Tokenization – Stillborn or on the Verge of a Breakthrough?

Tokenization – Stillborn or on the Verge of a Breakthrough?

Tokenization of real-world assets has been a topic of discussion in the crypto space for several years now. While the concept has been around for a while, it has faced criticism from many crypto purists who view it as operating under a centralized framework. However, recent technological advances have migrated the tokenization process from closed, permissioned projects onto public, permissionless blockchain platforms. Tokenization refers to the process of converting real-world assets into digital tokens that can be traded on a blockchain. This can include financial securities such as stocks and bonds, or commercial rights such as trade receivables, fractionalized real estate, or art. Tokenization has often found favor around market crash moments, when a public backlash arises against native crypto tokens like Bitcoin and Ether.

At such times, there is a mindset that it is more palatable to convert familiar, relatively stable, pre-regulated assets into blockchain-based digital assets than to bet on pure crypto. However, blockchain purists often reject this model, pointing out that it breaks the “trustless” structure of decentralized blockchains because someone or some centralized institution must now be trusted to identify, represent, and attest to the value of the assets on chain.

Moreover, many have been dismissive of the underlying models used in early tokenization projects, which were built on permissioned blockchains run by consortia of banks or other companies, a centralized framework that crypto advocates view as adding no more value than the more efficient, less expensive option of a SQL database. Time will tell whether the latest wave of tokenization – which has drawn in large Wall Street banks, the Singaporean government, and asset managers such as Wisdom Tree and Hamilton Lane – moves this idea beyond the fringe into the mainstream. However, there are reasons to believe it has momentum.

One reason for this is the technological advances in cryptography that have encouraged tokenization projects to migrate from those closed, permissioned projects onto public, permissionless blockchain platforms such as Polygon. This has allowed them to tap into the more rapid pace of innovation happening on those chains, including in areas such as zero-knowledge proofs, which enable a balance between the privacy that investors and issuers demand and the advantages of programmability, instant settlement, and data transparency.

Another driver behind this advance lies in economic conditions. Inflation and higher interest rates are forcing entities to seek out new markets and trading efficiencies and to free up dormant capital. The pitch behind tokenization is that it achieves all of that.

Other big fund managers are eyeing different democratizing opportunities. Franklin Templeton CEO Jenny Johnson talks about tokenization offering the opportunity to customize individual investors’ portfolios around their interests – including adding exotic new assets such as tokenized royalty streams from their favorite musical artists.

August 15, 2023No comments

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