Tokenization is the process of creating a digital representation (token) of an asset on a blockchain. These assets can range from real estate and art to data, identity, and financial instruments like treasuries or equities. A token signifies ownership and acts as a foundational element for various solutions.

In short, tokenization offers a streamlined, efficient method for digital asset representation, that reduces intermediaries, improves custody management and auditing. It simplifies global transactions and business operations, bringing several benefits to both the financial and real economies.

Benefits for the Financial Economy

• Enhanced Asset Management: Blockchain’s immutability ensures automatic auditing and reduces administrative burdens and costs.

• Increased Market Efficiency: Digital identity and investor accreditation in smart contracts streamline processes and eliminate middlemen.

• Broader Access to Capital: Tokenization lowers minimum investment requirements, enabling wider participation in private capital funds.

Benefits for the Real Economy

• New Business Opportunities: Tokenizing assets like crops allows for bartering and better asset control.

• Financial Inclusion: Platforms like Centrifuge provide SMEs with global access to capital, promoting economic growth.

Benefits for the Crypto Economy

• Stable Collateral and Yield: DeFi protocols benefit from less volatile collateral and yield sources, diversifying risk exposure. For instance, a relevant portion of the Maker DAO Revenues come from tokenized assets.

• Institutional Participation: The development of CBDCs can catalyze a fully tokenized market, attracting institutional investors and enhancing market reliability.

The tokenization market layers

In order to enable this evolution, developments in three different layers need to happen.

1. Tokenization Layer: Involves the creation of tokens by issuers on either public or private blockchains. This layer includes regulated entities and oracles, which provide necessary data for tokenization.

2. Interoperability Layer: Bridges different networks and protocols, facilitating asset migration and data exchange.

3. Application Layer: The most innovative layer, where applications are built on public blockchains. These applications initially focus on B2B interactions but will eventually cater to B2C, enhancing user experiences and efficiency.

Tokenization in numbers

The Real-World Asset (RWA) tokenization industry is in its infancy but already demonstrates a significant impact on both DeFi and traditional finance (TradFi). With 68.5k wallets on the ETH network holding RWA tokens (approximately 50% of the total market), most holders are accredited investors and protocols aiming to diversify and manage risk, explaining the 106% year-on-year growth rate.

The tokenized treasuries market, with a market cap of US$ 839 million, has grown by 94.6% YoY. Notably, BlackRock entered the space in March, tokenizing already over US$ 450 million in public treasuries. This growth is crucial, as US T-bills are considered one of the safest fixed-income investments. Tokenizing these assets enhances distribution, financial accessibility, and provides safer collateral for DeFi, a trend already adopted by protocols like MakerDAO, where 30.5% of revenues come from T-bills and RWA.

Collateralized lending is another key area. By March 8th, 2024, active RWA-backed loans reached US$ 640 million, benefiting sectors like Auto, Consumer Goods, and Fintech. The Global South, particularly Kenya, Nigeria, and the Philippines receive significant capital from these loans, totaling US$ 73.82 million, US$ 70.27 million, and US$ 53.28 million respectively. Leading players in this space include Centrifuge, Goldfinch, and Maple, with market shares of 54.4%, 16.7%, and 15.5% respectively.

Tokenization & RWA in Brazil

Brazil's tokenization landscape is rapidly evolving, with the Brazilian CBDC being designed to include the tokenization of public bonds. Local entrepreneurs are also exploring opportunities, especially in credit card receivables.

For instance, in 2019, the Brazilian Central Bank introduced “registradoras” (registers) to centralize and digitize credit card transactions, significantly improving the financial system's efficiency. This regulation allowed the ownership of credit card receivables to become transferable, enabling retailers to choose financial institutions for merchant cash advances. In 2023 alone, this method generated $407.3 billion in credit, representing 12% of Brazil's total private credit.

This created a perfect wave, with a digitalized asset that can be easily tokenized, taking advantage of blockchain capabilities. In this context, we believe that tokenizing these assets is the low-hanging fruit in the Brazilian market, and should experience a fast-paced adoption.

Final Thoughts

Tokenization is a trend set in motion that we believe will stick around. It can bring tangible benefits for both the real and digital economy, so many financial institutions are starting to implement it and ripe its benefits. Furthermore, with a tokenized economy, it will become possible to develop cheaper and more efficient financial products, and transactions will be ruled by smart contracts. In this environment, moving assets at the speed of the internet will become the norm.

There are still some challenges ahead, namely interoperability, standardization and most importantly regulation. However, these challenges no longer impose an existential threat to the market and will only define the pace of innovation.

If you like this content, you can find a deeper discussion about the state of DeFi on our TradFi to DeFi Paper, or if you are an entrepreneur with a Web3 / Fintech / Embedded Finance product, contact us, we are investing!

DISCLAIMER: This material is provided to you for informational purposes only. This is neither an offer to sell nor a solicitation of any offer to buy any securities in any fund managed by Iporanga Ventures (the “company”), nor is it an offer to provide investment advisory services. And the targeted performance contained herein is provided for illustrative purposes only and is not intended to serve as, and must not be relied upon by any person as, a guaranty, an assurance, a prediction of a definitive statement of fact, a probability or as investment advice.