Why am I bearish on bringing real-world assets into DeFi lending protocols?
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Why am I bearish on bringing real-world assets into DeFi lending protocols?
If you want to use RWAs as collateral, you need to be able to own these assets in the event of liquidation.
Navigating Web3 tides with focused insightsWritten by: Teddy Woodward
Translated by: TechFlow intern
Combining with RWA (real-world assets) means integrating with real-world legal systems. If you want to use RWA as collateral, you need to be able to own those assets in the event of liquidation. You can't do this on a blockchain—you need a legal entity.
Establishing a legal entity capable of seizing collateralized assets at scale is costly, requiring substantial initial investment and ongoing legal and regulatory expenses. All real-world assets are different, and each transaction is customized. This means that the associated legal, auditing, and risk assessment costs for each asset onboarding are significant.
The liquidation process is slow and expensive. Illiquid RWAs lack transparent markets and price oracles. This means you don't know whether you'll be able to sell the asset or at what price. And if you do sell it, you still have to pay legal fees throughout the process.
Put it all together, and what you get is:
1. Massive costs from intermediaries such as lawyers, accountants, and auditors.
2. Lack of transparency, inefficient execution, and unreliable outcomes.
Wait—aren’t these exactly the problems DeFi was supposed to solve?
When combined with RWA, DeFi lending protocols lose their advantages and inherit TradFi’s problems. RWA doesn't scale like crypto assets. DeFi lending protocols should leverage their natural strengths and focus on new, crypto-native economies. Success will come from serving the growing crypto-native economy—not from trying to force DeFi technology into outdated systems where it doesn't fit.
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