The Rise of Tokenization: Understanding its Importance
In recent months, the tokenization of real-world assets (RWAs) the blockchain ecosystem. Tokenization is the process of converting the rights to an asset—whether tangible or intangible—into a digital token on a blockchain.
These on-chain tokens act as a digital representation of ownership, encapsulating the value and rights associated with a physical or digital asset. This transformation is facilitated through the use of smart contracts – enabling the entire process to be seamlessly automated.
In contrast to traditional systems, tokenization allows transparent and secure issuance, along with efficient management of these digital assets, therefore overcoming the inherent limitations and inefficiencies of current frameworks.
This powerful use case of blockchain technology has found a compelling synergy with the values of DeFi – creating a unique opportunity which significantly amplifies their combined impact on the financial system. By combining the virtues of DeFi with the tokenization of RWAs, we now have the ability to source more stable collateral. This not only results in more sustainable yield and diversified risk for these protocols, but also solidifies DeFi’s inevitable position within the broader financial landscape. As DeFi continues to innovate towards a transparent, open economy, tokenization stands at the forefront as an instrumental tool, providing a clear and direct path to this ambitious goal.
It’s important to note that tokenization does much more than merely streamline the financial system – it has the potential to revolutionize the global economy on a fundamental level. It realistically enables a future where opportunities are democratized and legacy systems are reconfigured to push forward a new era in the evolution of humanity. By tokenizing RWAs, we are actively enabling global, inclusive participation in wealth creation, thereby transforming the economy and laying the groundwork for a fairer world.
The Tokenization Market Outlook
Leading institutions are viewing tokenization as a trillion dollar market opportunity due to its ability to unlock the liquidity of currently illiquid assets – primarily in the private capital markets. Boston Consulting Group projects that, as a conservative estimate, the global market for tokenized illiquid assets could reach $16 trillion by 2030. However, on the higher end of the projection, the market has the potential to reach an astounding $68 trillion.
Considering the exponential scale of the tokenization market, an increasing number of leading financial institutions are recognizing the magnitude of its potential. In this sector alone, tokenization is firmly positioning itself as the catalyst for widespread adoption of blockchain technology.
What is being tokenized?
Whilst financial instruments are leading the way, there is a wide spectrum of traditional assets that can be tokenized:
- Traditional financial instruments
- Securities – This broad category includes equity securities (stocks), debt securities (bonds), derivatives and various types of investment funds.
- Structured Investment Products – Complex financial instruments crafted from multiple underlying assets like bonds, commodities, currencies, equities or mortgages. They strategically combine various elements from securities and derivatives to tailor risk and return profiles.
- Private equity – Involves investments in private companies – typically reserved for high-net-worth individuals (HNWIs) and investment funds.
- FX Market – Includes all currencies that are traded internationally.
- Derivatives – Financial contracts whose value depends on an underlying asset – can include futures, options and swaps.
- Commodities
- Insurance
- Intellectual Property
- Real Estate
- Wine, Fine Art, Luxury goods and other rare collectibles
The Transformative Potential of Blockchain
For Investors
- Democratized access – Tokenization facilitates asset fractionalization, which substantially broadens market participation – especially in private markets and structured investment products, which are historically reserved for HNWIs. The significantly reduced operational costs for issuers also enables smaller investment minimums, further empowering retail investors.
- Ownership rights – Blockchain provides a secure ledger where each token represents a stake in an underlying asset. This immutable record ensures that the investors’ ownership rights are not just recognized, but also easily transferable – making the investment process much more flexible.
- Transparency & security – On the security layer, blockchain’s immutability ensures accurate and transparent records, giving investors peace of mind and greater confidence in their on-chain investments.
- Efficiency – Automation via smart contracts streamlines the distribution of payouts, dividends and interest, making the investment process more effortless and efficient.
For Issuers
- Increased liquidity – The ability to fractionalize assets plays a huge role in unlocking liquidity across various markets. Bain Capital estimates that private assets outside the financial system are worth around $540 trillion – a large amount of which face liquidity challenges. Tokenization is emerging as an effective solution in unlocking value and providing easier access to capital for traditionally illiquid assets.
