Overview of Coral Finance's RWA Journey: How to Bring Stocks into DeFi and Increase Their Liquidity

Author: Coral Finance

Since November 2021, the total value locked (TVL) in DeFi has decreased by over $120 billion. DeFi yields have hit rock bottom, closely related to the sluggish trading volume and investor participation over the past two years. This predicament exposes the long-term instability and recursive nature of DeFi yields. In most DeFi protocols today, investors earn yields based on on-chain activity. During bull markets, due to frequent on-chain activity and rising cryptocurrency prices, investors can reap substantial rewards. However, as on-chain activity and prices decline during bear markets, the bull market can quickly reverse, leaving investors with almost no attractive yield opportunities.

If there were a new source of yield that is stable and not significantly affected by market fluctuations, would you participate? This is precisely the goal that Real World Assets (RWA) aim to achieve. RWA are assets that exist off-chain but are tokenized and introduced to the blockchain as a stable source of yield in DeFi. RWA can represent various types of traditional assets, including commercial real estate, bonds, stocks, cars, and almost any other means of value storage that can be effectively tokenized and accounted for.

The potential impact of RWA on DeFi seems transformative. RWA can provide sustainable, reliable yields supported by traditional asset classes for DeFi. Furthermore, RWA enable DeFi to bridge the gap between decentralized finance systems and traditional financial systems. This means that DeFi can begin to address the significant liquidity, opportunity, and value issues that exist beyond the realm of digital assets. If DeFi intends to make a significant impact on the way finance operates, then the successful implementation of RWA seems crucial.

Bridging to Traditional Finance

In today's DeFi landscape, RWA are primarily divided into equity-based DeFi markets, physical asset-based DeFi markets, and fixed-income DeFi markets. Stocks, as one of the underlying assets in equity-based DeFi markets, also face liquidity challenges. This allows Coral Finance to approach the vast traditional financial market, which has enormous trading volumes outside the cryptocurrency world—providing liquidity to the stock market through a premium trading mechanism.

RWA is recognized as one of the main tracks in the global crypto space. Numerous teams and projects have been attempting to tokenize real-world assets from different angles. We have never stopped chasing the trend. Not temporarily, but consistently achieving real value.

The design of Coral Finance's premium mechanism naturally aligns with and serves the stock market, bringing stocks on-chain to introduce liquidity. Our first and foremost pilot target is the Hong Kong stock market.

Hong Kong Stock Market

Over the past decade, Hong Kong's IPO financing scale has consistently ranked among the top three globally, often in first place. It is recognized as one of the most attractive markets in the world.

In terms of the proportion of investors from outside Hong Kong, institutional and individual investors from outside Hong Kong account for 41.2%, with investors from the U.S. and Europe contributing over 45% of the trading volume, and investors from Asia outside Hong Kong contributing over 45% of the trading volume. Institutional investors dominate, but the proportion of individual investors is rising.

The Hong Kong stock market, with its robust financial environment, has always been a focal point for quality companies and international investors. Despite the thriving Hong Kong stock market and diverse opportunities, liquidity issues persist.

The market is divided into two parts: the Main Board and the Growth Enterprise Market (GEM). The Main Board features more mature and established companies, while the GEM caters to smaller and growth-oriented companies. As we delve deeper into these numbers, the liquidity disparity becomes evident.

As of August 29, 2023, the average market capitalization of Main Board stocks is approximately HKD 333.48 billion, significantly higher than the average market capitalization of GEM stocks at HKD 57 billion. This disparity highlights the liquidity challenges faced by companies listed on the GEM.

Source: https://www.hkex.com.hk/Mutual-Market/Stock-Connect/Statistics/Hong-Kong-and-Mainland-Market-Highlights?sc_lang=en#select3=0\&select2=7\&select1=28

Given the continuous decline in the market capitalization of the Hong Kong Stock Exchange, the liquidity issue has become even more pronounced. Since peaking in January 2023, it has experienced a staggering drop of nearly $870 billion. This decline is attributed to weak investor sentiment. Additionally, the Hong Kong benchmark Hang Seng Index has fallen by about 9% this year, marking a decline for two consecutive years.

Collaboration with Donghao Group

Addressing the liquidity issues in the Hong Kong stock market requires strong support from local traditional financial institutions. Coral Finance is beginning to establish roots in Hong Kong. We have reached a strategic cooperation agreement with Donghao Group to jointly explore opportunities for RWAs. This win-win partnership is expected to accelerate the process of introducing RWAs, especially Hong Kong stocks, to the blockchain while encouraging Web2 users and enterprises to actively participate in DeFi construction.

Donghao Group provides diversified financial services to global clients, with its business covering brokerage and financing, fixed-income product trading, underwriting and placement, securities research, fund management, portfolio investment, IPO fundraising, mergers and acquisitions, and capital restructuring. The group has extensive traditional financial resources and maintains close cooperative relationships with several companies listed on the Hong Kong Stock Exchange.

Bringing stocks into DeFi and increasing their liquidity is not as simple as launching a liquidity pool on a DEX overnight. One reason is that stocks or physical assets are typically traded on public markets and are therefore subject to strict regulation. Another reason is that equity and physical assets often require off-chain physical ownership of the underlying asset class. Although the process is challenging, we have been maintaining close communication with Donghao Group to explore how to collaboratively build this bridge under regulation.

What It Means for Coral Finance

RWA is of significant importance to us. First, the scale of DeFi is still far from comparable to traditional finance. This disparity provides us with an excellent opportunity to enter the trillion-dollar market beyond the cryptocurrency realm. We anticipate explosive growth that will position Coral Finance among the leading DeFi projects in the industry.

Second, once we successfully bring stocks into Coral Finance, it will bring tremendous benefits to our treasury and ensure continuous revenue generation. This is because Coral's treasury will be fully backed by real-world assets, and the yields earned by contributors will also come from them.

Finally, this paints a broader picture. Despite differences in market policies, the successful business model and experiments of the Hong Kong Stock Exchange will provide us with valuable experience in expanding into global financial markets. We firmly believe that this trend is inevitable and will once again drive DeFi towards prosperity.