a tiny proportion of all the world’s wealth. Therefore, tokenizing assets is perhaps the most consequential development in bringing the vision of mainstream DeFi utilization to life.
Convergence is a DeFi protocol intent on grasping this opportunity, and one of the investment areas it believes is ripe for disruption is private equity. Convergence has developed a proprietary layer for wrapping tokens, thereby providing a gateway between real-world assets and the DeFi ecosystem. Dubbed ConvO, it mints tokens that are programmed to transfer the economic benefits of ownership between buyers.
The project also operates an automated market maker, designed to support price discovery and reduce spread, and pools where asset owners can create offering to entice liquidity providers.
Using the protocol, anyone wanting to raise private financing could wrap their real-world assets such as company equity and create a liquid market for them on the Convergence DEX.
There’s a compelling argument for implementing DeFi-type products in private financing, both in the crypto-sphere and wider markets. The idea of using tokens to crowdfund a startup is nothing new in crypto, but it’s been through its own evolution.
From the ICO model, which was fairly meaningless from the perspective of equity investing, emerged the security token model. Security tokens, which convey equity ownership to investors, have mostly failed to capture the attention of the markets due to a lack of secondary trading infrastructure from a technical and regulatory perspective.
Protocols such as Convergence solve the technical side. From the regulatory perspective, there are also positive signs of progress. In May, the Cyberdyne Tech Exchange of Singapore launched as the world’s first regulated digital exchange for asset-backed tokens. This year, Switzerland will also complete its pioneering “Blockchain Act” rollout in August, with the final segment covering secondary trading of digital assets.
However, Convergence is among the first to market with a DeFi protocol allowing the decentralized issuance and trading of asset-backed tokens, managed entirely by smart contracts running on the blockchain.
Crypto projects seeking private investment often make an allocation of native tokens for investors. However, it’s common that these tokens are locked to prevent dumping. This issue speaks to a wider problem in the private financing markets – that investors are often tied up long-term with illiquid assets. Even where there is the ability to sell and a willing buyer, there’s no exchange or platform where buyers and sellers convene, making price discovery difficult.
Therefore, private financing makes an excellent candidate for DeFi’s automated market makers and incentivized liquidity pools. The end-to-end solution on Convergence allows an asset owner to mint their tokens and create open, liquid markets for them without needing to apply for listing on a centralized exchange.
Fractionalization introduces even further potential to enhance liquidity. Currently, the private equity markets are almost the exclusive preserve of institutional investors, denying individual investors any opportunity to speculate. The open nature of decentralized finance means that Convergence is open to everyone. However, fractionalization of tokenized assets means that even investors with minimal funds can purchase a share of a startup or venture they find interesting.
The idea of self-driving banks is indeed an intriguing one, but they aren’t simply going to arrive fully formed. They’ll evolve as a result of first-movers making the bold steps necessary to connect today’s DeFi protocol to assets and markets of real-world value.