2023 has been a “huge year” for tokenization in decentralized finance, says Ben Forman.
The managing partner of ParaFi Capital says he is surprised that most of the tokenization activity arrived “post-FTX,” when institutional interest “seemed to wane in the space.”
Speaking to Blockworks on the Empire podcast (Spotify/Apple), Forman says that institutional entities like JPMorgan, Invesco and KKR are now providing a consistent answer to the question, “What are you most excited about in the blockchain space?”
“Eight or nine times out of ten you will hear: ‘tokenization of real-world assets.’”
According to Forman, there are currently 150 to 200 different teams building in the real-world asset (RWA) category, “with probably 500 to 1,000 different pilots behind that” that will launch in the “next few years.”
Read more: What are real assets? DeFi’s Latest Yield
Forman says he sees growing interest in the tokenization of traditional assets in the form of “tokenized gold, tokenized treasuries, tokenized LP stakes and funds.”
But another “fascinating category” that has developed, he says, is the tokenization of non-financial assets. The California DMV, he says as an example, represented 14 million car titles. He then mentions the symbolization of university diplomas, identity data and concert tickets as further examples.
These are assets that retain value, he says, but don’t have the same kind of established capital market infrastructure as bonds, stocks, currencies and commodities.
“Many of these assets will simply bypass the existing financial market infrastructure at the banks and move directly up the chain,” he says.
“I wouldn’t be surprised if in two to three years,” he says, “when people evaluate layers and applications, the most important metric will be: [total value locked] of real possessions.”
Do everything on-chain
Forman says he sees “a lot of private credit funds” exploring blockchain for its efficiency benefits in securitization, sending interest payments and disintermediating fund managers.
“They do pretty much what they normally do,” he says, “but sit on top of a blockchain for efficiency.”
Investor Santiago Santos notes a major benefit of moving RWAs up the chain: “You could price these things more efficiently and you can measure the risks in real time.”
Read more: Real World Assets in DeFi: Buzzwords or the Real Deal?
“The key to opening up here,” says Santos, “is that there is more transparency.”
“It is a 24/7 market. There’s more capital flowing in and out of these things. The price should better reflect the risk.”
“That opens up a whole range of tools if you do everything on-chain.”
Forman says that while government bonds are the “next logical step down the chain,” he is more excited about the “longer tail” potential of less conventional asset classes.
“You have creators on YouTube who get paid every month,” he says as an example.
“There’s a company that’s effectively going to the makers and saying, ‘Hey, we’re buying 49%, or a percentage, of these future cash flows, which are modelable and predictable… you can take a lump sum upfront and then we’ll on a pro rata basis in the future.”
Forman suggests that asset classes that don’t exist in traditional capital markets could be the most interesting in the chain, “because you can get transparency around payments… [making] this is effectively a securitization.”
“All monthly cash flows can be distributed through the chain.”