We should be tokenizing assets with substance, not speculation 

If we tokenize all assets in a speculative rush, the risk of creating illiquid markets and trapped value will manifest on a large scale

OPINION
article-image

Midjourney modified by Blockworks

share

Standard Chartered’s recent prediction that the tokenized RWA market could rise to $30.1 trillion by 2024 will likely fuel the crypto industry’s hankering to tokenize everything it can lay hands on. And with BlackRock spearheading the charge, there’s no chance of a slowdown any time soon.

But caution must come. If we tokenize all assets in a speculative rush, the risk of creating illiquid markets and trapped value will manifest on a large scale. The result? More volatility and less external capital flowing into Web3. 

Most RWA projects are all fighting for the same liquidity pools, which aren’t as big as perhaps first perceived. It’s red pond syndrome. The RWA industry needs to start looking at the blue ocean of fresh new capital from outside of the Web3 ecosystem if it really wants to expand the whole pie. 

What will that take? True liquidity and broader access in the market, but also accountability in reclaiming the narrative from Wall Street and traditional finance, who’ve been doing a lot of the heavy lifting. Web3 needs to bring better awareness to the benefits of tokenized access so that institutional investors can come in to properly support the maturity of the market. 

Tokenization doesn’t promise success 

Firstly, though, there needs to be a reassessment of how assets are evaluated and qualified as being a sensical tokenization option. Just because the technology to tokenize complex assets exists, doesn’t mean it should be deployed frivolously. 

To gauge whether something should be tokenized, we should be asking the following question: Does this asset have intrinsic value and will its tokenization address the market by solving a problem? 

We can already see that speculative RWA tokenization doesn’t always guarantee (and often fails to deliver) liquidity. Take the real estate market, for example. The surface gleams with promise to disarm economic disparity and put the underprivileged on the map through fractional ownership opportunities. But what good is it to own 0.001% of a property in a system that lacks any meaningful dividend structure? Value gets trapped, liquidity stagnates. It is therefore not surprising to see that onchain real estate is the slowest growing RWA category. 

Careful assessment is necessary 

Making previously inaccessible assets accessible to the majority is a clear potential benefit of tokenization. But the initial spike in demand that we’re now seeing won’t be sustained if there’s no emphasis on deriving true intrinsic value. There’s not much point in tokenizing an asset without clarifying if it actually has commercial viability. It’s simple supply and demand principles that seem to be ignored. 

Read more from our opinion section: Most RWAs today are tokenized nonsense

That said, on the other end of the spectrum, I hope there’s no need for me to protest against any encores still circling the likes of Pokemon cards. We should’ve all passed that checkpoint by now. Instead, mature assets such as private equity and private credit can consolidate the upward trajectory of the RWA market by providing serious utility to investors.
Private credit loans are one of the fastest growing categories, worth over $2 trillion as of last year. 

Secondly, once a genuine demand for real value has been identified, we need responsible approaches to bringing the assets onchain. There must be a presence of market makers who can conduct comprehensive risk assessments around the underlying price discovery. This is how any inherent volatilities can be managed and accounted for. Otherwise, in spite of any real world success, the nature of an asset becomes susceptible to fluctuations in the wider market. 

Web3 must also play to its strengths as well. How many assets in the real world lack self-custody and transparency around existing transaction data? Too many, is the answer. 

High-value artwork is a particularly good example. Owners often lack direct access to their artwork and rely on third parties for custody and care — often locked away in specialized facilities to protect it from theft or damage. The art world is also notorious for its market opacity, with undisclosed fees and disputes over provenance and authenticity factors often clouding the landscape. Tokenizing art makes for a very promising case study of how bringing assets onchain can directly solve the real world problems that are attached to them. Having digital proof of ownership circumvents the need for geographic access to the piece; the need for intermediaries within transaction processes is minimized; and decentralized storage solutions can further prevent fraudulent activity. 

Education is key

Educational initiatives must be brought to the table in order to make the natural qualities of the blockchain more known to institutional investors. 

A Bain study conducted across high-net-worth individuals found that enhanced transparency was one of the top three reasons for considering an investment opportunity. 

Surely, those who lack the autonomy that they want over their investments would find genuine (albeit fractional) ownership more appealing. Tokenization will therefore attract more investors and thus more capital — especially when it’s combined with blockchain’s ability to clearly show an asset’s history.

With the RWA industry clearly picking up steam, it will undoubtedly play an astronomical role in determining global economic developments over the next decade. That is why it is so important to get it right now, rather than having to try and correct it later.



Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Templates.png

Research

ZKPs enable efficient offchain transaction processing and validation, resulting in increased throughput and reduced fees. Solana's ZK Compression leverages ZKPs to minimize onchain storage costs, while Sui's zkLogin streamlines user onboarding by replacing complex key management with familiar OAuth credentials.

article-image

North Korea suspected in breach of Indian exchange’s multisig wallet

article-image

Plus, Sanctum’s CLOUD token has officially launched — but not without problems

article-image

It’s not yet clear whether Donald Trump is pumping bitcoin. But an unofficial memecoin is still seeing benefit.

article-image

StarkWare takes a step towards making StarkNet for Bitcoin

article-image

The numbers point to one conclusion: Risk is back, or at least it was during the first half of the year