• Tue. May 28th, 2024

How Traditional Finance Can Embrace Blockchain – A Guide

Steve Kornacki

BySteve Kornacki

Aug 31, 2023

In the dynamic and ever-evolving landscape of decentralized finance (DeFi), a pivotal metric known as “total value locked” (TVL) has emerged as a critical indicator. The TVL transcends its origins in cryptocurrencies to encompass a more comprehensive array of tokenized real-world assets (RWA).

These RWAs have usefulness in mortgages and illiquid funds and have found their place within smart contracts on various blockchain networks. This marks a significant stride towards integrating traditional finance (TradFi) into the blockchain, heralding a new era of financial possibilities.

Bridging the Gap Between DeFi And Traditional Finance

Traditionally, the TVL metric mainly concentrated on assessing the total value of digital assets locked in DeFi protocols. However, the unprecedented surge of interest and adoption of blockchain technology by conventional financial institutions has led to a paradigm shift.

Meanwhile, these institutions’ embrace of the blockchain revolution, such as RWAs within the TVL framework, has gained significant traction. This evolutionary step mirrors the broader development of the DeFi ecosystem and broadens the spectrum of assets represented on-chain.

Accordingly, DeFi platforms are becoming increasingly attractive to institutional investors. Thus, they ushered in a new era of trading tokenized bonds, equity, debt, and tangible assets such as real estate and art.

Although including RWAs in the TVL metric is still in its initial phase, with around $300 billion secured on-chain, a more detailed exploration of layer-1 and layer-2 blockchain ecosystems is bound to happen.

As of July 2023, the TVL figures on most blockchains are not dominated mainly by digital assets, including cryptocurrencies and non-fungible tokens (NFTs). However, a few blockchains have ventured into RWAs, causing a substantial increase in their overall TVL.

A prime example is the Provenance Blockchain, boasting a remarkable TVL of $9.3 billion. Out of this amount, $8.1 billion can be attributed to real-world financial assets like home equity line of credit (HELOC) loans and private equity funds.

This exemplifies the gradual but impactful penetration of RWAs into blockchain networks, underscoring the growing significance of the TVL metric.

TVL And TradFi

As the traditional financial and insurance sectors pivot towards harnessing the potential of blockchain solutions, the TVL associated with tokenized RWAs assumes a pivotal role in determining the suitable blockchain platform. Numerous factors come into play when selecting a blockchain for RWA tokenization.

Such factors include the availability of robust tools for asset management, the platform’s capability to adhere to compliance and privacy standards, and its ability to ensure security and scalability. This selection process involves identifying where tokenized financial assets are predominantly concentrated and where the momentum of RWA tokenization is at its strongest.

By analyzing a blockchain’s existing RWA TVL and projecting its growth trajectory, institutions can make informed decisions about the suitable blockchain for facilitating transactions involving tokenized RWAs.

The relevance of a blockchain, as inferred from its real-world financial asset TVL, correlates with its potential to serve as a sustainable solution for institutions striving to enhance transparency, efficiency, and overall productivity. While challenges certainly exist, such as the limited availability of segmented RWA TVL data, the industry is rapidly advancing toward solutions.

Eventually, RWA TVL will become a pivotal standard for financial and insurance institutions, empowering them to make well-informed decisions regarding blockchain adoption and integration.

A Glimpse Into The Future

As the mutual relationship between traditional finance and blockchain technology solidifies, the TVL metric emerges as an indispensable guide for institutions embarking on the transformative journey of tokenized RWAs. This metric assists in selecting blockchain platforms aligned with real-world asset adoption and growth trajectory.

As the finance industry continues to embrace the innovations facilitated by blockchain, RWA TVL is poised to serve as a guiding light, guiding decisions and catalyzing the pace of institutional adoption. The convergence of traditional finance and blockchain suggests a future where the TVL metric becomes a guide for successful and impactful integration, redefining financial services operations.

Steve Kornacki

Steve Kornacki

Steve Kornacki, a respected author at Big Trends Signals, uses his deep online trading acumen to create comprehensive guides and balanced reviews, empowering traders in their digital pursuits.

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