Author: ChíPhan
In recent years, the tokenization of assets (or real-world assets) has become a prominent trend and area of discussion in the cryptocurrency space. Our previous research - Tokenizing and Securitizing Real-World Assets on Public Blockchains - highlighted the potential of tokenization to increase liquidity across various asset classes and reduce alternative asset transaction costs. Recent research from leading financial firms such as JPMorgan, Bain, Citi, Goldman Sachs, and BNY Mellon supports this view: The general consensus is that asset tokenization can help increase growth through more liquid and standardized assets demand and enrich the market, thereby expanding interest in these financial instruments. For investment banks, this opens up additional revenue streams through new issuance services for digitally enabled assets, with the potential to disrupt traditional IPO underwriting market share in the long term. Alternative asset managers may find tokenization and the resulting global liquidity in secondary markets for tokenized assets to be a valuable addition to their strategic toolkit, particularly for their international investments. In addition, for investors, as the tokenized asset market matures in the future, the emergence of new asset classes may change the flow of funds and affect investment strategies and returns.
Although we are in the exploratory phase, as public blockchain infrastructure continues to evolve, the community has shown a significant commitment to moving this innovative idea forward through significant infrastructure development. As a result, the conversation has shifted from questioning the benefits of asset tokenization to exploring ways to experiment and implement it, with the major companies mentioned above keen to explore further.
Tokenization methods range between two extremes: (1) tokenizing assets onto permissionless public blockchains, and (2) tokenizing assets onto private networks and ecosystem. While each approach has its own pros and cons, we can expect many projects and investments to come in to support the further development of more synchronized financial markets.
On the public chain, stablecoins (or token cash) have demonstrated market fit as the dominant product for tokenized assets. Stablecoins have a market capitalization of over $140 billion, nearly double the combined trading volume of all other cryptoassets. Led by BlackRock ($BUIDL) and Franklin Templeton ($FOBXX), tokenized treasury has also surpassed $1.2 billion in market capitalization. The crypto community has also responded to the growing interest in tokenizing assets by advancing the infrastructure of public blockchains, given the risks posed by emerging technologies. These advancements include the introduction of new smart contract standards such as ERC-4626, ERC-7540, and ERC-404, and support for the creation of custom blockchains for enterprises exploring the tokenization of assets. These are important steps towards more seamless integration of tokenized assets onto public chains.
On the other hand, there are also people exploring permissioned networks, such as the Canton Network, which aim to enable seamless financial transactions between private blockchains. While this approach provides businesses with more control and privacy to alleviate compliance issues, it requires significant investment and resources to keep up with the pace of development of applications and infrastructure on public blockchains.
Looking ahead, the path to a blockchain environment filled with tokenized assets seems increasingly feasible. The growth in asset tokenization is clear, but simply digitizing assets does not fully solve the problems inherent in capital markets. The true value of digital assets will depend on their functionality and ease of circulation throughout the financial market, and asset tokenization will become a fundamental move towards a more integrated financial system. Continued experimentation and innovation in this space has the potential to change the dynamics of asset liquidity and transaction efficiency, while creating challenges and opportunities for achieving a more cohesive and streamlined financial ecosystem.
Amid the difficult conditions of the 2022 cryptocurrency bear market, asset tokenization (RWA) remains an industry focus to this day. This approach leverages the transformative power of public blockchain infrastructure and aims to catalyze the growth of alternative asset capital markets. By facilitating deeper liquidity and lowering transaction costs, it promises to open doors for all types of investors around the world.
Like any innovative concept, asset tokenization has been met with skepticism and legitimate concerns. However, the fundamental argument for asset tokenization—centered around democratizing access to investment opportunities and streamlining capital flow efficiency—remains compelling.
The unparalleled success of securities is largely due to their high liquidity and low transaction costs. Recognizing this, we believe that increasing the attractiveness of alternative asset classes depends on optimizing the same attributes (transaction fees and liquidity).
Existing financial structures, including sub-funds and fund-of-funds, provide access to alternative assets, but at a cost. They shift operational burdens from managers to distributors, increasing fees for investors without delivering the scalability, automation or simplicity needed for a digital, low-touch experience. In contrast, tokenization promises to enable a more scalable and efficient process that reduces overhead and ultimately benefits end investors.
Tokenization is a key innovation that reduces the intermediary fees and administrative burden inherent in traditional asset management. By employing public blockchain ledgers and smart contract applications, tokenization can facilitate direct transactions between parties and bypass intermediaries. This should encourage more trading activity and enrich liquidity in the asset class.
Low transaction costs also encourage market makers (or liquidity providers) to tap into the order book, thereby increasing liquidity in alternative asset classes. Additionally, tokenization leverages the power of public ledgers to streamline transactions and introduce transparency, especially for cross-border transactions. This approach has the potential to transform traditional illiquid assets (such as real estate or art) into more liquid investments, thereby expanding the market and investor base (even with strict KYC, KYB processes). Tokenizing assets on the blockchain can streamline the operations of alternative asset managers, reducing the complexity and costs associated with legal processes and capital management, according to a recent report from J.P. Morgan Onyx Digital Assets. This efficiency not only makes investment products more competitive, but also allows managers to focus on strategic decisions rather than administrative duties.
