Bluejay’s Bet on Real World Asset Lending

What a time that we live in with today’s markets. It’s been quite a wild ride over the last month, starting with what was probably the biggest bank run in the history of crypto, and its after effects on not only the markets but also existing crypto companies. However, we at Bluejay remain as committed as ever to create a much more open financial system with DeFi, focusing on stablecoin growth with actual real use cases vs purely speculative projects.

Speculative demand drivers (i.e. highly leveraged yields on stablecoins) can help a project bootstrap initial adoption, but are not sustainable long-term strategies. Just like in web2, rider incentives helped get people to test apps like Uber, but customers will always need a long-term user value proposition (e.g., faster, cheap rides) for a business to thrive. One of the use cases that Bluejay thinks is really promising for our stablecoins is real world asset lending.

What is real world asset lending?

Real world asset lending is where DeFi starts to cross over to traditional finance (TradFi) , and unlocks the liquidity on DeFi for real world assets and off-chain use cases. Examples include tokenizing assets like real estate, while allowing users to borrow against that, or utilizing collateralized or uncollateralized lending protocols to provide faster, cheaper and more accessible capital for small-to-medium businesses in emerging markets.

Some of these projects include Centrifuge, Goldfinch, TrueFi, and Silta

• Centrifuge: Centrifuge bridges assets like invoices, real estate, and royalties to DeFi. Borrowers can finance their real-world assets without banks or other intermediaries.
• Goldfinch: Goldfinch is a decentralized credit protocol for crypto loans without collateral. Goldfinch expands access to capital in emerging markets where crypto can truly empower financial inclusion.
• TrueFi: Uncollateralized lending protocol, which powers on-chain credit scores
• Silta: Silta does two main things: due diligence scoring on borrowers’ debt financing applications and act as a marketplace bringing together borrowers with tradfi and defi protocols to broker financing deals

Before the advent of the latest bear market, the real world asset lending space has been relatively understated compared to other DeFi sectors like GameFi and the metaverse. However, Bluejay has always been very bullish on the long-term success of the space, and the necessity of it for DeFi’s sustainability (see tweet from Bluejay on April 17th), before the sobering environment of crypto today finally turned some heads towards this direction (see podcast on June 14th with Dragonfly’s Haseeb Quresh).

Real world asset lending opens up a new multi-trillion dollar TAM to crypto, and stays true to finance’s primary purpose of directing capital to productive use cases. Currently, the yields on stablecoins across bluechip DeFi protocols are declining, with some being less than 3% for USD stablecoins. Additionally, a good portion of the other yield-bearing opportunities for stablecoins are built on mostly speculative opportunities, which we all have experienced the downside of in the last month or so. Real world asset lending protocols like Goldfinch give liquidity providers an opportunity to earn 10%+ yield on USDC or other stablecoins, and also be assured that the capital is being directed towards high-quality borrowers.

We can see the upside and growth of this vertical reflected in a few of the projects.

E.g., Goldfinch increased their loan size from $1M to $100M in just 1 year.

With Maple Finance, they increased the total amount of deposits on-chain from $8M to $923M in just 1 year.

How is real world asset lending as a vertical relevant to Bluejay Finance?

First of all, many of these protocols are focusing on Asia as a region, because of the more pronounced gap in credit and access to finance.

• Over 6 out of 10 people in Southeast Asia are currently underbanked and don’t have access to formal financial services like credit.
• Long-tail loans for businesses and projects often get left out of the system. For example, for project financing, the traditional funding model is not well-suited for smaller projects that are valued under $100M because of the complex transaction costs, processes, and due diligence involved.

As many of these gaps have not been effectively addressed by traditional finance, it is a tremendous opportunity for DeFi to potentially step in and provide the access to capital that would not have been made available before.

However, for most of these protocols, the loans are currently being denominated and dispersed in USD stablecoins only, like USDC. While this is an acceptable way to start, it does create a few different problems, especially as these protocols scale:

• Foreign exchange risk: denominating a loan in USD when the LPs and the borrowers sit in countries outside of the US creates an additional level of risk that might make people uncomfortable with adopting, and creates extra cost for parties. For instance, denominating a loan in DeFi in INR for an Indian business vs. USD for an India business would have saved 6% in the cost because of the foreign exchange exposure.
• Transaction costs: The USD stablecoins often have to be off-ramped into USD fiat, and then transferred to the borrower’s country using traditional remittance rails. This requires expensive OTC trades for foreign exchange, multiple days to process and send, and transaction fees along the way.
• Cognitive friction: Most people and businesses in countries outside of the US are used to operating in their local currency vs. USD. Switching to think about your balance sheet and loans in USD is unnatural when you’re familiar dealing with your local currency on a daily basis.

Bluejay’s Stablecoin Commitment and Next Steps

This is why Bluejay is super excited to be building non-USD stablecoins to denominate loans for real world asset lending use cases in Asia. This way, there are alternative options like SGD or PHP stablecoins to be used for loans, which allow for removing some of the friction when it comes to foreign exchange, transaction costs, and user experience.

We recently just announced our partnership to provide local stablecoins for Silta Finance’s loan pools for infrastructure financing. Bull or bear, we will keep building our product and bridging the ecosystem with strategic partners! This is just the start of our journey with our long-term bet on real world asset lending, so stay tuned as we announce more partnerships in the months to come.

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