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In 2023, the market for tokenized business assets grew by between 16% and 23% in CAGR (compound annual growth rate).
Still, even the most optimistic valuations agree that tokenized assets currently account for less than 11% of crypto’s total valuation.
While some dub tokenization a failed technology, the macro trends for its adoption are finally gaining steam.
According to DeFi Llama and Fed’s research, the fraction of real-world assets in DeFi more than doubled over the last year.
The European Investment Bank now issues tokenized bonds while KKR has started to tokenize private equity fundraising.
As the regulatory environment is preparing for a merger between TradFi and blockchain, it is up to exchanges to build what no developers have been able to thus far trust.
Fractionalization and secondary markets
One of the original reasons for tokenized asset design was asset ownership fractionalization and the creation of secondary markets for highly illiquid assets like real estate, fine art and bonds with large face values.
The provision of additional liquidity and renewed attention from retail investors in search of portfolio diversification are long-recognized factors in the stock market, represented by the popularity of stock splits.
Overall, financial markets tend to evolve towards higher liquidity and diversification efficiency.
From overseeing and rebalancing individual stock-pick portfolios, retail investors and asset managers switched to investments in mutual funds and ETFs.
In 2022, the total volume of ETF trading in the US constituted 32.5% of the country’s equity market transactions.
Unsurprisingly, research shows that an increase in ETF ownership results in higher common liquidity measures for the underlying stock. Tokenization is the trend’s natural step forward.
With smart contracts, ownership of virtually any tokenized asset can be fractionalized and resold via shared pools.
Tokenization aligns with another trend in traditional finance the rise of secondary markets.
Sufficiently deep secondary markets prevent investors from worrying about liquidation costs or large bid-ask spreads and provide more accurate valuation metrics and cheaper costs of raising capital.
Meanwhile, illiquid assets gravitate towards secondary markets.
For example, secondary trading of private equity funds increased fivefold from 2012 to 2022, and however controversial the role of MBS in the Global…
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