Could tokenizing unique real-world assets make DeFi exciting again?

2023 has been a “huge year” for tokenization in decentralized finance, Ben Forman says.

The ParaFi Capital managing partner says he is surprised that most tokenization activity arrived “post-FTX,” when institutional interest seemed to be “waning in the space.”

Speaking to Blockworks on the Empire podcast (Spotify/Apple), Forman says that now, institutional entities like JPMorgan, Invesco and KKR give a consistent answer to the question: “What are you most excited about in the blockchain space?”

“Eight or nine out of 10 times, you’re going to hear: ‘tokenization of real-world assets.’”

According to Forman, 150 to 200 different teams are building in the real-world asset (RWA) category today, “with probably 500 to 1000 different pilots going on behind that,” set to launch in the “coming couple of years.”

Forman says he sees growing interest in the tokenization of traditional assets in the form of “tokenized gold, tokenized treasuries, tokenized LP stakes and funds.”

But another “fascinating category” that has developed, he says, is the tokenization of non-financial assets. The California DMV, he says as an example, tokenized 14 million automobile titles. He then mentions the tokenization of university diplomas, identity credentials and concert tickets as further examples.

These are assets that hold value, he says, but don’t have the same kind of established capital markets infrastructure as bonds, equities, currencies and commodities.

“A lot of these assets are just going to skip over legacy financial market infrastructure with banks and move right on-chain,” he says.

“I would not be surprised if in two to three years from now,” he says, “when people evaluate layer-ones and applications, the most important metric will be [total value locked] of real-world assets.”

Do everything on-chain

Forman says that he sees “a lot of private credit funds” examining blockchain for its efficiency advantages in securitization, sending interest payments and disintermediating fund administrators.

“They’re kind of doing what they normally do,” he says, “but sitting on top of a blockchain for efficiency.”

Investor Santiago Santos notes one major advantage of moving RWAs on-chain: “You could price these things more efficiently and you can measure risk in real time.”

“The key unlock here,” says Santos, “is there’s more transparency.”

“It’s a 24/7 market. There’s more capital flowing in and out of these things. The price should be a better reflection of risk.”

“That opens up a whole variety of instruments if you do everything on-chain.”

Forman says that while Treasurys are the “next logical thing to come on-chain,” he’s more excited about “the longer tail” possibilities of less conventional asset classes.

“You have these creators on YouTube that are getting paid every month,” he says as an example.

“There’s a company that’s effectively going to creators and saying, ‘Hey, we’ll buy 49%, or some percent, of these future cash flows, which are modelable and predictable…you can take a lump sum up front and then we participate pro rata going forward.”

Forman suggests that asset classes that don’t exist in traditional capital markets are the ones that could be the most interesting on-chain, “because you can get transparency around payments… [making] this basically a securitization.”

“All the monthly cash flows can get distributed on-chain.”

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