Tokenization A Trillion Dollar Market? A Quick Read of 21.co’s Latest Tokenization Report

Exploring the Potential of Tokenization A Quick Overview of 21.co's Latest Market Report on the Trillion Dollar Industry

Source: 21.co

Compiled by: LianGuaiBitpushNews Yanan

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The integration between cryptocurrencies and traditional asset classes (including fiat currencies, stocks, government bonds, and real estate) is experiencing unprecedented growth. The industry’s argument is becoming clearer that blockchain is becoming the underlying infrastructure for every asset class, and its future applications will surpass everyone’s imagination. Tokenization was impossible before the Bitcoin blockchain appeared. Subsequently, Ethereum introduced a global computing platform for smart contracts, which quickly led to the rise of various blockchains and distributed ledger technologies.

Here is a summary of the key information covered in the report:

• SEC Clears the Way for Grayscale’s Bitcoin ETF: A Victory for Bitcoin Enthusiasts and a Giant Leap for Investors
• Stellar (XLM) Price Flip Flops, Bulls Struggle to Keep up
• Ether’s Price Takes a Dive: Is Ethereum Losing its Spark?

Total Assets: $118.57 billion

The tokenized asset value of public chains reaches $118.57 billion. As of October 2023, Ethereum and Tron have the largest share in tokenized assets, mainly based on the number of stablecoins issued on the network. Ethereum’s tokenized assets reach $69.1 billion, accounting for more than 58% of all tokenized assets ($118.57 billion), with the most vibrant ecosystem, more than 6 million daily active users, and nearly 6,000 monthly active developers. The chart also shows that Ethereum has optimized its project for security and decentralization, with over 800,000 validators. Other projects are competing in terms of speed and scalability. Tron ranks second with over $45 billion in tokenized assets, while Solana, ranking third, maintains the fastest settlement time record at 0.4 seconds.

Public Chains vs. Permissioned Distributed Ledger Technologies

The table below illustrates the evolution of tokenization trends. Although the first and most successful instances of token financial innovation were stablecoins backed by fiat currencies, over time, the scenarios for tokenization have also increased. Some companies in traditional financial sectors, such as the European Investment Bank, have also issued bonds through private distributed ledger technologies (DLTs).

Compared to distributed ledgers, public blockchains such as Ethereum provide a globally accessible platform with proven technology. DLT benefits from strict end-to-end KYC and AML processes, as well as highly centralized liquidity in traditional financial ecosystems. Tokenization will help blockchain achieve deep liquidity in traditional finance.

97% of Tokenized Assets are Stablecoins

Stablecoins were the original tokenized assets and have a certain degree of product-market fit. In Ethereum-compatible networks, stablecoins occupy nearly 97% of the tokenized market share ($69.13 billion), followed by tokenized commodities like gold and tokenized government securities like US Treasuries. It’s worth noting that fiat collateralized stablecoins are digital representations of fiat currencies, such as the US dollar. The issuers of these products, like Circle and Tether, primarily maintain off-chain reserves of target assets in the form of short-term US Treasuries and cash, with the ratio depending on the issuer’s asset-liability management.

Tokenized Government Securities Grew Over 450% This Year

This year, tokenized US Treasuries have grown by over 450%, with total assets reaching $650 million. The rise of on-chain US Treasuries can be attributed to the current high-interest rate environment. Issuers include cryptocurrency companies like Ondo and Backed Finance, as well as well-known traditional financial institutions like Franklin Templeton.

Tokenized Assets Continue to be Distributed Across Various Trading Venues and Channels

The lack of regulatory clarity and inadequate shared infrastructure has largely resulted in tokenized assets lacking a unified trading platform. As mentioned earlier, stablecoins are the dominant force in the tokenized market. Stablecoins can be widely used and have very active trading activity on both centralized and decentralized exchanges. As shown in the chart below, stablecoin trading pairs account for 70% of the total trading volume on decentralized exchanges. In contrast, at the beginning of 2020, the majority of trading volume (60%) was dominated by altcoin trading pairs (e.g., BTC/ETH), but this proportion has dropped to 30% by 2023.

