Podcast Summary
Traditional finance assets being tokenized and brought on-chain: Robert Leshner aims to bring $300 trillion in traditional finance assets onto the blockchain, increasing accessibility, transparency, and efficiency.
Traditional financial assets, such as stocks, bonds, funds, and real estate, are increasingly being tokenized and issued on blockchains. Robert Leshner, the creator of Compound and now the founder of Super State, is leading the charge in bringing $300 trillion in traditional finance assets on chain over the next few years. This is a significant shift as it allows for greater accessibility, transparency, and efficiency in financial markets. The use of Linux and the modular execution layer provided by Cartesi enables the development of decentralized applications that can leverage the infrastructure and tooling of the Linux ecosystem. While the real world tokenization of assets is a slow process due to legal and regulatory considerations, the potential benefits are significant. The integration of traditional finance and decentralized finance (DeFi) is an exciting development that will likely transform the financial industry in the coming years.
Tokenization of Real-World Assets: A Necessity with Celo's Layer 2 Solutions: Celo's layer 2 solutions offer low gas fees and easy crypto payments for tokenizing real-world assets, but managing legal and tax obligations can be complex. TOKU provides practical tools for oversight and payroll tax compliance, and with infrastructure and regulatory clarity improving, asset tokenization is poised for success.
The tokenization of real-world assets, such as securities and T-bills, is becoming increasingly inevitable due to the advantages offered by blockchain technology. Companies like Celo are leading the way in this space, with their layer 2 solutions bringing benefits like low gas fees and easy crypto payments. However, managing the legal and tax obligations of token grants can be complex. TOKU provides practical tools to help with this, offering effective oversight and payroll tax compliance. The history of asset tokenization dates back to 2017 and 2018, when the security token market saw significant growth but ultimately failed to deliver on its promise. Robert Leshner, founder of Compound Finance and now a startup founder in the arena of tokenizing real-world assets, believes that the time is right for this technology to succeed now. He attributes the previous failure to a lack of infrastructure and regulatory clarity, but with advancements in both areas, he is optimistic about the future of asset tokenization. Crypto platforms like Kraken are also playing a crucial role in making crypto accessible and inclusive for everyone, providing a secure and simple trading experience. As the crypto space continues to evolve, it's clear that the tokenization of real-world assets will be a significant part of its future.
Bringing Off-chain Assets onto the Blockchain: The process of bringing off-chain assets onto the blockchain is gaining significance due to the advantages of on-chain assets, with the first successful implementation being stablecoins, and the field is now entering a new phase with infrastructure, investor demand, and support progressing.
The process of bringing off-chain assets, which are assets not originally recorded on a blockchain but on other types of ledgers, onto the blockchain has been a significant focus over the past six years. This is because on-chain assets offer greater functionality, transparency, and programmability. The idea of tokenizing these assets began to gain traction around 2017 with the rise of smart contracts on Ethereum. However, the first successful implementation of this concept was with stablecoins, which represent off-chain assets and their value on the blockchain. Stablecoins, such as USDC and Tether, have seen immense success due to their ability to be redeemed for the underlying asset and the openness and versatility of their digital format. Although there haven't been many breakthroughs in tokenizing other assets yet, we are now at the beginning of the next chapter in this field, as infrastructure, investor demand, and support for these assets continue to develop.
Understanding the Challenges of Tokenizing Real-World Assets: Dollars have easily transitioned to tokenized assets, but real-world assets like real estate and bonds face complexities due to separate versions of truth. Stablecoins show promise, but finding assets with significant demand and robust markets is the real challenge.
The ease with which dollars have transitioned into on-chain assets, or tokenized assets, sets the stage for understanding the challenges other assets face in doing the same. Dollars, both on-chain and in the real world, are highly fungible and liquid. However, as we move beyond dollars to less liquid and less fungible assets like real estate and bonds, the process becomes more complex due to the existence of two separate versions of truth. This is the hurdle that most real-world assets have not yet overcome. While stablecoins have shown that alternate liquidity can form beyond traditional markets, the real challenge lies in determining which assets have significant demand for tokenized versions and will therefore have robust markets. The key is finding the assets that fall between dollars and esoteric assets, and the infrastructure improvements, increased public acceptance, and custodial solutions in the crypto space are opening the door to this new frontier.
