I have long written about the "tokenization of everything". This is something that is emerging now as the push into real world assets (RWA) takes hold.
Companies such as Blackrock are diving deep into this. We are seeing people like Larry Fink getting ahead of his peers in terms of adoption. The game is still very early with the totals amounting to nothing more than rounding errors for Wall Street.
That said, it is only a matter of time before tokenization takes over. This is because we see two areas where the efficiencies provided far outweigh how things are presently done.
Basically, tokenization can take on two forms:
A) the digitization of paper based assets (real estate is a prime example)
B) the tokenization of assets that open up new markets by removing siloes and putting assets on a digitized ledger which allows for further functionality
Both are going to be drivers of tokenization although my sense is the second will garner more interest.
The Tokenization of Everything: Changing Finance
There are a lot of benefits to tokenization. In fact, we are seeing developments that simply are not possible with traditional markets.
We see:
- 24/7 trading
- liquidity against stablecoins
- peer-to-peer transaction
- real time settlement
Securities, whether real estate funds or stocks, involves registering the ownership. It also entails the settlement of funds between buyer and seller.
This tracking is often done via paper or silo digitization. When we have ledgers that are isolated, they operate independently and require going to the source of the database.
With public ledger, assets verification can be done without having going back to the source. Ethereum or other smart contracts chains expands access to markets via tokenization. Anyone with an Internet connection can enter markets if properly structured.
How would this evolve?
Consider that an individual in Nigeria can own a piece of a building in New York City. This is the power of tokenization. Digitization is a process of providing access to whatever one is providing. In other words, it provides access.
Tokenization is the epitome of this concept. By spreading past isolated assets such stock, participation can increase. When we look at the retail activity involved in things such as Private Equity, the lag is evident.
Here is where tokenization enters.
Liquidity
The most liquid asset is the US dollar. The tokenization of the dollar is, by far, the most successful. When we add in the fact that Treasuries are quickly following suit, we see how the liquidity in this area is exploding.
What this means is the stablecoin as the liquidity pool is something that crypto assets can tap into. By pairing with USD stablecoins, the liquidity pool is further enhanced.
A tokenized asset without liquidity is still a boat anchor. Buying an asset is one thing; selling it when required is completely different.
Illiquid markets do not excel. Assets mired in this realm tend to drop in price. They lack larger entrants due to the fact that successful investors do not enter what they cannot exit.
For crypto people, Bitcoin was in this position for years. Larger players did not even look at it since BTC lacked the liquidity necessary for billion dollar trades.
That is no longer the case.
Stablecoins are seeing their totals grow. We are near $310 billion, with most being USD denominated. As this total heads toward $1 trillion, the amount of liquidity skyrockets.
Ultimately, we will see a financial world built around this. There is no reason to dilute the liquidity pools. A number of stablecoins will dominate, with others providing niche services. Through easy swapping mechanisms, moving from one to another will be seamless.
Here is where total liquidity comes in. When we are talking about trillions, mostly used for financial services, the liquidity of assets goes up exponentially. This enables larger markets to be tokenized.
Everything is about to change. We have probably 5 years where this process will unfold. By the early 2030s, the financial spectrum will be completely different.