Lack of Regulatory Clarity and Inadequate Shared Infrastructure Will Also Limit Accessibility

In our research on tokenized assets, we found that while avenues for decentralized trading exist, most issuers prefer to use independent platforms or applications to comply with strict regulatory standards. These platforms, although leveraging public blockchain technology, still face many limitations in terms of accessibility due to the need for KYC/AML (Know Your Customer/Anti-Money Laundering) verification or geographical restrictions. This approach may contradict the original openness of the crypto world, but with advancements in technology and regulation, this issue is expected to be resolved. This reflects that the greatest innovations often occur in backend infrastructure, such as using public blockchains for settlements.

Tokenization is still in the early stages of development

As of early 2023, there are approximately 431 million cryptocurrency users worldwide, accounting for about 5.36% of the global population. Among them, there are 47 million tokenized users, accounting for 10% of the total cryptocurrency users.

Cryptocurrency adoption rate vs. Internet/Banking penetration rate

The current level of cryptocurrency adoption is equivalent to the level of internet adoption in the year 2000. From 2016 to 2022, the compound annual growth rate (CAGR) of cryptocurrency holders was 89%, surpassing the 65% growth rate of internet users from 1994 to 2000. The projected growth rate for the next 22 years is expected to stabilize at 12.45%, consistent with the growth rate of internet users from 2000 to 2022.

Public blockchains are permissionless, meaning anyone can create a free wallet and engage in transactions with tokenized assets. As long as one has internet access, they can use cryptocurrencies. As shown in the bottom left chart, countries with the highest cryptocurrency adoption rates often have higher internet penetration rates, with the exception of the Philippines. Emerging economies with lower internet penetration rates, such as South Asia and Sub-Saharan Africa, are limiting the development of cryptocurrencies.

According to World Bank data, decentralized finance (DeFi) has the potential to provide financial services to around 1.4 billion adults without bank accounts. However, the bottom right chart shows that regions with the highest cryptocurrency usage rates often have higher banking penetration rates. There are also some notable exceptions, such as Vietnam and the Philippines.

Developers, the leading indicator of value creation

Developers and entrepreneurs are the early adopters of blockchain technology and potential creators of value. They primarily develop consumer services and products or strengthen backend infrastructure. As of June 2023, there are 21,338 active developers, which is about twice the number in January 2020 and about 20 times the number in January 2015. Despite exponential growth, cryptocurrency developers only account for about 0.1% of the total global developer population (27.7 million).

Trends in tokenized assets are emerging

In a survey conducted by BNY Mellon in 2022 on institutional investors (including asset owners, asset management companies, and hedge funds excluding cryptocurrency-specific funds or alternative fund management companies), 97% of respondents stated that “tokenization will completely change asset management” and “is beneficial to the industry.”

By October 2023, approximately 47 million people will hold tokenized assets. It’s worth noting that 99% of this number comes from stablecoins, with other use cases still in the experimental stage. Tokenized assets account for about 10% of the total cryptocurrency market value, second only to BTC and ETH. This indicates that stablecoins have gained some market fit.

Now is the best time to build

Similar to the internet protocol, blockchain will become more invisible in the backend, with innovation focused more on consumer applications. Based on Carlota Perez’s framework, cryptographic technology is transitioning from the frenzy phase to the synergy phase. Through this transformation, cryptographic technology will integrate more closely with existing financial software and tokenize real-world assets (RWAs).

The future outlook for tokenization

Tokenization is another breakthrough in financial innovation, comparable to mutual funds introduced in the 1970s and ETFs in the 1990s. However, with the right regulatory framework, tokenization’s impact will be even greater as it allows any asset to be digitized on the blockchain.

Tokenization offers: better liquidity, stronger accessibility, higher settlement efficiency, greater transparency, increased composability, and improved interoperability.

Tokenization: a trillion-dollar market

According to research estimates, by 2030, the market value of tokenized assets will reach $35 trillion in a bear market scenario and $100 trillion in a bull market scenario. The baseline scenario prediction is based on tokenization accounting for 10% of the global regulated open-end fund net assets (assets of $70 trillion in the second quarter of 2023). The bull market prediction’s annual growth rate is similar to historical observations of cryptocurrency holders’ growth. The bear market is half of the baseline scenario prediction.

Main challenges to be addressed

• How tokenization can legally transfer ownership

• Lack of clear price determination mechanisms and collateral standards

• Differences in regulatory rules among countries

• Ensuring security

• Strengthening collaboration among various parties

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