Onchain Finance

What Is Onchain Finance?

Onchain Finance, often abbreviated as OnFi, represents the institutional side of the blockchain financial revolution. While experimental, community-led protocols defined the early years of crypto, Onchain Finance focuses on bringing established financial instruments like government bonds, private equity, and real estate onto the blockchain via tokenization.

The primary goal of Onchain Finance is to improve the efficiency of global markets. By moving these assets onchain, institutions can benefit from 24/7 trading, instant settlement, and a reduction in the number of intermediaries required to process a transaction. It essentially uses blockchain as a superior technological layer for the existing financial system.

How does Onchain Finance work?

Onchain Finance relies heavily on tokenization. This is the process of creating a digital representation of a physical or traditional asset and storing it on a blockchain.

1. Asset Selection: An institution selects an asset, such as a U.S. Treasury bill or a share in a private fund.
2. Legal and Regulatory Mapping: Unlike purely decentralized protocols, Onchain Finance operates within strict legal frameworks. The issuer ensures the tokenized asset complies with securities laws and other requirements, such as Know Your Customer (KYC).
3. Minting and Distribution: The asset is tokenized and distributed to qualified investors’ wallets.
4. Lifecycle Management: Actions like interest payments (dividends) or voting rights are handled automatically via smart contracts, reducing administrative costs.

Onchain Finance vs. DeFi: What’s the Difference?

While Onchain Finance and Decentralized Finance (DeFi) both use blockchain technology and smart contracts, they are distinct in their philosophy, participants, and regulatory approach:

• Centralization and Identity: DeFi is typically permissionless, meaning anyone with a wallet can participate without revealing their identity. Onchain Finance is usually permissioned, requiring participants to pass identity verification (KYC/AML) before they can interact with the assets.
• Underlying Assets: DeFi often focuses on crypto-native assets, i.e., tokens that only exist in the digital world. In contrast, onchain Finance focuses on Real-World Assets (RWAs) that exist outside the blockchain but are being tracked on it.
• Governance: DeFi protocols are often managed by decentralized autonomous organizations (DAOs), while the assets and processes in Onchain Finance are managed by regulated financial institutions, such as banks or asset managers.
• Regulation: DeFi exists in a rapidly evolving regulatory gray area. In contrast, Onchain Finance is designed from the ground up to fit into existing legal structures, making it a preferred choice for large-scale adoption by many global institutions.

Ultimately, if DeFi is about building an entirely new, independent financial system, Onchain Finance is about upgrading the old financial system to run on modern, blockchain-based infrastructure.