Tokenization's progress and challenges: While stablecoins have made strides in tokenization, the lack of tokenized versions of other currencies and regulatory hurdles remain obstacles. However, the speaker is hopeful about the future of tokenization and anticipates progress soon.
The tokenization movement in crypto is gaining significant momentum due to the influx of talent, energy, and resources being devoted to it. While progress has been made, particularly in stablecoins, the lack of tokenized versions of other currencies like euros or yen is puzzling. One potential reason is the success of stablecoin businesses like Tether, which make substantial profits through the spread between the dollar and the yield on Treasuries. However, this may not be a concern for emerging markets where inflation rates are much higher. Another factor hindering the widespread adoption of tokenization is the regulatory landscape and the lack of established service providers. Despite these challenges, the speaker is optimistic about the future of tokenization and expects to see significant progress soon.
US Dollar's dominance in stablecoins creates a significant competitive advantage: The US Dollar's large liquidity pool in stablecoins makes it hard for other currencies to compete, but new competitors could emerge by offering better products or incentives.
The dominance of the US Dollar in the digital currency space, specifically in the form of stablecoins like Tether, creates a significant competitive advantage due to its large liquidity pool. This liquidity advantage makes it difficult for other currencies, like the Euro or Yen, to make significant inroads in the market. The high margins enjoyed by stablecoin issuers, such as Tether, create an opportunity for new competitors to emerge by offering better products to consumers. However, the current large scale of Tether's operations and the associated high margins make it challenging to imagine how this could be achieved on a large scale without significant market pressure or regulatory intervention. Additionally, the potential for stablecoin issuers to distribute some of their profits to holders in the form of yield or other incentives could make their products more attractive and competitive in the market.
Tokenizing Treasury bills: Challenges in technology and regulation: Tokenizing Treasury bills involves complex technology and regulatory challenges due to their unique characteristics as securities with maturities and expirations.
The idea of tokenizing Treasury bills or other financial assets to provide holders with interest rates similar to those of stablecoins like Tether or USDC is an intriguing concept. However, it comes with significant challenges. From a technological standpoint, representing and managing the nuances of financial assets with maturities and expirations is complex, making on-chain operations complicated. Additionally, from a regulatory perspective, every country has different approaches to securities, and a tokenized asset that doesn't change in value, like a Treasury bill, is fundamentally different from a stablecoin or a currency. A security is defined as an investment issued by an issuer, like the U.S. Government or a corporation, directly to a purchaser, with the expectation that the purchaser will make or lose money. A Treasury bill, as a security, is subject to various regulations, making it challenging to tokenize and distribute as easily as stablecoins. The path to implementing such a system is complex, and it's essential to consider both the technological and regulatory challenges involved.
Stablecoins vs Securities: The Difference: Stablecoins, due to their stability and issuer-investor separation, are typically not considered securities. However, if they're backed by assets with fluctuating value, they could be classified as securities. Understanding securitization history can help clarify the distinction.
Stablecoins, like USDC and Tether, are generally not viewed as securities due to their lack of relationship between the issuer and investor, and their stability in value. This is because they function more like currencies than securities, and have markets for them just like traditional currencies and commodities. However, if a Stablecoin is backed by assets that go up and down in value, such as stocks, it is more likely to be considered a security. The regulatory domain for Stablecoins is relatively unencumbered compared to securities, which have more complex regulations due to information asymmetry between the issuer and the market. As we move into the world of yield-bearing assets and tokens, the distinction between currencies and securities becomes less clear-cut. It's important for the crypto industry to study the history of securitization and securities law to better understand the principles and challenges involved.
Tokenized treasuries: Current landscape and future possibilities: The tokenized treasury landscape shows less divergence compared to early stablecoin days, with Tether and USDC predominantly holding treasuries. Speakers discussed potential for Tether to distribute yield, but legality and feasibility are unclear. Continued exploration and experimentation are crucial for creating scalable and diverse financial instruments.
