Tokenization essentially refers to the transfer of traditional and financial assets like stocks and bonds, real estate, artwork, carbon credits, and financial instruments like T-bills and stocks, onto a blockchain.
This shift promises lower overhead costs and increased efficiency. Some of its most touted benefits are the democratization of access, and improved liquidity resulting from the fractionalization of assets, i.e. the division of ownership into smaller parts.
Tokenization players
Centrifuge portrays itself as the institutional ecosystem for on-chain credit. It has been smack in the middle of real-world asset (RWA) tokenization.
The company lets businesses put up their real-world collateral to mint the decentralized stablecoin DAI. Today, it’s servicing over $235 million in assets.
Tokenization lets you “create liquidity for things that aren’t liquid today,” said Lucas Vogelsang, CEO and co-founder of Centrifuge, which has tokenized over $400 million of real-world assets.
Polygon acts in the same way. Franklin Templeton, an asset manager with over $1.4 trillion in AUMs, launched one of its funds on Polygon earlier in 2023.
Slow adoption
The first tokenization took place in 2017. But strangely enough, the sector has not caught up to the hype experts and DeFi proponents bestowed on it.
One can blame the lack of tokenization adoption on the limitations of available infrastructure and a continuing shortage of institutional-grade digital assets custody.
Not enough wallet solutions offer sufficient flexibility in managing account policies, such as trading limits.
Also, many legacy clients in capital markets have yet to show interest in tokenization, perhaps due to regulatory uncertainty.
And so, today, there are only $345 million in tokenized assets on-chain today.
This is minuscule in comparison to the trillions in AUMs in traditional, non-DeFi platforms.
But perhaps tokenization is finding its legs.
Renewed interests in tokenization
Avalanche Foundation rolled out in July a $50 million initiative to purchase tokenized assets created on its layer-1 blockchain.
The initiative, Avalanche Vista, aims to highlight the value of tokenization in different sectors like equity, credit, real estate, and commodities.
US-based Broadridge, a fintech infrastructure company, now facilitates over $1 trillion worth of tokenized repurchase agreements monthly on its Distributed Ledger Repo (DLR) platform.
Late last year, Blackrock CEO Larry Fink called tokenization the “next generation of markets.” Others have called it fintech 2.0.
Regardless, the sudden change of perception is likely due to the emergence of blockchain and smart contracts as viable and adaptable technologies.
Read: Tokenization: Digital power for democratizing investments
DeFi, or decentralized finance, has also accelerated thanks to decentralized lending and yield farming activities. Yield farming earns depositors of tokenized assets rewards (interest) on their deposits into decentralized applications (DApps).
It is conservatively estimated that 2 percent of the global money supply will be tokenized in the next 5 years or the equivalent of $3 trillion. Stablecoins like central bank digital currencies (CBDCs), private market funds, securities and real estate will lead this drive.
Approximately $120 billion of tokenized cash is now in circulation in the form of fully reserved stablecoins. Stablecoin on-chain volumes have routinely exceeded $500 billion monthly.
What assets can we tokenize?
Companies in financial services, retail, music, gaming, and media are continuing to pursue opportunities in Web3, such as tokenized loyalty programs.
The Monetalis group has worked to tokenize RWAs and use them as collateral. The company has tokenized $1.2 billion in treasury bills that blockchain-based credit marketplace Maple Finance uses as collateral.
Investors can even tokenize intellectual property. Anyone earning ad revenues from, say, YouTube, could tokenize that income in the form of a copyright and sell it to a financier. This provides the seller with a loan against future earnings.
Traditional businesses in logistics projects could benefit from tokenization. A grain shipper could expand his loan deals, based on volumes of trade, to not only include banks but also capital from anywhere on the planet, through tokenization.
The Monetary Authority of Singapore is now tokenizing bonds, working with DBS Bank and JP Morgan to do that.
Tokenizing commodities, funds, and stocks
Research from Bank of America revealed that the tokenized market for gold alone surpassed $1 billion, providing exposure to physical gold, 24/7. The trade happens in real-time, where settlements incur no management costs, and traders don’t pay storage or insurance fees.
A recent report from Ernst and Young found that 57% of institutional investors want exposure to tokenized assets.
Looking at tokenizing private equity funds, a blockchain can take the place of the fund, while a smart contract can replace the fund manager. This can increase the value of such funds by 1 to 2 percent just on these savings alone.
Stocks can be tokenized allowing fractional ownership of high-quality assets like Tesla or Amazon or Netflix, and allowing the buying or selling of these tokens instantly, 24/7.
And the best part about tokenization is that it comes free of crypto price speculation. The only risk is the one traditionally associated with doing normal business.
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