Public Blockchains and the Tokenization Revolution
Tokenization refers to the registration of asset ownership on blockchain infrastructure. In tokenized form, assets can potentially benefit from a blockchain’s functionality, including more efficient settlement and the ability to interact with smart contracts.
For the most part, the modern financial system is already fairly efficient, and tokenization itself may not lead to immediate efficiency gains. Rather, the main benefits we believe could come from bringing together users, assets, and applications onto a common global platform.
From a crypto markets perspective, while a variety of assets may benefit from the tokenization trend, the one with the most potential will likely be the protocol that can provide that common global platform. At the moment, Grayscale Research believes the Ethereum blockchain has the best chance of serving this purpose in the future.
Tokenization is one of many applications of public blockchain technology. In some cases, where existing “back office” processes are very cumbersome, moving asset administration onto blockchain infrastructure may create immediate efficiency gains. But for many types of assets—e.g., public equities—the current digital infrastructure works reasonably well, and it is not obvious that public blockchains would work any better. In these cases, the potential gains from tokenization may come from network effects: by moving the world’s assets onto a common platform we can potentially create a financial system with greater functionality, improved access, and lower costs.
From a crypto markets perspective, while a variety of assets may benefit from the tokenization trend, the one with the most potential may be the protocol that can serve as the unified platform for tokenized assets, investors, and related applications. At the moment, Grayscale Research believes the Ethereum blockchain has the best chance of serving this purpose in the future.
Systems Upgrade
At some point, when blockchains are more widely adopted, securities may be issued and tracked entirely on-chain. But today, the beneficial ownership of securities—as well as real assets like real estate, physical commodities, and collectibles—is recorded on traditional off-chain ledgers (typically electronic book-entry accounts). Tokenization refers to the process of registering asset ownership on blockchain infrastructure, so that market participants can benefit from a blockchain’s functionality.[1] By design, the price of the blockchain-based token should closely track the price of the underlying reference asset.
Some of the benefits of transforming asset ownership into blockchain-based tokens may include:
Accessibility: Like the internet itself, blockchains are not limited by national borders. Tokenizing assets could therefore bring access to the world’s best capital markets to investors in a wider range of countries. Blockchains may also open access to new asset types through fractionalization.
Tokenization Present and Future
Exhibit 1: Stablecoins have found product-market fit
Exhibit 2: Timeline of select tokenization projects
The latest wave of tokenization has focused on two distinct markets: US Treasuries and closely related assets, and credit products.
Tokenized US Treasury products are designed to function as cash equivalents and can be considered a yield-bearing alternative to stablecoins. According to data provider RWA.xyz, all of the existing products offered today have a weighted average maturity of less than two years.[8] In other words, these are products designed to offer yield and serve a cash-like function. When cash interest rates were close to zero, the opportunity cost of holding stablecoins was relatively low. But now that US Dollar interest rates are close to 5%, investors have a greater incentive to seek out yield-bearing alternatives, and this has likely contributed to the growth in tokenized Treasury products.
Exhibit 3: Roughly 60% of tokenized Treasury products are on Ethereum
A variety of firms have also introduced tokenized credit products. This is a diverse category including direct loans to individual counterparties, pools of structured credit products (e.g., ABS, CLOs), and lending to intermediaries in specialized sectors (e.g., real estate financing, emerging markets). While these products can be risky and complex—and are currently designed only for institutional investors—their aim is straightforward: to channel capital from lenders to borrowers through a blockchain infrastructure. According to RWA.xyz, there are currently $612mn in active loans in this category, with an average yield of about 10% (Exhibit 4).[10]
Exhibit 4: Tokenized credit products reach a diverse mix of borrowers
There are many other potential applications of tokenization technology, but few have moved past an experimental stage. For example, tokenized real estate platform RealT offers non-US investors access to fractionalized ownership of property; the protocol currently has $103mn in total value locked.[11] There is also hope that tokenization of private funds will offer a way for the alternatives industry to tap into a wider range of investors. It remains to be seen whether these new distribution channels will contribute meaningfully to the industry’s AUM. A variety of fixed income securities have been directly issued on-chain, from both public sector issuers (e.g., European Investment Bank) and private sector issuers (e.g., Siemens). Although there have been previous attempts to tokenize equity securities, we suspect that these projects will require more regulatory clarity before progressing further.
