Fresh after the collapse of Terra-Luna last year, BCG released a report stating that despite a slowdown in cryptocurrency trading volumes and market cap, illiquid asset tokenization was expected to reach $16 trillion over the next decade.
An FTX meltdown, some bank failures supposedly related to crypto, and multiple SEC enforcement actions later, the picture may not look so rosy.
However, Citi Group still seems to be enthusiastic about the sector. The group released a report in March 2023, stating that tokenizing financial and real-world assets was still a “killer use case”. for blockchain technology.
While the report acknowledged that the promise of blockchain had been talked about for a few years, tokenization could still be the feature that tipped it over the edge to mass adoption. Citi predicted it could be between $4 and $5 trillion by 2030. While this is a far cry from BCG’s $16 trillion, Citi noted that “the momentum for adoption has changed for the better” (undoubtedly a major disappointment for the SEC).
The reason for this belief? Citi’s research found that governments, major institutions and companies have continued to develop blockchain-based tools. Now they would have moved from exploring the benefits of tokenization to trials and proofs of concept.
“It just makes damn sense,” says Maex Ament, co-founder of Centrifuge. “There is simply no more discussion. To put assets on-chain – it’s just cheaper for everyone.
“Only for the intermediaries, where it makes no sense for them, they push back. The rest of the world understands that it is a superior technology.”
Could we still be on the verge of a symbolic revolution despite a delay?
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The FTX effect
Ament explained that the collapse of FTX had created a significant roadblock in adopting asset tokenization in the real world.
“We are just scratching the surface. There is still no institutional money coming in. We are still experimenting,” he said. “The real money is just waiting on the sidelines. No one has yet done anything substantial in my book.
“That was different nine months ago. We felt nine months ago that it was going to happen. And then FTX happened… They went on the brakes in November and we still haven’t recovered.
Even Citi’s report, despite their multi-trillion dollar forecast, held that adoption was unlikely in the years to come. Instead, they stated that mass adoption could still be “six to eight years away.”
“I do believe that the C-level suites, the boardrooms still suffer from the FTX dilemma,” Ament continued. “It’s pretty amazing how many people lost money in FTX. They simply stood with their feet in something they considered safe. And then they were completely wiped out.
“In a year’s time, maybe the big institutional money will start flowing back in. I think it just takes time.”
A revamp of the back end of the financial system
According to Citi, Ament, and many others researching tokenization, the technology just “makes sense.”
As a disruptive technology, Blockchain is an outlier. However, the Citi report says that unlike other technologies (such as generative AI), the potential for disruption lies deep within the financial system – a highly regulated area with strong ties of fear and uncertainty and a web of outdated systems.
As such, its mass adoption has been shrouded in caution, and cryptodrama notwithstanding, it lacks the “sex appeal” of general-purpose AI.
“To be sure, blockchain is not about to have a ChatGPT moment,” the report states. “Blockchain is a back-end infrastructure technology, more akin to cloud computing than artificial intelligence (AI) or the metaverse, which have a more prominent consumer interface.”
“Mass adoption for AI could happen as early as two to four years, driven by the recent rapid increase in data availability and computational power, improved algorithms and models leading to products like ChatGPT, which have attracted massive public attention.”
“Blockchain, on the other hand, may take longer for mass adoption (perhaps six to eight years) due to the need for collaboration between participants, standardization of platforms, and interoperability and compatibility with existing systems and software.”
However, if adopted, the benefits to the financial system will come along with a few other innovations.
“Ultimately it’s all about the price. The transparency, speed, interoperability and compostability also result in cheaper transactions and a better price,” says Ament.
He explained that at the level of currency tokenization, as seen with stablecoins, it could also deliver on the crypto promise of improving global access to wealth. The lack of national boundaries suggested by the blockchain allows access from all over the world to on-chain assets. This has already enabled innovations such as cross-border lending protocols.
Launch of Centrifuge Prime
Centrifuge has made significant strides in lending and investment, operating between on-chain and real-world assets. The company recently launched a suite of products aimed at DAOs, enabling them to diversify into real-world assets and create new revenue streams.
At the same time, Centrifuge’s loan pools are funding sources for real businesses and asset owners.
“DAOs sit on stablecoins and get nothing for it,” Ament explains. “Right now you are on USDC. The only person making money with USDC is Jeremy from Circle. He makes four or five percent on Treasury. Why shouldn’t the DAO with 20 million in stablecoins get a return on it?”
“(With Centrifuge Prime) we’re making it incredibly easy for DAOs to take those assets and just put them in a Centrifuge pool. You get a 6-7% return on a very bland, safe asset, almost as safe as a stablecoin. And you get 6% without leaving the blockchain and investing through Centrifuge in something that has real impact.”
Once in the loan pools, the assets go to fund real-world assets, including asset-backed securities and real estate, which the company says provide a source of “predictable and sustainable returns.”