Foreseen from Convergence: The Path of DeFi Breaking into Real World Assets

This article is an original piece by Chain Catcher, author: Rilak.

Ethereum has brought decentralized trading, lending, and yield to anyone connected to the internet, creating a decentralized ecosystem with various types of digital assets over the past few years—comprising Security Tokens (STs), Utility Tokens (UTs), and Non-Fungible Tokens (NFTs). UTs are limited to untrusted native protocols in crypto finance, while STs attract attention from private market innovations, equity crowdfunding, and financial institutions focused on ownership, and NFTs are linked to areas such as crypto art, gaming, and voxel 3D.

Now, the wind is changing for these digital assets. Native protocols are opening up exposure to real-world assets like tokenized stocks; DeFi protocols are beginning to experiment with the physical assetization of NFTs; and digital asset exchanges have also lit the green light to seize shares of traditional market unicorns.

A Trend: The Multidimensional Integration of DeFi and CeFi

DeFi is increasingly embracing real-world assets, with bridges like Convergence, Persistence, Centrifuge, Naos Finance, and ShuttleOne emerging to connect DeFi and CeFi, bringing various real-world revenue-generating assets on-chain, while expanding the perimeter of the DeFi world and providing momentum for innovation in traditional finance.

Taking the innovation of claiming traditional market stocks as an example, the Convergence platform allows equity to be traded in the form of wrapped security tokens ("WST"). This innovative form brings unprecedented advantages to the market:

In this decentralized equity trading model, individual investors can invest in assets that were previously inaccessible, such as shares of unicorn companies, private funds, or even a small portion of real estate projects; at the same time, it addresses the major pain point of investing in private equity trust funds—low liquidity. Data shows that in February 2021, the monthly total trading volume of all decentralized exchanges reached a new high, surpassing $60 billion since hitting $58 billion in January. The market urgently needs asset tokenization protocols to act as a channel connecting liquidity from the DeFi space; in addition, the security tokens on Convergence are backed by physical assets, and their ownership is legally recognized. This may be essential for some institutional investors.

In addition to Convergence, protocols like Centrifuge are rethinking how businesses trade with each other. It is a project focused on supply chain finance, founded by a group of Silicon Valley veterans. They are experienced in payment processing and fintech, and are currently addressing issues such as invoice processing, payment delays, and liquidity by liberating data from isolated enterprise systems.

Many similar protocols effectively bridge DeFi and CeFi, bringing various real-world revenue-generating assets such as corporate credit, supply chain finance, consumer finance, and real estate rental income rights on-chain, greatly broadening the intersection of DeFi and traditional finance.

Specific Measures of Asset Tokenization Protocols

Taking the mechanism of physical asset tokenization on the Convergence platform as an example, we can glimpse the whole picture. The available information indicates that its product can be broken down into four components: ConvO, ConvX, ConvPool, and ConvDAO.

ConvO:

ConvO will enable asset owners seeking financing (such as shares of large investment institutions) to issue initial wrapped security tokens (WST). They will set the subscription price for their WST and establish corresponding swap pools. A portion of the tokens issued in WST will be reserved for the Convergence protocol to provide liquidity for ConvX. In addition to asset owners, ConvO also issues premium investment assets for CONV holders. To ensure the quality of the initial assets on the platform, asset owners setting up the initial WST products will need to pass an inspection by the Convergence team and obtain final approval from ConvDAO before listing the asset.

ConvX:

ConvX is an automated market-making mechanism (AMM) that allows users to convert CONV and real-world assets on the Ethereum chain. Convergence will charge a fee of 0.3% for each transaction, of which 0.25% will be used to reward liquidity providers, and 0.05% will be used for the effective operation of the protocol.

ConvPool:

ConvPool aims to incentivize CONV or CONV-LP holders to contribute their tokens to the protocol, in other words, to provide liquidity for the ecosystem. In return, liquidity providers will receive 0.25% of the transaction fees from Convergence X. Additionally, CONV or CONV-LP holders can stake their tokens. In return, they can earn CONV rewards based on specific interest rates.

ConvDAO:

CONV token holders form a decentralized community for governance, where they will propose and vote on protocol upgrades. Users who use 2% of their CONV for voting will be eligible to take governance actions.

Market Acceptance of Such Protocols

After securing millions in funding led by Hashed in March, with participation from institutions like NGC, GBV, and Alameda, Convergence conducted its IDO on Polkastarter on March 25. The project's progress accelerated significantly post-IDO, supported by partnerships with giants from various fields.

Convergence first opened up the East Asian market. In terms of community collaboration, on April 7, it announced a partnership with Winkrypto in Greater China. Winkrypto will assist Convergence in domestic branding and media strategies, increasing participation from the domestic blockchain community in Convergence; on April 12, South Korea's leading crypto community Ellipti announced a partnership with Convergence. The South Korean crypto community is a fertile target market, with a high level of crypto technology and a sophisticated user base. The collaboration marks the strategic entry into the South Korean market.

Most importantly, in terms of attracting traditional assets, many investment institutions have begun to explore decentralized platforms. On April 9, Soul Capital announced a partnership with Convergence to seek various assets outside the crypto world for Convergence users. Soul Capital is a family VC based in Hong Kong, focusing on investments in innovation and emerging technologies. Its portfolio includes some well-known startups in the Asia-Pacific region, such as the Hong Kong van rental app GoGoVan, 3D video game production company EPIC Games, and Indonesian e-commerce giant Tokopedia. Through this partnership, some assets in the startup portfolio invested by Soul Capital can be traded on Convergence in the form of wrapped security tokens. Any DeFi user with an accessible wallet will be able to invest in a small portion of equity in those startups, meaning retail investors can use their crypto assets for such investments for the first time. This can also be seen as an alternative to traditional exit strategies.

It is worth noting that, unlike other token-based economic platforms, what can be traded on Convergence is not just shares of unicorn companies, but also fragmented NFTs (a way of shared ownership) and options for token projects that have not yet been listed on exchanges. From large investment institutions to individuals with ownership, anyone could potentially be a participant on this platform.

This is just the beginning. Teams like Convergence have given us many insights, and it is clear that the digital asset economy is merging, bringing together traditional financial participants and cryptocurrency investors. Trustless protocols are reshaping the landscape of decentralized financial economics through governance of "code as law," smart contracts, and token economics. We believe that the integration of traditional finance and DeFi will unlock new synergies and promote fintech innovation.