The Revolution Will Not be Private
In fact, virtually all of the successful applications of tokenization to date—e.g., stablecoins, tokenized Treasuries, and tokenized credit products—have been launched on public blockchain infrastructure. The reason is simple: this is where the users are.
We expect that there will be efficiency gains from moving certain assets onto blockchain infrastructure. But the bigger promise of tokenization comes from seamlessly connecting assets and investors (or borrowers and lenders) across the globe, and from building a richer set of experiences through interoperable applications. Public blockchains have many applications beyond tokenization, which make them the natural hub for user assets and activity over time. For this reason, they will also likely continue to be the main destination for asset issuers and for developers building open financial applications. In our view, it is very unlikely that a private permissioned blockchain—run by a corporation of national government—could credibly provide the neutral global platform needed to host the world’s tokenized assets.
Transactions, fees, and value accrual
Exhibit 5: Assets across Crypto Sectors could benefit from tokenization
The Tokenization Vision
Grayscale Research believes that many aspects of digital commerce are transitioning from closed platforms hosted by centralized intermediaries, to open and decentralized platforms based on public blockchain infrastructure. Tokenization is one of many blockchain adoption trends, but potentially an important one given the size and scope of global capital markets. If public blockchains can bring together borrowers and lenders (or asset issuers and investors), and disintermediate existing financial technology, the increase in network activity should bring value to public blockchain tokens.
[1] Crypto market participants often refer to tokenized traditional assets as “real world assets” (RWA), to distinguish between digitally native assets. We avoid that term in this report.
[2] So called “atomic settlement,” which is closely related to the concept of delivery vs payment (DvP) in traditional finance. See, for example, “On the future of securities settlement”, Morten Bech, Jenny Hancock, Tara Rice, and Amber Wadsworth, Bank of International Settlements Quarterly Review, March 2020.
[3] See, for example, “Tokenization: Overview and Financial Stability Implications,” Francesca Carapella, Grace Chuan, Jacob Gerszten, Chelsea Hunter, and Nathan Swem, Federal Reserve Finance and Economics Discussion Series, 2023.
[4] “An Assessment on the Benefits of Bond Tokenization,” Hong Kong Monetary Authority, 2023; “HSBC CEO Noel Quinn says future tokenised products, like gold offering, will be ‘backed by something real’”, South China Morning Post, April 15, 2024.
[5] Although much smaller than tokenized gold, there have been efforts to tokenize other commodities, including silver, diamonds, agricultural products, and carbon credits.
[6] Source: Artemis, as of April 25, 2024.
[8] As of April 25, 2024.
[9] Source: RWA.xyz, as of April 25, 2024.
[10] As of April 25, 2024.
[11] Source: Defi Llama, as of April 25, 2024.
[12] Source: Federal Reserve Flow of Funds Accounts, as of Q4 2023.
[13] See, for example, “The Future of Wealth Management,” JP Morgan and Apollo, 2023; “Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets,” Citi, 2024.
[14] Exhibit 5 shows the largest tokenization protocols by token market capitalization as of April 25, 2024, the largest specialized purpose smart contract platforms by market capitalization as of April 25, 2024, general purpose smart contract platforms currently hosting tokenized assets, as well as general purpose smart contract platforms and blockchain utilities used in proofs of concept by traditional financial services firms.
[15] Here we focus on Layer 1 networks and assets. In the future, when Layer 2s are less centralized and sufficiently secure, tokenization projects may move to these networks.
[16] Including mainnet and Layer 2s.
[17] Source: Artemis 30d averages as of April 25, 2024 for users and total value locked; Dapp radar as of April 25, 2024 for number of decentralized applications.
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