04 Oct 2021 · 4 min read

The Unfolding Evergrande Debt Crisis And Its Potential Repercussions For Crypto Trading

Disclaimer: The Industry Talk section features insights by crypto industry players and is not a part of the editorial content of Cryptonews.com.

The crypto market is widely known for its extreme volatility, so much so that even the slightest bump can send the prices of prominent cryptocurrencies through the roof or tumbling lower. So, the recent ‘flash crash’ following a Chinese real estate giant’s liquidity crisis shouldn’t come as a surprise to many.

Global stock markets were already preparing for a catastrophic climax as Chinese real estate giant, Evergrande, faced a key test earlier this week. As preliminary media reports indicated, there were high probabilities of Evergrande defaulting on its USD 300 billion worth of debt, which, in turn, started having a knock-on effect on the stock market, sparking a widespread sell-off.

A Fresh Cycle Of Market Uncertainty

Although the world’s most indebted real estate company has agreed to clear a USD 35.9 million interest payment on a domestic bond, it still owes another USD 83.5 million for an offshore bond. With the company running out of money to pay its debts to more than 170 banks and an additional 121 financial companies, it has overshadowed the entire global market, pushing uncertainty front and center. 

Traditional stock markets and digital assets, like cryptocurrencies, began feeling the ripple effects of the ongoing risk source. While Asian equity markets plunged on worries about Evergrande’s default, the UK’s energy prices surged, putting energy providers at risk of insolvency. Simultaneously, Wall Street experienced its own decline after the S&P 500 dropped 1.70% on Monday (September 20th), its worst day since May 2021.

Evergrande's struggles are increasingly characterized as a major test for Beijing, with some worrying that it could catalyze China’s very own ‘Lehman Brothers moment.’ Although there is no guarantee that Evergrande's crisis will cause similar ripple effects, it has sent shockwaves through global markets.

The Impact On The Crypto Market

With Evergrande on the brink of defaulting again, the market value of cryptocurrencies declined to USD 1.7 trillion. While there is no direct link between the Chinese real estate giant and the crypto market, the news sparked a broader sell-off, leading to a plunge in Bitcoin, Ethereum, Cardano, Solana, and other prominent coins, with more than USD 350 billion lost within 48 hours.

Per Coindesk, the Evergrande fiasco has implications for the entire crypto ecosystem, primarily because of Tether’s Chinese debt holdings. While Bitcoin and other cryptocurrencies may be facing a short-term impact, one needs to worry about stablecoins, especially Tether (USDT). While its ratio to the US Dollar is 1:1, Tether isn’t directly backed by any fiat currency and instead backed by commercial paper, which is short-term debt issued by companies, many of them from China.

Even though the team behind Tether has denied holding Evergrande’s commercial paper, it hasn't denied that it holds similar issuance from other Chinese companies. Evergrande’s current situation is just a part of a much bigger problem clouding the Chinese equity market, questioning the long-term stability of Tether (USDT).

The trouble with this crisis is that the assertion that Bitcoin and other altcoins act as ‘digital gold’ is now being challenged. While the term ‘digital gold’ suggests that cryptocurrencies are safe-haven assets, able to withstand market pressure or high inflation, current market conditions demonstrate that cryptocurrencies are behaving more like a traditional stocks. This is mirrored by investors rushing to sell to have more cash on hand amid a more uncertain global economic outlook.

Tokenizing Real-World Assets As Collateral Using Blockchain

With companies running out of money to pay debts, several financial institutions and banks worldwide will undoubtedly face liquidity problems. The ongoing financial crisis with Evergrande is a stark reminder that broad sell-offs can trigger global economic meltdowns, especially when billions of dollars are at stake.

Whether within traditional financial markets or decentralized finance (DeFi), the need for liquidity is paramount. Each market functions on its own, but the market conditions of one sector may indirectly influence another. This is where blockchain technology comes into the picture, connecting decentralized apps (dApps) to real-world use cases.

Centrifuge is a promising project that merges both traditional and blockchain ecosystems, unlocking liquidity for real-world assets. The platform connects real-world assets (RWA) like invoices, real estate, and royalties to DeFi. Founded in late 2017, Centrifuge connects lenders and borrowers transparently and efficiently while eliminating intermediaries and inefficiencies of the traditional financial systems. 

Dubbed as the Real-World DeFi, the decentralized nature of Centrifuge’s asset financing protocol empowers anyone to tokenize their real-world assets. Once tokenzied, they can be posted as collateral for financing via Tinlake, the corresponding asset-backed lending dApp.

Since Centrifuge bridges real-world assets and DeFi, it can potentially cut capital costs for SMEs while providing DeFi investors a stable source of yield income, irrespective of the market condition of cryptocurrencies. With an open marketplace of real-world asset pools on Tinlake, Centrifuge allows users to get financing for their real-world assets without any banks or intermediaries, directly and automatically managed by smart contracts.

As the first, largest, and most successful real-world asset platform in DeFi, Centrifuge’s current total value locked (TVL) is USD 33,424,656, the highest in the Polkadot ecosystem. The platform has also integrated with leading DeFi platforms like Maker, Aave, Celo, and is built on Polkadot to ensure fast transactions and low gas fees.

Not only does Centrifuge solve the problem of liquidity for small and medium businesses, but Centrifuge can also deliver more stable yields for investors, creating a sustainable, closed-loop economy that benefits each respective stakeholder.