Asset tokenization refers to the registration of asset ownership on a blockchain infrastructure in tokenized form, allowing assets to benefit from the functionality of the blockchain, such as more efficient settlement and the ability to interact with smart contracts.
While the modern financial system is already quite efficient, tokenization itself may not bring immediate efficiency improvements. Instead, we believe the main benefits may come from bringing users, assets, and applications together on a common global platform.
From the perspective of the cryptocurrency market, while various assets can benefit from the tokenization trend, the most potential may lie in protocols that can provide this universal global platform. Currently, Ethereum blockchain is believed by Grayscale Research to be the most likely to achieve this goal in the future.
Public blockchains can be seen as a general-purpose technology with many potential use cases, from payments to video games to digital identity systems. The value of this technology comes in part from bringing various applications onto a permissionless and open architecture platform. When users, capital, and applications are concentrated in one place, everyone in the ecosystem can benefit from network effects.
Tokenization is one of the many applications of public blockchain technology. In some cases, if existing “back-office” processes are highly cumbersome, moving asset management to blockchain infrastructure may immediately improve efficiency. However, for many types of assets (such as publicly traded stocks), the current digital infrastructure works quite well, and whether public blockchains can play a better role is not obvious. In these cases, the potential benefits of tokenization may come from network effects: by transferring global assets to a common platform, we may be able to create a more powerful, accessible, and cost-effective financial system.
From the perspective of the cryptocurrency market, while various assets can benefit from the tokenization trend, the most potential may lie in protocols that can serve as a unified platform for tokenized assets, investors, and related applications. Currently, Grayscale Research believes that the Ethereum blockchain is the most likely to achieve this goal in the future.
System Upgrades
As blockchain technology becomes more widely adopted, securities could be fully issued and tracked on the chain. However, currently, ownership of securities income and ownership of physical assets such as real estate, commodities, and collectibles are recorded on traditional off-chain ledgers (usually electronic bookkeeping accounts). Tokenization is the process of registering asset ownership on blockchain infrastructure so that market participants can benefit from the functionality of the blockchain. By design, token prices based on blockchain should closely track the prices of the underlying reference assets.
Some benefits of converting asset ownership to blockchain-based tokens may include:
Efficiency in settlement: Blockchain transactions can settle almost instantly and can be set up to exchange assets under payment conditions, reducing the risk of settlement failure.
Programmability: Tokenized assets can be integrated into software applications to enable additional functionality. For example, this may include conditionally transferring tokens based on off-chain information (such as compliance approval) or using tokens as collateral for decentralized lending platforms.
Accessibility: Like the internet itself, blockchain is not limited by borders, so tokenized assets can provide investors from a wider range of countries or regions with access to the best global capital markets. Blockchain can also facilitate access to new asset types through fractionalization.
Cost reduction: By increasing automation and reducing the role of intermediaries, tokenized assets can lower the issuer’s costs through lower underwriting fees and reduced interest rates.
Researchers at the Bank for International Settlements (BIS) have defined a tokenized “continuum” to consider how this process affects specific markets. On one hand are markets that still require a lot of manual workflow, such as real estate or bank loans. These assets may be difficult to tokenize, but the process can create meaningful efficiency improvements.
On the other hand, many other markets currently use electronic bookkeeping systems that are quite efficient, such as listed stocks, mutual funds and ETFs, and listed derivatives. These assets may be easier to tokenize, but the efficiency gains provided by the process are more limited.
The best candidate assets for tokenization may lie somewhere in the middle of the BIS continuum: markets that can benefit from slightly improved electronic record-keeping and smart contract functionality – a list that may include many types of fixed-income securities, such as government bonds and structured products.
However, as discussed further below, the greatest benefits may come from moving all assets onto a unified global platform.
Current and Future Tokenization
The first application of tokenization technology to find product-market fit (PMF) was stablecoins, which tokenized the simplest and most liquid asset in all assets – cash.
The total market value of stablecoins now stands at $158 billion, with Tether (USDT) and USDC leading the way (Chart 1). Stablecoins come in various forms, but both USDT and USDC can be considered fiat-backed stablecoins.
