Opinion: Tokenization to Experience a Groundbreaking Year in 2024 with Real-world Assets
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The integration of traditional real-world assets (RWA) into blockchain technology has been a popular topic of discussion. Major players in the financial industry, such as Euroclear and Goldman Sachs, have recognized the potential benefits of tokenization, including reduced transaction fees, faster execution times, lower database management costs, and simplified provenance and proof-of-ownership procedures.
In 2023, the theoretical discussions started turning into practical implementations. The private credit market, which had been severely impacted by the Terra-Luna collapse in 2022, experienced a recovery of 60%. Interestingly, the automotive sector became the primary beneficiary of tokenized private credit, accounting for 42% of the market. However, the most significant development was the emergence of a new type of RWA product called tokenized treasuries, which aimed to challenge stablecoins as the largest category of RWA. Treasuries, sought after by both retail and institutional investors, saw a seven-fold increase in volume and brought stability to the blockchain ecosystem. It appears that 2024 will be a pivotal year for RWA tokenization.
Recent advancements in blockchain technology have focused on optimizing transactions to enhance efficiency, security, and scalability. Layer-2 solutions like zero-knowledge proofs and optimistic rollups have increased the throughput of primary blockchains, reduced transaction execution time, and stabilized gas fees. Projects dedicated to cross-chain communication have also contributed to the overall value and usability of the web3 ecosystem.
Moreover, new services have emerged to improve the efficiency of RWA tokenization. Companies like Maple, Centrifuge, and Backed have applied concepts from decentralized finance (defi), such as liquidity pools and collateralized lending, to traditional finance. This has allowed users to invest in real-world corporate bonds, participate in tokenized private credit, and engage in tokenized borrowing with institutional lenders.
In early 2023, Ondo Finance introduced the Ondo Short-Term US Government Bond Fund (OUSG), which provided investors with access to a tokenized version of BlackRock’s iShares Short Treasury Bond ETF. While OUSG initially had a total value locked of only slightly over $110 million, it marked the beginning of the rise of tokenized US Treasuries.
Tokenized treasuries became the backbone of growth in 2023. According to research from the Federal Reserve and data from DeFi Llama, the fraction of real-world assets in defi more than doubled in the past year. While institutionalized infrastructure like Goldman Sachs’ Digital Asset Platform and JPMorgan’s Tokenized Collateral Network played a role in this growth, the issuance of tokenized US government short-term debt played a significant part. Investors were attracted to riskless short-term debt following Federal Funds Rate hikes, and the collapse of yields across the crypto landscape further contributed to the popularity of tokenized treasuries.
Although the tokenized asset market has matured in 2023, there are still unanswered questions that hinder the transparent development of the RWA industry. Regulation remains a crucial aspect that requires clear guidelines or legal precedents to ensure tokenized assets hold the same legal status as their underlying assets. Additionally, the infrastructure needs to evolve to enable efficient access to tokenized asset markets.
Despite these challenges, the broader adoption of RWAs is expected to continue in 2024, with tokenized treasuries being the primary beneficiary of increased attention. Tokenized treasuries are a perfect fit for risk-averse defi investors, as they offer stability, safety, and yield. The capital allocation to tokenized US Treasuries exceeded $1.09 billion in April 2024, indicating significant growth.
Looking ahead, there are opportunities to expand beyond tokenized treasuries. Sukuk, which is similar to bonds in Islamic Finance, could be the next asset class to be tokenized. Sukuk provides fractional ownership and a share of generated cash flow, making it a suitable investment for the Muslim community. Furthermore, the stablecoin market is experiencing competition and diversification, with gold-backed stablecoins offering a promising opportunity. Given the current interest in gold and the lack of technical excellence in previous gold-backed stablecoins, a new iteration of this concept is likely to succeed.
In conclusion, tokenized real-world assets have moved past their infancy stage and are set for more widespread adoption in 2024. Tokenized treasuries will continue to dominate, but there will also be innovation and competition in the Sukuk, fiat, and gold-backed stablecoin markets. The future of RWA tokenization is promising, but regulatory clarity and infrastructure development are crucial for its continued success.