The same publication also noted that tokenization fundamentally changes asset management through data standardization, workflow mutual aid, and process automation. These advancements not only alleviate the costs associated with manual reconciliation, but also pave the way for investor-friendly innovations such as automated capital calls and automated ownership transfers.
Another Citigroup report, "Bringing Traditional Assets to Digital Networks: Exploring Tokenization in Private Markets," provides an in-depth look at how traditional assets can be integrated into digital infrastructure. The report reveals the potential of tokenization to increase the accessibility and efficiency of private markets.
Citibank, Wellington Management Company and WisdomTree conducted a practical demonstration of these concepts using the Avalanche Evergreen subnet "Spruce". The Spruce subnet is a purpose-built blockchain with features tailored for institutional use. Features of the Spruce subnet include multi-level permissions, Ethereum Virtual Machine (EVM) compatibility, and extensive customizability.
This proof of concept demonstrates the tokenization of a traditional asset (a private equity fund issued by Wellington Management) and its introduction into a digital network. ABN Amro participates as an investor, WisdomTree represents the wealth management platform and Citibank acts as issuer agent on Spruce. These experiments and studies demonstrate that through tokenization, the market will undergo a significant shift toward becoming leaner, more efficient, and more accessible. They reveal blockchain’s potential to overcome traditional barriers and open up new possibilities for asset management and investment.
Citi’s exploration of asset tokenization has yielded positive results, marking a new era for traditional markets:
“Tokenization unlocks the value of traditional markets into new use cases and digital Distribution channels, while achieving greater automation, more standardized data tracks, and even improving overall operating models, such as those driven by digital identities and smart contracts, are significant advantages over traditional models.”
"Combined with segmentation, greater transparency and the liquidity of secondary trading, this capability could open hitherto inaccessible asset classes, such as private assets, to a wider range of investors."
“…we expect tokenization to soon start driving tangible utility through the new use cases it enables. The programmability offered by digital tokens enables models that were not traditionally feasible, such as automating rules-based asset allocation. Making private assets easier to trade and settle faster may also make them easier to use in automated model portfolios.
As before. As mentioned above, the scope of tokenization has two extremes:
(1) Tokenize traditional assets onto a permissionless public blockchain, using the infrastructure and applications available on the public blockchain and liquidity resources
(2) Tokenize assets on a private permissioned blockchain within a controlled system
At first glance, stablecoins may seem to have nothing to do with “real world assets.” However, from a financial and accounting perspective, cash is one of the most fundamental assets. Therefore, it makes sense to include stablecoins (which represent $140 billion tokenized on public blockchains) into the discussion of tokenization innovation.
Despite market capitalization being below the peak of the 2021 bull run, stablecoin trading volume has shown signs of resilience and recovery over the past six months, reflecting the overall Positive sentiment in the cryptocurrency market. However, trading volumes remain below peak levels.
One notable aspect of this resilience is the moderate positive correlation between the total trading volume of cryptocurrencies and the total market capitalization of stablecoins, with a correlation coefficient of approximately 0.50 . This suggests that as stablecoin market capitalization grows, overall cryptocurrency trading volume also grows; although this relationship is not entirely linear.
Notably, stablecoin trading volume has exceeded that of all other cryptoassets combined, including major players such as Bitcoin and Ethereum. This highlights the critical role of stablecoins in providing liquidity and stability in volatile cryptocurrency markets.
Recent developments have witnessed major breakthroughs in the stablecoin space. PayPal’s launch of PYUSD marks a major milestone, making it the first publicly traded company to launch a global stablecoin product. The ERC -20 token is backed by a highly liquid asset and promises to be easily redeemable and widely used, leveraging PayPal’s massive user base to achieve rapid adoption. Within eight months of launch, PYUSD’s market cap had exceeded $150 million, peaking at $270 million in the first two months of 2024.
Similarly, Hong Kong-based Binance-backed First Digital Labs is making a splash with its yield-based stablecoin FDUSD. FDUSD has achieved a market capitalization of over $2.4 billion in just a few months, quickly becoming one of the top 5 most traded digital assets, highlighting the vitality and competitiveness of the stablecoin market.
These developments demonstrate that the stablecoin market is booming and will play an increasingly important role in the cryptocurrency ecosystem. As the market continues to mature, the entry of mature financial institutions and the launch of innovative products such as income-based stablecoins will further shape the future of digital asset trading.
The financial sector is experiencing a wave of change with the emergence of tokenized yield assets. These assets blend traditional finance with the transparency and efficiency of blockchain. By tokenizing assets such as private credit or alternative investments such as real estate, issuers can represent ownership portions of these assets as digital tokens on a blockchain network. These tokens entitle the holder to a share in the earnings of the underlying asset, which may include rental income, interest payments, or other forms of income. The use of smart contracts can automatically distribute proceeds to token holders, ensuring that the process is transparent and efficient. A number of income-producing asset projects have been successfully launched over the past two years.