They operate similarly to other tokenized assets: traditional assets are held by off-chain custodians, and tokenization represents the ability to hold them in a blockchain wallet. This form of digital cash can then be used for payments, benefiting from the potential for almost instant settlement, lower costs, and/or the ability to interact with smart contracts.
Chart 1: Stablecoins have found product-market fit
Following stablecoins, the next widely adopted tokenized asset is gold (Chart 2). The total market value of the two largest projects, Tether Gold (XAUt) and PAX Gold (PAXG), is around $1 billion. While there are many ways to invest in gold, these products offer some blockchain functionalities, such as the ability to transfer risk outside of weekends or traditional market hours. This feature proved useful during recent geopolitical tensions in the Middle East, with both XAUt and PAXG experiencing significant increases in the week of April 13-14 when other markets were closed.
Chart 2: Timeline of selected tokenized projects
The latest wave of tokenization focuses on two very different markets: US treasuries and closely related assets, and credit products.
Tokenized US treasury products are designed as cash equivalents and can be seen as alternatives to stablecoins with returns. According to data provider RWA.xyz, all existing products currently offered have a weighted average maturity of less than two years.
In other words, these products are designed to provide returns and perform cash-like functions. When cash rates are close to zero, the opportunity cost of holding stablecoins is relatively low. But now, with US dollar rates close to 5%, investors have more incentive to seek alternative options that generate returns, which may drive the development of tokenized treasury products.
Currently, circulating tokenized treasury funds, led by Franklin Templeton’s US Government Money Fund (FOBXX) and BlackRock’s USD Institutional Digital Liquid Fund (BUIDL), have surpassed $1 billion in size (Chart 3). Many existing products have been launched on the Ethereum network and seem to be targeting crypto-native institutions such as cryptocurrency hedge funds and decentralized autonomous organizations (DAOs).
However, the largest fund, FOBXX, takes a different approach: it is launched on the Stellar blockchain and is open to retail investors through a mobile application. In summary, about 60% of theTokenized Government Bond Funds AUM on Ethereum, 30% on Stellar, and the rest on other blockchains.
Figure 3: Approximately 60% of tokenized government bond products are on Ethereum.
Companies have also introduced tokenized credit products. This is a diverse category, including direct loans to individual counterparties, structured credit product pools (such as ABS, CLO), and loans to intermediaries in specific industries (such as real estate financing, emerging markets). While these products may carry risks and complexities and are currently only designed for institutional investors, their goal is simple—to guide capital from lenders to borrowers through blockchain infrastructure. According to RWA.xyz, there is currently $612 million in active loans in this category, with an average yield of approximately 10% (Figure 4).
Figure 4: Tokenized credit products cover a diverse range of borrowers.
Tokenization technology has many other potential applications, but few have moved past the experimental stage. For example, RealT, a tokenized real estate platform, offers investors outside the United States a way to fractionalize property ownership; the protocol currently locks up a total value of $103 million. There is also hope that tokenized private equity can provide a channel for alternative investment industries to reach a broader range of investors, but whether these new distribution channels will make a significant contribution to the industry’s AUM remains to be seen.
Various fixed-income securities have been directly issued on the blockchain, with issuers including both public sector issuers (such as the European Investment Bank) and private sector issuers (such as Siemens). While attempts have been made to tokenize stocks in the past, we suspect that these projects will require clearer regulatory frameworks before further progress can be made.
If tokenization continues, it has the potential to drive a significant amount of blockchain activity and fee revenue, as the potential market size is enormous—with U.S. government bonds alone representing a $26 trillion market and total loans in the domestic non-financial sector amounting to $36 trillion. The current scale of tokenized assets on-chain represents only a negligible fraction of these totals. However, in order for these products to expand beyond today’s crypto-native institutions, they will need to more effectively connect with existing pools of capital. This may require establishing connections with broker or bank accounts or providing investors with compelling enough reasons to move their assets onto the chain.
