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Most crypto analysts and experts agree that the tokenization of real-world assets (RWA) is set to become one of the defining trends of 2024. In early January, asset managers Brevan Howard and Hamilton Lane announced their plan to become the first to tokenize their funds, collaborating with Libre to bring assets on-chain. They followed similar announcements from financial giants like Deutsche Bank in September and HSBC in October, both of which are setting up digital asset custodial services for tokenized assets. However, this is just the tip of the iceberg. Boston Consulting Group has estimated a $16 trillion business opportunity in the tokenization of illiquid assets, with up to 30% of that coming from non-financial assets, which could include intellectual property, artworks, car fleets, or anything that can be bought and sold.
The new adopters will invariably create more demand for the kind of financial infrastructure and expertise that already exists in defi as they try to replicate existing TradFi structures on-chain. However, crypto-natives must make tough decisions over long-held principles to avoid missing out on these unprecedented opportunities.
The unique nature of the on-chain opportunity
Defi’s evolution as an entirely on-chain segment means that builders and users have become used to operating within certain limitations imposed by the technology. But the corollary of those limitations is the opportunity to exploit the benefits of on-chain infrastructure and the new paradigms it enables.
Decentralized exchanges offer one case in point. TradFi exchanges operate based on the central limit order book model, which depends on the presence of market makers to provide liquidity. DEXs necessarily evolved without the presence of market makers as nobody wanted to pay Ethereum’s high fees on the earliest order book DEXs. Thus, the automated market maker model pioneered by Uniswap, where liquidity providers pool funds that are used to facilitate token swaps, became the most dominant.
More recently, advancements in blockchain infrastructure and the sophistication of DEXs have led to the launch of several on-chain order book exchanges. So, an institution interested in discovering how to get the most out of RWA tokenization has several options for the way they can structure a DEX for delivery to their customers, depending on the type of customer to which they’re catering. Traders tend to prefer limit order books as they offer improved capital efficiency. In contrast, investors who would typically use market orders anyway could find a simpler, AMM-based DEX that is more straightforward than a trading platform with lower fees.
As the crypto industry has matured, we’ve seen several notable examples of crypto-native projects and companies that have gained investment or even been acquired outright by traditional companies seeking to gain access to on-chain opportunities. Last October, financial infrastructure giant DTCC announced it would buy blockchain-based financial and regtech developer Securrency in a deal worth $50 million. Around the same time, Kasikornbank, Thailand’s second-largest bank by assets, acquired local crypto exchange Satang.
Crypto and defi expertise and talent will also become sought after as institutions and companies seek to beef up their blockchain capabilities. In recent months, the Federal Reserve of San Francisco, S&P Global, and the National Payments Corporation of India have all been hiring specialists with a background in defi or digital assets. As interest in RWA tokenization and defi heats up in 2024, we can expect to see hiring ramp up further.
While this growth will undoubtedly deliver unprecedented opportunities to a sector that’s only just emerging from a crypto winter, people may find they have to make decisions and trade-offs based on the immovable reality of dealing with the global financial sector. The digital asset space has historically evolved around principles that are still held dear to many. Bitcoin’s inception as an open-source, permissionless infrastructure attracted people who identified with decentralization, privacy, and community ideas.
However, many of these ideas directly conflict with the principles or even laws that govern corporations and institutional finance. Compliance requirements make few allowances for privacy, while decentralized governance is still anathema to the traditional corporate organizational setup. As the march to RWA tokenization continues, it may begin to feel like the institutions are the ones holding all the cards, while participation on the part of crypto-natives will come at the price of working on initiatives based on privacy, transparency, or inclusion.
As a result, some people in the crypto sector will undoubtedly be left with difficult choices. Deciding to take an equity deal, accept a takeover bid, or embark on a new role at a financial institution will mean accepting that the sector’s future now encompasses a different reality than the cypherpunks envisaged.
However, adoption in 2024 is synonymous with institutional investment and mainstream interest. If adoption is a worthy enough goal, then compromising should be an easier decision.