Wall Street to Main Street: Why Tokenization is the Infrastructure Play to Watch”
It seems sudden but it is not, Tokenization is everywhere now. Not utilized broadly but certainly discussed on Linkedin and other forums, Tokenization is the word of the day, maybe the year.
Let’s start with a definition of Tokenization. That way we can all read along with the same idea of what it means. Yes, like most new tech there is some debate about what it means exactly.
A note about my use of ChatGPT, I love it and use it for research but not for writing. It seems insincere to say I wrote a blog and in reality ChatGPT is the author. If I use something directly from ChatGPT I will try when possible to reference the source that ChatGPT uses.
I asked my new bestie ChatGPT of the definition and “he” says…
“Tokenization is the creation of a digital representation of real-world or digital assets — issued and traded on a blockchain infrastructure — that embeds ownership, rules, and transferability in code. — ChatGPT
In fairness, more wordy than how I would define it but I like it just the same. I also have to share ChatGPT’s opening salvo after I asked \ prompted for the best current Tokenization definition.
“Ah, tokenization — one of those buzzy words that seems to mean everything and nothing, depending on who you ask. It’s like “cloud” was in 2008: everyone wants it, few can explain it, and even fewer are sure they need it.” — ChatGPT
I gotta give “him” credit, that is spot on and a very good point and the main reason I am writing today’s blog.
What does it mean to tokenize an asset. Well first get used to the acronym RWA, which simply means a Real World Asset, aka something physical or based on atoms that is about to get represented by a digital version or certificate.
From the Lab to the Factory
This is the expression I use when I want to emphasize that a new technology needs to get out and get to market. I recall trying to commercialize Public Key Infrastructure (PKI) back in the early days of crypto, this was before Satoshi’s white paper led to lots of folks using the term crypto.
We started to refer to PKI as “Pilots Keep Increasing” as we could not get out of the lab and into the factory. PKI was just not ready for primetime in 1999 nearly a decade before Bitcoin captured our imagination. We had pilots with some of the largest banks in the world like Barclay’s, Citi and WFB. We tripped over two key points we missed.
- No clear use case
- No clear business model
Never go to market with a new technology unless you have these lined up.
In our case PKI required about $1M in infrastructure just to stand it up and even for the largest banks in the world that was real money in 1999 let alone to deliver an unknown use case and revenue.
I am a huge fan of the lab for R&D and building cool new things, but at some point science experiments as fascinating as they are, they don’t pay the bills. The factory pays the bills.
I just downloaded a fascinating paper from a16z and it is pure gold. Rather than me repeat it all here, let me link to the excellent paper and emphasize that you really want to think about this BEFORE you tell everyone you are tokenizing everything. Focus is better.
First some highlights from this excellent paper.
Scaling a Pre-product market fit startup is almost a sure-shot way to kill it!
90% of (all) startups and 70% of startups that raised Series A end up as failures! Noting that: Lack of Product/Market Fit is the most common reason behind why startups fail.”
“Finding the Product/Market Fit is the hardest challenge for all startups”
“On a high level, you’ve found product market fit when you can repeatably acquire customers for a lower cost (CAC) than what they are worth (LTV) to you” Elizabeth Yin in the a16z paper
I easily recognize all of these points from my time in selling PKI to banks.
Is Tokenization beyond the PMF chasm that beguiles so many startups?
I think the answer is yes, but let’s see if that holds true. First let’s look at tokenization from the perspective of what it is NOT. Well it is not a stablecoin, one of the other really hot crypto subjects we keep hearing about. Once again I used my friend ChatGPT to help me here. “He” drew up this handy chart for me.
The net is that Stablecoins are a digital equivalent of fiat currency and Tokenization represents a real world asset in a digital form.
What about traction for tokenization? What is enough traction to say “Tokenization is out of the lab”
I am going to go out on a limb and say that BlackRock knows a thing or two about investing. Well BlackRock’s BUIDL Fund has passed $375M AUM on Ethereum. You will notice that the BUIDL Fund diagram below has Circle’s stablecoin as part of the flow, that does not contradict the point made above.
BlackRock’s BUIDL Money Market Fund on Ethereum
Maybe BlackRock is wrong, fair enough, how about Franklin Templeton they have a $360M tokenized money market fund called Franklin OnChain US Government Money Fund (FOBXX). Franklin used Polygon to build their tokenized investment vehicle instead of Ethereum. Franklin stated the key was that they wanted a Layer 2 Blockchain. Well now we have to just give a quick note on Layer 1 vs Layer 2 Blockchains, don’t worry it is not complex at all.
Layer 2 blockchains are secondary frameworks or protocols created on top of an existing blockchain. Polygon is a Layer 2 Blockchain built on top of Ethereum a Layer 1 Blockchain.
