Tokenized: This Week in Real-World Assets

As crypto matures, ideas for marrying the power of the $20 trillion global financial services sector to the technological advantages of the blockchain are emerging. Momentum is building quickly behind the idea of tokenizing real-world assets, which is basically making a virtual investment vehicle on the blockchain derived from tangible, valuable things like homes, gold, art and collectibles, and even intangible instruments such as U.S. Treasuries and contracts.

Wall Street and crypto advocates alike argue that the process of tokenization is more efficient than, say, the manual mortgage application process. It creates liquidity and is cheaper, too, allowing for tokenization of smaller value items and theoretically should then be accessible for broader swaths of the world’s population.

Each week I’ll be rounding up the latest stories and reports from CoinDesk and the industry to keep you up to date on the progress of the tokenized real-world assets revolution.

Long one of crypto’s big ideas, tokenization may finally be ready for prime time. Wall Street is diving in, creating tokens for everything from buildings to gold bars. One advantage: relatively little regulatory scrutiny.

Takeaway: A great primer on what tokenization is, how it works and what its impact will be on the financial services world as we know it. CoinDesk contributor Jeff Wilser interviewed the CEOs of four startups that tokenize real-world assets, plus financial advisers and blockchain experts about the ideas and theories behind this burgeoning sector.

The impacts can be huge: “Maybe tokenizing stocks will just be a novelty. But if it’s truly cheaper and more efficient, and if it eventually scales to become the new normal, the impact could change Wall Street in ways it’s hard to imagine. Stocks could be traded 24/7, like cryptocurrency.”

But Wilser is not drinking the Kool-aid just yet: “The key word here, of course, is theoretically. Plenty of things sound transparent and risk-free in crypto – just ask the investors of Terra.”

To scale, DeFi platforms need to attract institutions keen to trade tokenized bonds, equities, and debt, and physical assets such as gold, real estate and art, says Enrico Rubboli of Mintlayer.

Takeaway: An insider – a software developer turned CEO of a Bitcoin sidechain – makes the case for tokenization. In this opinion piece, Rubboli breaks down the well-known risks of decentralized finance and how the remedies have created problems such as over-collateralization, which dampens adoption.

Elements of traditional finance, such as the loans for real estate, cars and other valuable assets, are the solution. The way forward is a marriage of TradFi and DeFi: “DeFi protocols have already proven their worth in the digital asset markets and their efficiency is so compelling that traditional financial institutions are studying their potential.

While there is still some opposition to the idea of automated and decentralized asset trading, due to its association with a crypto market that’s often perceived to be lawless and volatile, there’s a growing consensus that traditional finance can no longer ignore the potential benefits blockchain can provide.

Ondo’s OUSG token, one of the largest on-chain tokenized Treasury products, has accrued $134 million of assets under management on Ethereum.

Takeaway: A surge in tokenized U.S. Treasuries is the latest sign of adoption in the growing movement to tokenize real-world assets. DeFi investment platform Ondo, formed by ex-Goldman Sachs associates, launched just seven months ago but has already broadened its offerings to include issuing tokens on Polygon from its initial platform on Ethereum.

The move is another indicator for the thirst for this type of product: “Tokenized Treasuries has grown to a $600 million market, with Ondo Finance’s OUSG token claiming a significant share of $140 million since its inception in January. Flux Finance, developed by Ondo’s team and governed by a decentralized autonomous organization (DAO) through community votes, lets investors take out loans by pledging OUSG as collateral. It has $44 million of total value locked on the platform, according to DefiLlama.”

From $100B+ asset managers to young startups, tokenized US Treasuries are exploding in popularity. This 50+ page report dives into the details of what differentiates them.

Takeaway: A direct way to invest in this emerging space is to find a fund that gives you broad exposure to millions of dollars of tokenized assets. Data analytics firm RWA.xyz released a report analyzing the emergence of investment vehicles for tokenized Treasuries.

Since the start of the year, more than a dozen such products have launched, from established asset managers such as Franklin Templeton, to new ones, such as Arca. The firm looked at 10 of them, divided by whether they are actively or passively managed, and analyzing risks, convenience, and potential yield.

Each assessment include commentary, such as: “Amongst all other products, [Franklin Templeton’s] BENJI stands at the top in terms of investor protection and transparency. Nonetheless, users can only access the products by downloading the mobile application. This might cause inconvenience particularly for corporate and institutional users. In the future, we look forward to some interesting ways for Franklin to enable Peer-to-Peer transfer functionality of BENJI tokens.”

MakerDAO now boasts a $2.34B RWA portfolio.

Takeaway: MakerDAO, a peer-to-peer lending platform on the Ethereum blockchain, is the third-largest DeFi protocol by total value locked. It now earns the vast majority of its fees from the tokenization of real-world assets, but it’s not without controversy. “Despite the revenue rolling into Maker’s coffers, RWAs have proved a contentious subject within the protocol’s community. Last August, MakerDAO’s founder, Rune Christensen, floated a 25% hard limit on the protocol’s real-world asset collateral including centralized stablecoins as part of its Endgame roadmap.”