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Securitization on the Blockchain

Merging Defi and TradFi​

The retrenchment of traditional banks from the SME markets to focus on their largest clients has created a funding gap in the trillions to underserved SMEs and financially excluded consumers. This has enabled a new asset class of fintech lending, i.e. tech-enabled specialist lenders, to grow exponentially.

Securitization is a financial process where various types of assets, such as loans, are bundled into tradable securities, usually in the form of bonds. This practice enhances liquidity by allowing these securities to be bought and sold on secondary markets. These securities provide investors with a claim on the cash flows generated from the bundled assets, enabling them to earn returns through the assets' performance. Fundraise through securitisation in TradFiis complex and expensive with multiple service providers involved. The lack of transparency also adds a risk premium for originators. Alternative lenders and fintechs, typically with under $30m portfolios, find it difficult to access capital markets.

Legacy systems of transferring value are slow, cumbersome and laden with friction and inefficiencies. Just as the internet was transformative for the mobility of information, digital assets will be revolutionary for the way in which value is transferred. We are witnessing entirely new financial rails being engineered and for the first time being able to handle users at scale.

Extending DeFi lending collateral universe​

The current crypto lending is mostly collateralised by native crypto assets. This excludes a vast majority of borrowers and projects from accessing crypto credit, particularly those financing real world assets such as renewable energy projects or trade finance.

Value locked in DeFi has been limited to crypto. In order to grow, diversify and be regulatory-proof, Defi needs to tap into the multi-trillion dollar real world assets where businesses such as SMEs in global trade have a real need for capital such as:

  • Trade finance solutions involving multinationals trading with emerging markets suppliers
  • Revenue-based financing for on-chain and off-chain records of activities
  • Fintech capital for both consumer and SME borrowers
  • Green financing schemes such as renewable energy, urban mobility or sustainable agriculture.

On-chain Securitisation​

Each RWA is tokenized into a Non-Fungible Token (NFT), which represents the asset on the blockchain. This NFT undergoes valuation, and the asset's originator may then use it as collateral to borrow from a lending pool. Over time, the originator repays the borrowed amount along with any accrued interest.

Investors who provide liquidity to the pool receive pool note tokens, which accrue Annual Percentage Yield (APY) within their price. When the debt is fully repaid, investors can withdraw their investment along with any profit earned, directly from the pool.

Real-world assets, by their nature, are often illiquid with long maturity periods, making direct investments challenging. Securitization addresses this by pooling multiple assets together, which allows investors to finance the pool rather than individual assets. This pooled structure facilitates easier financing and trading of assets.

Once an asset is tokenized and its corresponding NFT minted on the blockchain, the NFT serves as a digital representation of the asset's off-chain collateral within an investment pool. The asset is priced, and liquidity is borrowed against it. All transactions—including principal and interest repayments—are recorded on the blockchain, providing asset-level transparency. Investors can easily view the contents of a pool, track borrowings, repayments, and overdue payments. This transparency offers a stark contrast to traditional finance, where financial records are often restricted to private databases, and analysis is limited to spreadsheets.

This on-chain approach ensures that every financial transaction is immutable and transparent, enabling public verification and building trust in the financial ecosystem managed on the blockchain.