The Benefits of Assets Tokenization
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At a time when the prices of many cryptocurrencies are rallying strongly, one big, recent development is underappreciated. Tokenization of “real world assets” has also been surging.
To understand what this development means and the potential benefits of tokenizing these assets, we need to reframe how we view the digital assets ecosystem.
We frequently here questions like: ‘What is the price of ether?’, ‘how correlated are digital assets with other asset classes?’, ‘what allocation should I make to this asset class in a diversified portfolio?’. While questions like these are interesting, they all pertain to digital assets as an asset class in and of itself.
Another way to view the space is to see the various networks (e.g. the Bitcoin, Ethereum or Solana networks) as digital infrastructure. Similar to how TCP/IP or POP3/SMTP are protocols for building and commercializing services, digital asset networks are the foundation layers on which financial services (and other services) can be deployed and made available.
Asset tokenization is one such example. To quickly define this term, asset tokenization means using distributed networks and the databases that form a component of these networks to register interactions between parties.
The most tangible example seen in recent years is the emergence of stablecoins, mostly tokenized U.S. dollars. There are many ways to structure these stablecoins. One popular model is to accept U.S. dollar deposits, typically invested in U.S. Treasuries, and then issue U.S. dollar tokens against those holdings (e.g. USDC, USDT). The outstanding supply of these tokens currently stands at approximately US$150 billion – up from almost nothing five years ago.
This product-market fit has now been established, and now the question is: If one can issue U.S. dollar tokens, why couldn’t one issue other currencies or assets on-chain? This is the core of what the tokenization trend seeks to provide.
Another example is U.S. Treasuries. There is currently around $750 million in tokenized U.S. Treasuries, up from a base of almost nothing just two years ago. These tokenized T-bills have one advantage over traditional stablecoins: they generate and deliver a yield. More generally, tokenized assets provide the potential for 24/7 exchange, faster settlement time (T+0) and greater accessibility as they could be used by anyone with a cell phone (for example).
These examples and others, including tokenized gold, demonstrate how digital asset networks are used as the underlying digital infrastructure for distributing financial services. When viewed through this lens, we can consider what other value-add services could be delivered via digital asset infrastructure, instead of measuring the successes of these networks by the price of their native cryptocurrency.’An ideal outcome from the use of this technology would be for a faster, cheaper, more transparent and accessible financial system for all.’