Revolution won’t happen on private chains
A common misconception is that tokenization may not benefit crypto assets because the activity will take place on private permissioned blockchains rather than public permissionless blockchains like Ethereum. While banks have indeed attempted to use private blockchain infrastructures (such as JPMorgan’s Onyx, HSBC’s Orion, and Goldman Sachs’ DAP), this at least partially reflects current regulations that prevent depository institutions from interacting with public chains, and asset managers not subject to these restrictions have been operating on public chains or a mix of public and private chains.
In fact, almost all successful tokenization applications to date (such as stablecoins, tokenized government bonds, and tokenized credit products) have been deployed on public blockchain infrastructures.
The reason is simple: that’s where the users are.
We expect that moving certain assets onto blockchain infrastructures will bring efficiency improvements, but the bigger promise of tokenization lies in seamlessly connecting assets and investors (or borrowers and lenders) from all around the world and building richer experiences through interoperable applications.
Public blockchains have many other applications besides tokenization, which makes them natural centers for user assets and activities over time. Therefore, they are also likely to continue being the primary destinations for asset issuers and developers of open financial applications. We believe that private permissioned blockchains operated by companies or national governments are unlikely to provide a globally neutral platform trusted enough to custody world tokenized assets.
Trading, fees, and value capture
Blockchain transactions typically generate fees, which can flow directly to token holders (such as dividends) or indirectly through token supply reduction (such as buybacks), thereby adding value to blockchain-based tokens. However, the mechanisms by which this occurs will depend on the protocol type and token attributes (Figure 5).
Figure 5: Assets from various crypto industries that can potentially benefit from tokenization.
Some components of our smart contract platform crypto sector should see the most direct impact. L1 blockchains in this segment (and perhaps some components of their L2 ecosystems eventually) can serve as a universal global platform for tokenized assets. The native tokens of these protocols are typically used to pay transaction fees (“Gas”) and may receive staking rewards or benefit from token supply reduction.
There is fierce competition in the smart contract platform crypto sector, but the Ethereum ecosystem still dominates other blockchains in terms of users, assets (locked value), and decentralized applications. Additionally, we believe Ethereum can be considered highly decentralized and neutral to network participants, which may be a necessary condition for any global tokenized asset platform.
Therefore, we believe Ethereum is currently in the most favorable position among smart contract blockchains to benefit from the tokenization trend. Other smart contract platforms that could potentially benefit from the tokenization trend include Avalanche (a platform used by financial institutions for various proof-of-concept projects), Polygon, Stellar, and L1 blockchains designed specifically for tokenization, such as Mantra and Polymesh.
The next beneficiaries include the tokenization protocols themselves and platforms that facilitate the introduction of traditional assets into on-chain software applications (Figure 6). Many of these providers do not have governance tokens (such as Securitize, Superstate), but some do.
For example, Ondo Finance, which issues tokenized government bond products, and Centrifuge, a platform for tokenized credit products and part of the financial crypto sector, investors should consider the nature of governance rights they confer and whether they grant any protocol revenue before considering these tokens.
Figure 6: Returns of some tokenization protocols year-to-date.
Finally, as tokenization leads to increased blockchain activity, it may support many other components of the crypto ecosystem. For example, Chainlink hopes its Cross-Chain Interoperability Protocol (CCIP) can provide core infrastructure for message-passing data across blockchains (including private and public chains). Similarly, the Biconomy protocol offers certain technical processes that can help traditional financial institutions interact with blockchain technology (e.g., “paymaster” service, allowing users to pay gas fees with tokens other than native blockchain tokens).
Chainlink and Biconomy are both part of our utilities and services crypto sector.
Tokenization Vision
In summary, many digital commerce use cases are transitioning from closed platforms hosted by centralized intermediaries to open and decentralized platforms based on public blockchain infrastructures, and tokenization is just one of the many blockchain adoption trends.
However, given the scale and scope of global capital markets, it may be an important trend, and if public chains can facilitate the matching of borrowers and lenders (or asset issuers and investors) and decentralize existing fintech intermediaries, the increase in network activity should bring value to public chain tokens.