Franklin Templeton has launched the first U.S.-registered mutual fund on a public blockchain, allowing investors to purchase shares directly through the BENJI token. This approach marks a leap forward in integrating mutual funds with blockchain technology, providing a seamless and efficient investment process.
What sets Centrifuge apart is that it creates a transparent marketplace for lending and borrowing real-world assets without the need for traditional intermediaries. By tokenizing assets such as mortgages and invoices, Centrifuge enhances liquidity and provides a new avenue for cryptocurrency-backed lending, highlighting the versatility of DeFi applications.
Ondo Finance showcases a unique portfolio of tokenization strategies, from providing on-chain exposure to traditional ETFs to facilitating trading of tokenized stocks. Their efforts to bridge the gap between traditional securities and blockchain exemplify the growing intersection between DeFi and traditional finance.
Maple Finance provides customized on-chain lending opportunities for the niche market of institutional and accredited investors. Their focus on high-quality mortgage loan pools demonstrates the growing scope of blockchain applications to meet the complex needs of sophisticated investors.
These platforms highlight the key to the shift towards a more inclusive, efficient and integrated financial ecosystem. Tokenized income assets represent an emerging area that can redefine investment models and provide new opportunities for growth and diversification in the digital age.
The journey to tokenizing real world assets (RWA) has been paved by the efforts of numerous protocols, such as Goldfinch, Tokeny, Securitize, and Polymath.
On the other hand, the strategy of tokenizing assets on custom permissioned blockchains has also gained traction.
For example, Canton Network (a public permissioned blockchain) successfully demonstrated its ability to conduct atomic transactions (cash on delivery, or DvP) across enterprise chains using Global Synchronizer powered by composable smart contracts. Each participating institution has its own Canton node to access applications on each permissioned blockchain and connects to the Global Synchronizer to facilitate atomic transactions across the various Canton blockchain networks.
While this approach can maintain the privacy and control required by regulators, it requires a certain level of development investment to keep up with the evolving application layer and Sources of liquidity. Therefore, it will be interesting to see whether these enterprise blockchains can interact and synchronize with public chains to drive faster market advancement.
In cases where enterprises have more explicit requirements for control and privacy, they can also use Avalanche’s technology stack (developer tools) to create their own custom private blockchain (private subnet). However, tokenized assets on these chains need to be transferred to other subnets via the Teleporter Bridge.
In the above tokenization report, Citi also highlighted the continued development of transaction-level privacy technologies, such as zero-knowledge proofs (ZK) and fully homomorphic encryption (FHE), which will help further protect the inclusion of Privacy of financial transactions involving confidential or proprietary information.
There is a statement in Canton Network’s pilot report that puts it well. Summarizing the current status of digital assets:
"Asset tokenization is on the rise, but presenting assets in new digital forms is not enough to address entrenched industry challenges in capital markets. The true value of digitally native assets lies in their utility and liquidity in financial markets. Asset Tokenization is the first step; an enabler for more synchronized financial markets. But as we move beyond the first phase of digital issuance, financial institutions and their customers are asking, now what? Assets have limited value when they are locked on balance sheets or have limited opportunity in secondary markets with limited liquidity or connectivity. The next building block will help create a composable system where different tokenized assets that exist on different ledgers, including public and private ledgers, can be exchanged, swapped, or transferred to other ledgers. , and the execution risk is minimal.
These initiatives by major blockchain ecosystems highlight the concerted effort to advance the tokenization of alternative assets. By developing an infrastructure layer tailored to institutional application needs and raising standards for interoperability and efficiency, the blockchain community is laying the foundation for a more accessible and efficient digital asset space.
Tokenizing assets onto the blockchain is now a solved problem, as evidenced by the market cap of stablecoins and yield assets (treasury bills), as well as the on-chain availability of other alternative asset classes. In addition, there are dozens or even hundreds of projects quietly advancing to explore the inclusion of various assets on the blockchain.
Treasury tokenized products are gradually gaining acceptance. Chart: rwa . investors, while balancing the benefits of lower transaction costs with the slightly higher and unknown technical risks inherent in any new technology. While tokenizing assets on permissionless public blockchains can take advantage of the growing liquidity on the chain, due to the trustless nature of these blockchains, the growing technology stack and applications Programs may face intense regulatory scrutiny. On the other hand, tokenizing assets on private networks and ecosystems, while providing the necessary customization and configuration to meet changing regulatory requirements, puts the ecosystem at a disadvantage compared to permissionless public approaches, especially It's in developing the application layer to attract users and investors. As these technologies continue to evolve, the combined efforts of the blockchain ecosystem, financial institutions, and specialized protocols will revolutionize asset management and trading. This shift has the potential to reshape the investment and financial landscape into one characterized by robustness, increased efficiency of capital flows, and a more transparent system that provides a wider choice of on-chain and off-chain financial instruments.
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