When it comes to the decentralized world, cryptocurrency gets all the attention. That is further evidence that the "price go up" crowd is what overwhelms the industry.
In reality, we are looking at a major technological shift. This is what is going to revolutionize the financial system. Cryptocurrency, albeit misleading, is riding along on top. Tokenization, i.e. digital assets, is the major breakthrough.
This does not, however, take place, without blockchain. Tokens have been around for decades. These are nothing more than quantified representations of data. For the most part, they are non-tradeable, lacking market value. Nevertheless, they were a mainstay of computer science.
Cryptocurrency is really nothing more than a representation of data. We are dealing with the digital world. Most of these tokens can be traded which provides price discovery.
Underlying it all are decentralized networks. This is crucial.
In this article, we will explore how blockchain is becoming even more important. It is time to stop focusing solely on cryptocurrency and place more attention on the networks.
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Blockchain Becoming Important: Real World Assets
What is cryptocurrency without blockchain? To rephrase, it is possible to have cryptocurrency without a blockchain?
Obviously this depends upon the definition one has of cryptocurrency. If decentralization is a component, then a decentralized network is necessary.
However, the quantification of a digital asset which is tradeable can be done on centralized systems. The banking system could easily set something like this up. In fact, that is what we have today with most legal tender under fractional reserve banking. The majority of transactions are not done using banknotes.
Again, we can debate the semantics of cryptocurrency or not. The point isn't to generate that discussion as much to highlight the importance of decentralized networks.
Here is where blockchain enters. It is what makes cryptocurrency different. To me, the major breakthrough from Satoshi Nakamoto with Bitcoin was the ability to reach consensus without a centralized entity.
Over the past 15 years, we saw the explosion of the cryptocurrency market. So far, much of it is hype, with little truly being transformative. Some green sprout projects are popping up, especially in the area of DeFi.
The next 10 years could see that changing a great deal.
Tokenized Real Estate
Real world assets (RWA) being tokenized is a long discussed topic. This is something that is delayed since most of the assets discussed are heavily regulated. When we look at real estate, governments have a major hand in that.
It is unfortunate since this is one of the key areas that financial innovators are targeting. The real estate market is primed for tokenization. It is an industry that is archaic, still operating with paper in many instances. The process of buying and selling a house is slow and expensive. Price discovery is done through appraisals (comparisons), which are estimates at best.
This can often cause liquidity problems as liquidation or collateralization are slow. It is also a process that is difficult, if not impossible, to automate.
According to a Deloitte report, the tokenized real estate market is expected to explode by 2035.
- Tokenized private real estate funds are expected to grow to US$1 trillion by 2035, with a total market penetration rate of 8.5%.
- The tokenized ownership of loans and securitizations could grow to US$2.39 trillion by 2035, with a total market penetration rate of 0.55%.
- The tokenized ownership of undeveloped land and under-construction projects is expected to reach US$50 billion by 2035, with a total market penetration rate of 0.80%.
Much of this will be taking place on blockchain. This is from the report:
Disruptive technologies, such as asset tokenization, could transform real estate over the next few years. Built on blockchain technology, tokenization converts physical or financial assets into bite-sized, digital representations that can be securely traded or owned in fractional portions on a digital platform. Tokenized real estate could not only pave the way for new markets and products, but also give real estate organizations an opportunity to overcome challenges related to operational inefficiency, high administrative costs charged to investors, and limited retail participation.
Asset fractionalization is something else that was long discussed within the cryptocurrency industry. The fact that a token can represent anything means that it can easily be part of a larger whole.
We already see this to a degree with base layer coins. It is something that is often overlooked since few frame things in this manner.
Each Ethereum coin represents a percentage of the entire network. There are a certain amount available, means the value of the total can be divided by the number of units. The holder of the coin has fractional ownership in the network.
RWA is a bit different since the expected activities will be designed for specific purposes. It could represent an individual property, a percentage of a fund that invests in different assets, or a debt instrument that was used for funding.
The key is to have blockchains operating as the database of ownership. Each blockchain has an inherent ledger system which tracks all activities. When structured for financial transactions, it is no different than a bank statement.
To revolutionize the system, it is going to require blockchain. There is no reason to go down this path and simply built it upon traditional infrastructure. That will not achieve the shift.
We can see there is a lot of money on the line. Innovators are scrambling because of the expected windfall. The existing system is simply too slow to expand and grow.
Blockchain can do this.