- Real-time settlement – Unlike traditional systems, where settlement can take days, blockchain facilitates near-instant settlement, thus eliminating counterparty risk and transforming the investment workflow.
- Operational efficiency – Manually-intensive operations can be automated via smart contracts. Boston Consulting Group reports that asset tokenization could save $20 billion in global clearing and settlement costs alone.
- Regulatory compliance – Subnet technology on Avalanche provides issuers with the ability to create customized blockchains that can be easily configured to meet compliance laws of any part of the world they operate in.
Interoperability – powering innovation
Interoperability, one of the key virtues of blockchain technology, serves as a powerful catalyst for innovation, enabling seamless composability between applications.
For investors, this unlocks an increased number of investment opportunities, which further diversifies their portfolio. Meanwhile, for issuers, it allows them to leverage the benefits of interconnected applications, expanding their reach to a broader number of market participants.
Interoperability plays an important role in cultivating a more inclusive and connected ecosystem across various industries, allowing for capabilities beyond the restrictions of legacy infrastructure.
The Tokenization Landscape on Avalanche
Avalanche’s dynamic Subnet technology is empowering institutions and traditional companies across industries. Leveraging their customizable features, these companies are not only seamlessly transitioning their existing offerings on-chain but also introducing new innovative tokenized products. Here’s an overview of 9 tokenized products being built exclusively on Avalanche:
Financial Services
Securitize & KKR
Securitize, an industry-leading tokenization platform, has been instrumental in driving accessibility to the private markets through compliant tokenization. In September 2022, they collaborated with prominent global asset manager, KKR, to provide tokenized exposure on Avalanche to KKR’s healthcare fund, typically reserved for HNWIs. This pioneering effort signified a major advancement in Avalanche’s objective to digitize RWAs.
Further pushing market transformation, in July 2023, Securitize initiated the offering of tokenized shares in a Spanish real estate investment fund, specializing in commercial healthcare real estate. Securitize is the first to offer such digital asset securities under the EU’s new pilot regime for digital assets.
Intain
As part of Avalanche’s Evergreen initiative, Intain was one of the first structured financial services to build a Subnet with IntainMARKETS – a tokenized marketplace for asset-backed securities. Intain leverages automation and blockchain transparency for operational efficiency, enabling real-time investor reporting and swift payouts. This increased efficiency means a reduction in costs, which in turn allows for lower investment minimums, broadening the reach of their structured investment products.
By unifying all trust intermediaries onto a single platform for its administration services, Intain showcases blockchain’s ability to substantially streamline the entire deal structure process.
DEFYCA
Digital securities firm, DEFYCA, is building a tokenized private credit protocol that aims to open up investment opportunities in the private markets. Utilizing blockchain technology, DEFYCA is the first company to offer tokenized securities to professional investors under the EU’s upcoming cryptocurrency regulatory framework – MiCA.
In traditional systems, debt issuance is a manually-intensive operation, which involves liability matching, settlement, payment flows and price discovery. DEFYCA automates these steps through smart contracts, greatly improving administrative efficiency.
AmFi
AmFi is a financing platform that combines traditional financial products with blockchain’s efficiencies, enabling companies to easily set up and manage real-world credit solutions through automated processes. Its first product, AmFi Liquidity Pools, allow established financial services to create Funding Pools that are collateralized with tokenized RWAs. These Liquidity Pools faciliate funding for businesses whilst offering innovative products to investors. AmFi’s current focus is on democratizing access to capital for smaller businesses in Latin America.
INX
INX, an SEC-registered platform, facilitates compliant trading and investment in both cryptocurrency and security tokens. INX also helps companies raise capital through the issuance of digital securities and in doing so, provides unique investment opportunities. As part of its services, INX offers a comprehensive solution for issuing SEC-compliant digital securities, from token modelling and smart contract deployment to management of the token’s lifecycle.
INX works closely with regulators to ensure compliance, actively contributing to the development of regulatory frameworks in the digital asset industry.
HiYield
As part of Avalanche Vista’s initial cohort, HiYield is developing a user-friendly platform that aims to consolidate the global on-chain capital markets. The platform provides investors with an expanding set of strategies designed to generate sustainable yields across a diverse range of institutional-grade asset classes.