The main difference between Layer 1 and Layer 2 Blockchains is really a tradeoff between speed and scalability for Layer 2 vs higher security in Layer 1.
Yes Layer 3 is coming soon to a theatre near you, but don’t worry about it yet.
JPMorgan Onyx → Kinexys
The ultimate From the Lab to the Factory is JPMorgan’s Onyx. Well now it is Kinexys as they rebrand for the move to mainstream. To their credit JPM has been leading the way in payments innovation based on Blockchains. Let’s dive into this very cool example.
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The top diagram in grey is the traditional payment rails, we all pretty much get this and why it is frustrating. In color JPM lays out the new way to move money using Kinexys.
As we noted earlier, you need Use Cases to make it real and Kinexys does not disappoint. On their JPMorgan Payments dev site they show a nice array of real world use cases.
Well JPM has taken this beyond the theoretical to the real world. Kinexys has been live for 4+ years, most of that time it was branded as Onyx. The Kinexys platform has moved >$1.5 Trillion (yes with a T) and has a daily average transaction volume of > $2 Billion.
Not bad for an experiment in the lab….clearly it has left the lab.
Let’s see what else is coming our way on Tokenization.
Web3
We need to address something that is more ambiguous but is related to Tokenization. Web3. Personally I don’t like to over focus on Web3 as it can come across as too futuristic and amorphous.
Web3 is a term used to describe the next iteration of the internet, one that is built on blockchain technology and is communally controlled by its users.
Here is one of the more practical and visual views I found on Web3 as it includes Use Cases, which is a key aspect to success.
Web3 is built on 3 key technologies:
Web3 describes what the internet could look like if it was built on new technologies.
Here are the three main technologies that make up Web3 according to the experts on Web3 from McKinsey:
- “Blockchain. A Blockchain is a digitally distributed, decentralized ledger that exists across a computer network and facilitates recording of transactions. As new data are added to a network, a new block is created and appended permanently to the chain. All nodes on the blockchain are then updated to reflect the change. This means the system is not subject to a single point of control or failure.”
- “Smart contracts. Smart contracts are software programs that are automatically executed when specified conditions are met, like terms agreed on by a buyer and seller. Smart contracts are established in code on a blockchain that can’t be altered.”
- “Digital assets and tokens. These are items of value that exist only digitally. They can include cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), and NFTs (nonfungible tokens). They can also include tokenized assets of assets, including real things like art or tickets to concerts or sporting events.”
The great thing about Web3 is you now can see how it all comes together for a better internet. The future requires a different version of the internet and that starts with Blockchain and Tokenization so we are now full-circle back to today’s blog.
Tokenization is important to you and your organization so now is the time to get on board and move forward.
Tokenization Summary
It is real, it is here now and it is growing. See the chart below with the great conclusion that Tokenized Assets are going to reach $16 Trillion or 10% of the global GDP in 2030. Clearly that is out of the lab and into the factory.
Why Tokenize you ask, it is a fair question and the answer is it depends but you can lead your decision makers with this simple view of the beneifts of tokenization from “Transforming Financial Services: The Impact of Asset Tokenization” by Futurematters and GFTN.
No one can really argue against any of these benefits but back to our point about Use Cases, this list would be more or less on target but with emphasis depending on the use case.
From the same excellent report comes this crazy eye chart showing that if it has value it can and likely should be tokenized. Why? Well look above and see the benefits again, now lay those over your favorite asset class and you can see a digital future coming into focus rather quickly.
Personally, I am all about Supply Chains for both finance and provenance as just an amazing application of Tokenization.
The first step is to get your team up to speed on Tokenization and if you are reading this, that is a good first step.
“The future will be tokenized” — Dion Lisle
Venture VINE — Tokenized Wine
I recall a bank that had an amazing business tracking products that increase in value over time, their big focus was actually cheese, specifically Parmesan cheese as they had a multi-million dollar contract with Kraft foods. Well we talked about getting this business off an Excel spreadsheet and onto a Blockchain system, it was early days of Blockchain, so the project never took off. It turns out that there is a lot of business in tracking the value of assets that increase in value as they age.
There is even an idiom for it “ages like a fine wine.” Well anything other than your grandparents that you say this about is a fantastic candidate for Tokenization. Yes that includes actual wine too.
As you can see from the above basic diagram, Blockchain is once again the key for a Tokenized asset. And you can see too that this allows multiple owners of a single asset via an NFT structure.
The fine wine industry is valued at approximately $340 Billion globally so no imagine some percentage of that gets tokenized. That could be a nice business for a startup. Please note there are already startups in the space but there could be room for more.
No way to tokenize the views here in Sonoma County but enjoy this one.
