The transformative power of asset tokenization is steadily shifting the investment landscape, opening doors for both institutional investors and innovative asset creators. As evidenced at the recent ETH HK event in Hong Kong, featuring Ethereum founder Vitalik Buterin and panels with our founder, the conversations are transitioning from theoretical to applied. In this overview, we will address the hard questions of why asset tokenization has reached an inflection point, the fundamental problems it solves, and the exciting future prospects it offers.
Why Has Institutional Adoption of Asset Tokenization Taken Off Now? What’s Different From the Past?
The path to adoption is not just about bridging so-called “real-world assets” into the crypto world. Instead, it’s about applying Web 3 solutions and technology to traditional finance. That’s where scale will be found.
While many initial attempts at asset tokenization were premature and didn’t succeed, they played a crucial role. They served as valuable experiments that resulted in innovation. The primary setbacks were often due to the lack of quality assets and insufficient distribution.
What we see now, also at EVIDENT, is clearly growing demand from established institutions aiming to move their high-quality assets to a digital setup. The innovation push in traditional asset management, which did not happen for decades, is now happening.
What is Driving Demand from Traditional Institutions for Asset Tokenization?
Nobody Cares About Fancy Technology Per Se; It’s About Pragmatic Solutions.
Tokenization, at its core, creates a digital representation of rights in an asset on the blockchain.
There are multiple methodologies to accomplish this. There is great potential in natively digital representation of rights in smart contracts (as we did with tokenizing carbon credit forward contracts).
However, to drive adoption, we choose a pragmatic approach, leveraging frameworks and rules recognized within the prevailing financial markets. For example, tokenizing tangible assets involves utilizing special purpose vehicles (SPVs) to hold an asset. This is a method that institutional clients understand and feel comfortable with.
What are the Actual Problems that Tokenization Solves?
Successful businesses in the space will form long-term partnerships and aim to address ‘boring’ yet significant pain points that institutions will pay to solve.
Efficiency: Lower cost, Higher speed
- The time has come for modernizing and streamlining the management and distribution of alternative assets. The prevailing methods, encumbered by manual processes and disparate systems, deserve an overhaul.
- The logic: digital asset → digital processes → process automation → efficiency, speed & user experience.
- We did this by analyzing current processes from a foundational level (i.e., what the law and regulations require) and re-invented efficient, compliant processes that minimize dependencies on manual steps and cost-intensive intermediaries like fund administrators and transfer agents.
- This revamp translates to an 80%+ reduction in costs, a more rapid go-to-market with assets, and accelerated processes, replacing weeks-long settlements with instantaneous transactions.
Distribution Power: Expanding the Horizon with Digital Tools
The landscape of asset management is undergoing a metamorphosis. While we are laying down the threads today with advanced digital tools and strategies, the future picture promises a diverse and dynamic ecosystem where issuers and investors interact with unmatched ease and efficiency.
- Empowering the Primary Market: At the heart of our efforts is an emphasis on enhancing the primary market distribution capability. With the advent of digital processes, we are able to reshape the very fabric connecting issuers and investors.
- Bridging Issuers with Investors: Our platform offers dedicated distribution tools to issuers that help create new distribution pathways. We have crafted solutions that empower issuers to effectively reach out, communicate with, and engage their existing investor networks. Beyond that, EVIDENT aims to introduce previously untapped investor networks and expansive capital pools, broadening the horizon of fundraising.
- E-commerce Revolution as a Blueprint: The pivot to a digital-centric paradigm in asset management doesn’t exist in a vacuum. It echoes the seismic shifts we’ve witnessed in other industries. Drawing parallels with the e-commerce sector, giants like Amazon and Alibaba didn’t just digitize shopping – they transformed its very essence. It was all about the digitalization of processes, standardization, and automation, driving down costs. Similarly, as we move to digital infrastructure in asset management, providers will offer the capacity to cater to a “long tail” of assets. Regardless of how niche or granular these assets may be, they can be offered for investment. This translates to unlocking a wider array of issuers and assets and paves the way for reaching new investor segments and growing the market overall.
Transparency: Better information, Lower risk
Transparency, in the age of digitization, isn’t just about clarity—it’s about providing all relevant stakeholders with a comprehensive, real-time, and trusted view. At EVIDENT, we’re proud to be pioneers in setting this gold standard in transparency.