While there is room for various constructions and opinions in the yield-bearing tokenized treasury space, the current landscape shows less divergence in approaches compared to the early days of dollar-based stablecoins. Tether and USDC, for instance, are predominantly composed of treasuries, not just cash in a bank as it may seem. The speakers discussed the potential for Tether to distribute yield to its holders through staking mechanisms, but it's unclear if this is legally permissible or feasible. Looking back at the stablecoin market, there were multiple approaches to designing dollar-based stablecoins, such as collateralized and algorithmic models, which had varying degrees of success. Despite the current uniformity in tokenized financial products, the speakers agreed that there's a vast design space for innovation in this area. The conversation underscores the importance of continued exploration and experimentation in the tokenized treasury space to create more scalable and diverse financial instruments.
Navigating the complexities of stablecoins and tokenized securities: Stablecoins and tokenized securities offer crypto benefits like interactivity and programmability, but require navigating complexities of securities regulation, leading to bank-like structures and treasury backings.
The world of stablecoins and tokenized securities is more complex than it seems at first glance. Mechanically, it may appear simple, but the transformation of these assets can lead to more bank-like structures and the use of treasuries for backing instead of cash in bank accounts. For instance, Coinbase's USDC rewards program and the tokenization of government securities funds like Superstate's are examples of this complexity. The goal is to provide the benefits of crypto, such as interactivity with DeFi protocols and programmability, while also navigating the complexities of securities regulation. These developments represent a sandbox phase for testing technology and processes, with the ultimate goal of making tokenized securities accessible to a wider audience.
Tokenizing traditional assets on the blockchain: Super State aims to tokenize various assets, enabling investors to hold all their assets, including bonds, stocks, and non-native tokens, in one place on the blockchain, increasing utility and eliminating the need for traditional brokerage accounts or TradFi systems.
Super State is focusing on creating tokenized products, starting with a short-term treasury fund, to make traditionally non-digital assets useful on the blockchain through smart contracts. This strategy builds on the success of stablecoins, which have shown that putting assets on-chain increases their utility. Super State aims to tokenize various assets, taking a volume play with smaller margins, as opposed to monolithic approaches like Tether and USDC with high margins. The ultimate goal is to enable investors to hold all their assets, including bonds, stocks, and even non-native tokens, in one place on the blockchain, eliminating the need for traditional brokerage accounts or TradFi systems. Over time, the usability of these tokens is expected to increase, allowing for expansion into additional asset classes.
Building the future of decentralized finance: Mantle and Arbitrum are leading the way in Ethereum layer 2 solutions, reducing gas fees and providing stable foundations for decentralized projects. Uniswap introduces new features to make token swaps more efficient and effective, accelerating the adoption of decentralized finance.
The future of finance is moving towards decentralized, on-chain systems, and projects like Mantle and Arbitrum are leading the way in building the infrastructure for this new ecosystem. Mantle, a DAO-led web 3 ecosystem, is using a high-performance Ethereum layer 2 solution to reduce gas fees and provide a stable foundation for its growing ecosystem of projects. Arbitrum, another Ethereum scaling solution, is also seeing rapid growth with over 100 projects deployed and a flourishing DeFi and NFT ecosystem. Both projects offer faster transaction speeds and lower gas fees, making it easier for developers and users to build and use decentralized applications. Additionally, Uniswap, a leading DeFi protocol, is expanding its offerings with a new sidebar extension, limit orders, and data insights pages, making it easier for users to swap tokens more efficiently and effectively. These new features allow users to make informed decisions and execute trades without the need for gas fees or obstructive pop-up wallet extensions. Overall, these projects are accelerating the adoption of decentralized finance and building the infrastructure for a more accessible, efficient, and user-friendly financial system.
Navigating legal and regulatory hurdles for tokenized financial products: The current reality is that legal and regulatory challenges limit access to tokenized financial products to qualified purchasers, but the hope is for future technology improvements and regulatory approvals to democratize these products.
While the technology for creating tokenized financial products exists, the legal and regulatory hurdles are significant and currently limit access to these products to qualified purchasers. For example, SuperStay's short duration US government securities fund, which offers a yield of 5.36%, is an ERC-20 token that can only be purchased manually by reaching out to the company. The fund is gated, meaning it's not transferable and can't be used in typical crypto native ways. The hope is that in the future, with technology improvements and regulatory approvals, these tokenized products can be democratized and purchased in a crypto native way by anyone. However, the current reality is that the process of navigating the legal and regulatory world is the biggest challenge, and it's a slow process. Traditional financial products, such as money market mutual funds and short-term yield bearing ETFs, can be bought without being a qualified purchaser and have already gone through the securities registration process. The path for tokens to go through this process is much murkier and less understood, making it a significant barrier to entry.
