Investment bank JPMorgan Chase & Co. is working with Singapore’s central bank to tokenize its DeFi cryptocurrency as part of an effort to better understand the economic potential and value-added use cases of cryptocurrencies.
In addition to JPMorgan, this endeavour, dubbed “Project Guardian,” comprises Singaporean multinational DBS Bank Ltd. and digital markets infrastructure provider Marketnode, both of which are licenced financial institutions and will serve as “trust anchors.”
In order to find out whether asset tokenization and decentralised financing (DeFi) are feasible, this initiative will use open, interoperable networks, according to the Monetary Authority of Singapore (MAS).
A statement made by the company indicated that this would allow crypto assets to be exchanged across many platforms, including the conventional banking system. A wide variety of topics will be examined in the blockchain business, including the use of DeFi protocols to combat market manipulation and risk.
A permission liquidity pool allowing DeFi apps to conduct borrowing and lending on a public blockchain network is being tested initially by MAS under ‘Project Guardian,’ according to MAS.
MAS chief fintech officer Sopendu Mohanty said in a statement that tokenization “may possibly boost the efficiency, availability, and affordability of financial services, promote liquidity in financial markets and enhance economic inclusion.”
Introducing DeFi to the general public
Traditional assets, like stock, may be represented by crypto tokens thanks to tokenization. The MAS trial looks to function in the same manner as the DeFi protocol Aave, which uses permissioned liquidity pools to target the wholesale finance market.
According to observers, banks often deposit a specific amount of money in tokenized bonds as collateral, which is secured by a smart contract. The company may then use the deposit as collateral for a loan with a maximum loan-to-value ratio of 75 percent.
A part of the income created by the borrowed 75 percent and any other banks that may have borrowed against bonds may be earned by other depositors by supplying liquidity to a pool that pays them a percentage of that interest.
According to researchers, the interest rate on a loan is determined by an algorithm based on supply and demand. When there is a bigger demand for loans, so is the interest rate. In this way, tokenization might revolutionise the role of commercial lenders in the mainstreaming of bitcoin and blockchain technology.
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