- Inherent Value of Blockchain: Institutions are not just looking for efficiency—they seek clear, continuous, and trusted audit trails. Thanks to the immutable characteristics of blockchain technology, this becomes feasible. This heightened level of transparency transcends being just an attractive feature; in today’s fast-evolving financial landscape, it’s a non-negotiable standard. Both investors and regulators recognize and commend this transparency, translating to reinforced accountability and heightened confidence in the system.
- EVIDENT’s Unique Approach: At EVIDENT, we’ve not just adopted this standard—we’ve enhanced it. Our platform offers functionality that empowers an issuer or asset manager to attach documents and data to an asset in an unchangeable manner. But our capabilities don’t end at traditional PDF documents. We’ve engineered the system to ingest data from IoT sensors, on-chain oracles, and more. The result? Highly reliable and comprehensive data sets. This richness of data informs and refines investment decisions, ensuring investors have a holistic view of their potential ventures. Consequently, the perceived risk profile of an investment diminishes, paving the way for an improved risk-return ratio.
- Valued by all stakeholders: Both investors and regulators value this clarity, ensuring greater accountability and assurance in the system.
Beyond the Forefront: The Emerging Advantages
There are elements of progress that might not be front and center right now in the traditional finance space but will play a role in continued innovation.
- Decentralization: The decentralization ingrained in our system ensures enhanced investor sovereignty. By distributing control and minimizing centralized gatekeepers, investors experience an unprecedented level of authority over their assets.
- Investment Product Innovation: The era of static, one-size-fits-all investment products is fading. Our platform and others facilitate the swift and adept creation of novel investable assets. These assets don’t just merge unique risk-return characteristics—they are emblematic of dynamic capital flows, bringing diverse investment horizons under a unified framework.
- Convergence of Traditional and DeFi Spaces: The future of finance isn’t just about novel tools but also seamless integrations. We’re witnessing the amalgamation of conventional financial assets with the innovative dynamism of the DeFi space. One pronounced outcome to expect is the inception of richer liquidity pools—deeper, more responsive, and tailored to the evolving needs of investors.
What does the future hold for tokenized assets over the next 12 months?
Based on the market dynamics today, we can aim to predict The Evolution of RWA Tokenization in a Glimpse into what is ahead. Here are a few points to consider.
The Paradox of Progress
- Temporal Perspective: Historical data and theories have taught us that while we may overestimate progress on a 1-year scale, we grossly underestimate the strides made on the 5 and 10-year timelines. This pattern holds true for the tokenization space, where the sprint-like momentum of the crypto frenzy has started to give way to a marathon pace.
- The Right Zoom: This is a moment for astute focus. We must remind ourselves to zoom out and recognize that the true innovators and builders in this space are in it for the long haul. Their success will hinge on their ability to filter out low-quality assets, adopt a steady growth strategy, and optimize for sustainability.
The Caliber of Tokenized Assets
- All About Quality: The types of assets ripe for tokenization are essentially limitless. However, the focus will be firmly on high-quality assets. As we move forward, we will witness a surge of top-tier assets offered in digital format, reflecting the industry’s maturation.
- EVIDENT’s Milestones: We are bullish about the journey ahead. We anticipate that our AUM will comfortably double in the coming 12 months, signifying our commitment to work with top issuers to bring premium assets live.
Market Trends & Asset Dynamics
- The Interest Rate Play: The attractiveness of assets to investors is significantly influenced by the prevailing interest rate environment. Given the current high-rate atmosphere, there’s a marked demand for fixed-income and private credit products. However, as we anticipate a potential tapering off of these rates around the end of 2024 or the onset of 2025, we expect a recalibration towards riskier assets.
- Blockchain’s Unique Offering: One of the game-changing features of tokenized assets is unparalleled transparency and data access. This not only enhances asset attractiveness but helps to mitigate their associated risks. It underscores one of the pivotal use cases for blockchain in revolutionizing asset management.
Consistent Pace on The Road Ahead
- The Pace of Progress: As the fervor of the crypto explosion recedes, the landscape will experience a more measured and broad-based growth. The real transformation, though seemingly slow, will be deep-rooted and extensive.
- EVIDENT’s Vision: Armed with patient capital and a laser-focused strategy, our path is clear. While we are aggressive in our pursuits, our ethos revolves around long-term innovation, taking the industry’s evolution one calculated step at a time.
The trajectory of asset tokenization is more than a transient trend; it’s a foundational shift with far-reaching implications. Institutions and individual investors alike stand to gain from the increased efficiency, distribution reach, and transparency it offers.
At EVIDENT, we are not just participants but active pioneers in this journey, committed to long-term innovation. The future of asset management is not just digitized; it’s tokenized.