Exploring Tokenized Financial Products with Blockchain Technology: Traditional finance companies face regulatory challenges in adopting tokenized financial products due to increased disclosure requirements and scrutiny. However, there are encouraging signs of receptive regulators in markets outside the US, and the long-term goal is to build high-quality, blockchain-based financial products for the US market.
The introduction of blockchain technology in financial products, even for traditional finance companies, complicates the registration process due to increased disclosure requirements and regulatory scrutiny. Traditional finance companies have started to explore tokenized products, but they are still largely traditional investments with limited token usability or functionality. The regulatory environment, particularly in the US, is a significant barrier to wider adoption of tokenized financial products. However, there are encouraging signs of receptive regulators in markets outside the US. The long-term goal is to build high-quality, blockchain-based financial products for the US market, despite the current regulatory challenges. Looking ahead, individual financial assets like stocks and bonds could be originally issued on a blockchain, but this is still a few decades into the future.
The Future of Stock and Bond Issuance: Tokenization on Blockchains: In the next 30 years, corporations may issue stocks and bonds as tokens on blockchains for a more efficient record-keeping system, with individual stocks, bonds, funds, and commodities expected to be tokenized.
The future of corporations issuing stocks and bonds may involve natively issuing them as tokens on blockchains. This concept, while not yet fully realized due to regulatory uncertainties, is expected to become a reality within the next 30 years. Blockchains offer a more efficient record-keeping system compared to current back office systems, making it a logical choice for issuing equities. Individual stocks and bonds, funds, and even commodities are all expected to be tokenized and issued on blockchains. Companies like Super State aim to offer funds beyond just T-bill funds on the blockchain. The transition to on-chain issuance and management of assets may seem daunting to some, but those familiar with blockchain technology see it as a superior file format that will eventually replace outdated systems like spreadsheets, contracts, and paper. Robert, a pioneer in DeFi and founding father of Compound, embodies this transition from the technological frontier of Silicon Valley to the financial hub of New York City, serving as an ambassador for this transformative shift in the financial industry.
Bridging the Gap Between TradFi and DeFi: Robert Leshner, a key figure in DeFi, is optimistic about bridging the gap between TradFi and DeFi, with major TradFi players expressing interest and skeptics gradually becoming believers.
Robert Leshner, an influential figure in the DeFi space, sees himself as a bridge between traditional finance (TradFi) and decentralized finance (DeFi). He believes that while technological challenges are being addressed, the real hurdle is getting TradFi to fully understand and accept DeFi. However, there's been progress, with major TradFi players like BlackRock and Franklin Templeton expressing interest. Leshner, who's now advocating for DeFi in TradFi circles, thinks the skeptics are gradually becoming believers. He's optimistic about the future, believing that blockchain technology offers advantages over the traditional system and can be applied to global financial markets. Despite the challenges, Leshner is confident that they're on the right side of history. Looking ahead, he predicts that a significant amount of new value will come on-chain by the end of this decade, although he's been cautious with his macro predictions in the past.
Predicted $5 trillion mass migration of assets to blockchain by 2027: Speakers predict significant growth in crypto market, potential $5 trillion asset migration, importance of tokenizing real-world assets, and reminder of crypto's risks and opportunities
Prediction of a significant mass migration of assets onto the blockchain within the next six years. The speakers estimate that this could potentially involve up to 5 trillion dollars' worth of assets, in addition to the existing crypto assets which are expected to reach 5-10 trillion dollars by that time. Robert, a guest on the podcast, shared his past experience of being cautious about overestimating societal change and emphasized the difficulty of changing behavior. Despite the current market cap of 2 trillion dollars not reaching 5 trillion by that time, the speakers remain optimistic about the potential growth of the crypto market. They also highlighted the importance of projects like the one Robert is involved in, which aims to tokenize treasuries and real-world assets, as part of this migration. The speakers also reminded listeners that while crypto is risky and involves potential losses, it represents the frontier of new opportunities and innovation.
