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Ripple's institutional DeFi could unlock Bitcoin ETF collateral value: Ripple CTO

Schwartz highlights regulated DeFi as a bridge between traditional finance and blockchain.

Golden XRP coin with DeFi icons.

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During Consensus 2024, Ripple’s Chief Technology Officer David Schwartz discussed the untapped potential of DeFi on the XRP Ledger (XRPL) for institutional use. Schwartz pointed out the current limitations faced by Bitcoin ETF holders when seeking loans, with brokers valuing these assets at zero due to volatility concerns.

“You know how much brokers value bitcoin ETF holdings for collateral on loans? Zero,” Schwartz stated.

Schwartz explained that brokers, such as Charles Schwab, are hesitant to accept Bitcoin ETFs as collateral due to the potential volatility and risk associated with these assets.

“Imagine you’re a broker and you have a lot of customers who hold the bitcoin ETF. As far as you know, that ETF could blow up tomorrow if you go to zero, you don’t want to have a lot of risk,” he said.

This limits investors’ ability to leverage their cryptocurrency holdings for loans within the traditional financial system. However, Schwartz believes that Institutional DeFi on the XRPL could provide a solution to this issue.

Ripple’s vision for Institutional DeFi on the XRPL involves creating regulated “islands” that enable both institutional and retail adoption. Schwartz cited stablecoins as a prime example of how this could work, with regulated entities like Circle and Ripple issuing stablecoins that can be used within DeFi ecosystems.

“The vision is these regulated islands, but that do enable defi applications,” he explained. “If you have an island that doesn’t connect to anything outside that island, why put it on a public block?,” said Schwartz.

Schwartz also discussed the potential for other technologies, such as decentralized identities (DIDs) and automated market makers (AMMs), to further bridge the gap between traditional finance and Institutional DeFi on the XRPL.

“What did allows is it allows the customer, it allows the enterprise to say, you know, Fractal ID has verified the identity of this person. So not only do we not have to go through the cost of doing it, but we don’t have to store the identity data,” he said.

AMMs, on the other hand, could provide continuous liquidity for a wide range of assets, benefiting both retail and institutional participants.

“It provides continuous liquidity at all times, which is good for the long tail,” Schwartz added.

The Ripple CTO emphasized the importance of interoperability in building a compelling blockchain ecosystem.

“Ripple can’t be the only successful blockchain company. The XRP electric can’t be the only successful blockchain. It’s impossible, because no one thing can be everything,” he stated.

Seamless interoperability is crucial for users to access the full potential of the ecosystem, and partnerships with companies like Axelar, which focuses on building bridges between blockchains, are seen as essential steps towards achieving this goal.

As the blockchain industry continues to evolve, Ripple’s approach to Institutional DeFi on the XRPL aims to provide a framework for increased adoption and liquidity. By leveraging stablecoins, DIDs, AMMs, and interoperability solutions, Ripple hopes to create a more inclusive and efficient financial system that benefits both institutional and retail participants.

“Our mission is for the XRP ledger to be a leader in bringing together more examples through things like the lending protocol, with things like AMMs, through real world asset tokenization,” Schwartz concluded.

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