HiYield is building towards a more inclusive financial system powered by blockchain technology. It aims to offer features such as fractional ownership, enhanced liquidity & accessibility, peer-to-peer lending & borrowing, and interest earning opportunities.
Cables
Cables is innovating in the tokenization space by integrating blockchain settlement technlogy into the FX industry – establishing itself as one of the first protocols to focus on this sector of the market. A self-custody DEX built on Avalanche, Cables is focusing on stablecoin and cross-chain pairs. The platform’s mission is to incorporate blockchain rails into the FX market as well as bringing FX derivatives to the stablecoin market. This unique approach gives both institutional and retail investors access to transparent pricing and unified liquidity, all within a non-custodial framework.
Insurance Services
Re
Re’s vision is to streamline the process of connecting capital in the nearly $1 trillion reinsurance market, increasing accessibility to this traditionally ambiguous asset class. Simply put, reinsurance is ‘insurance for insurance companies’ – it allows insurers to transfer their risk to a reinsurance company. This ensures that they can maintain a healthy balance sheet to allow for seamless payouts when claims are made.
The Re protocol gives accredited investors the opportunity to provide backing for real-world insurance policies and companies across a variety of risk portfolios. To achieve this, Re is building a dual product model on Avalanche. This involves the main dApp that lives on the Primary Network and a Subnet designed to store all private information – demonstrating the versatile use cases of Avalanche Subnets.
By leveraging blockchain’s transparency and speed, Re not only offers a superior experience to insurers, reinsurers and policyholders, but also expands opportunities for participation in the reinsurance market.
Lemonade
In March 2022, digital insurance company, Lemonade, made a significant move into the blockchain industry. They launched an initiative to protect African smallholder farmers from climate change risks by offering permissionless on-chain insurance. Built on Avalanche, the offering is one of the first projects by the Lemonade Crypto Climate Coalition, a DAO funded by the Lemonade Foundation.
The project addresses a pressing issue facing 300 million smallholder farmers in Africa, who largely lack protection against climate-related risks. Their dependence on rainfall for crop growth is increasingly challenged by environmental conditions such as drought, which can have serious impacts on their livelihoods. Traditional weather insurance is usually unavailable or expensive in these regions due to high operational costs and inaccurate weather data.
Lemonade’s innovative solution leverages smart contracts for policy management and automatic claim payouts, combined with Chainlink oracles for real-time weather tracking. With the huge reduction in backend costs, Lemonade is able to offer affordable insurance to farmers. Insurance capacity is provided through on-chain capital pools, which offer investors an opportunity to participate and receive a share of the farmers’ premiums. This transparent and efficient process eliminates counterparty disputes and streamlines the payout process, effectively delivering much-needed insurance services to emerging markets.
Lemonade’s pioneering efforts signifies an important milestone, showcasing the potential of blockchain technology as a solution to global challenges.
Avalanche Vista – Fueling Tokenization
In July 2023, the Avalanche Foundation announced the launch of Avalanche Vista – a $50 million initiative dedicated to propelling tokenization innovation on Avalanche. The initiative aims to accelerate innovative tokenization efforts, by using the alloc ated funds to purchase tokenized assets and support teams that are making significant developments in the tokenization space.
Avalanche Vista marks a pivotal moment in Avalanche’s journey, underlining their firm commitment to redefine traditional systems. By digitizing RWAs, Avalanche is playing a major role in democratizing access to investment opportunities, particularly within the historically-exclusive private markets.
Conclusion
The current financial system is undergoing a profound transformation, deeply intertwined with the rise of tokenization. As we tokenize RWAs, we are witnessing the reshaping of a global economy, through the convergence of traditional finance and DeFi. This unification is empowering the blockchain industry as a whole to demonstrate real change in creating a more inclusive financial landscape. The exponential impact of tokenization is gaining momentum and recognition across all sectors, evident in the surge of tokenized products in the ecosystem.
The potential of blockchain is no longer just an abstract vision – it’s a tangible reality being materialized on Avalanche today. As a leading player in this paradigm shift, Avalanche’s unique features and dedication to driving change provide a powerful framework in revolutionizing our global infrastructure.
