The evolution of crypto financial products: asset tokenization may be a key step

In each round of bull market, the rise in coin prices is only a result, which actually represents the substantial development of the blockchain industry. If the formation of the last round of bull market was mainly due to the wealth-creating effect brought by the exchange, then after 2019, the financial innovations brought by the exchange are an important driving force for the market to move from recovery to prosperity.

IEO, platform coins, futures, options, ETFs, DeFi liquidity mining and other crypto-financial products have brought new liquidity to the market, but most of these innovations still have the shadow of traditional financial products, and have not transcended the boundaries of the crypto world. They still solve the liquidity and incentive problems within cryptocurrencies. As blockchain technology is further recognized and applied, crypto-financial innovations may break through this boundary and connect more and more real-world assets, which will not only expand the tradable assets in the crypto world, but also improve the liquidity of real assets.

Asset tokenization is one of the main ways for crypto finance to connect with real assets. Now, which assets have been tokenized? What is the future development potential of these tokenized assets? Which platforms have already seized the opportunity? This article will review and look forward to the process of asset tokenization with these questions.

Crypto-finance links real assets: asset tokenization is the key

In the past, the development and innovation of crypto financial products were mainly based on traditional financial products. Through imitation and improvement, exchanges have brought a variety of gameplays such as new listings, futures, options, ETFs, etc. to users in the crypto world. Although these products have not yet "gone viral", they have greatly improved the liquidity of the crypto market and expanded the market size, laying a good foundation for the next step of development. Data shows that in the past year, the trading volume of BTC futures alone has surged from about US$37 billion to about US$369 billion, an increase of 987.30%, and the position has increased from about US$3 billion to about US$20 billion, an increase of 566.67%.

However, the liquidity growth brought by any product may face the problem of diminishing marginal growth. In this context, continuous innovation is particularly important. So, where will the next innovation of the exchange be?

The recent explosion of NFTs may provide new ideas for the innovation of crypto financial products. Since the beginning of this year, the combination of NFTs and crypto art has attracted a lot of attention, and the highest auction price of $69.34 million has made investors see the huge potential of NFTs. The slogan "Everything can be NFT" is not just a fantasy, but also reflects the core of the industry development, that is, connecting the crypto world and the real world through asset tokenization.

Simply put, asset tokenization is to map real assets to the blockchain and generate a token (mainly tokens here), which represents the ownership of real assets and can circulate freely in the blockchain network. If more and more real assets enter the crypto world through tokenization, the scale of tradable assets in the crypto world will be greatly expanded, and the liquidity of real assets will also be greatly improved. By then, blockchain will become the underlying network of daily life. It is no exaggeration to say that asset tokenization will be the core imagination of the next stage of crypto finance development.

Early trials of asset tokenization: Equity tokens have been listed on multiple exchanges

Although many assets have been tokenized, equity tokens are the most noteworthy in terms of liquidity and application potential. As the name suggests, equity tokens are the tokenization of shareholder rights. Since stocks are certificates of shareholder rights, equity tokens can also be simply understood as tokens corresponding to stocks.

After Coinbase went public, equity tokens once again became the focus of market attention. This is because many investors, especially domestic investors, found that they could not freely share the dividends of Coinbase's listing due to the influence of geopolitics. This is actually the reason why equity tokens are necessary.

In the traditional financial market, due to my country's financial management policies, domestic investors will face many problems in opening accounts and depositing and withdrawing funds when investing in US stocks. In addition, during the trading process, investors may also face the obstacle of US stock trading rules, such as investor protection rules that restrict T+0 transactions for small and medium-sized investors, and tax requirements such as capital gains tax, dividend tax, and personal income tax. These rules are quite different from A-shares, which objectively increases the difficulty for domestic investors to invest in US stocks.

In order to solve these pain points, FTX launched an equity token product as early as the end of October 2020. FTX's equity token is a product launched in cooperation with CM-Equity, a German compliant securities service provider. Users can trade equity tokens on FTX after passing CM-Equity's KYC review. These tokens can be redeemed for the underlying stocks through CM-Equity, and may also be able to be transferred directly from FTX in the future. Compared with direct trading of US stocks, FTX's equity tokens have some obvious advantages, such as 7*24 hours of trading at any time, allowing small and medium-sized investors to purchase tokens in units less than 1 share, full dividend distribution, support for cryptocurrency trading, etc.

At present, FTX has launched equity tokens of 46 underlying stocks, including Coinbase, Tesla, Apple, Amazon, Bali Baba, Twitter, ZOOM, Google, MicroStrategy, Netflix, PayPal, Robinhood and other high-quality assets. A total of 48 trading pairs have been opened for these assets, with USD anchored to a basket of US dollar stablecoins as the main trading asset. Among them, Tesla has taken the lead in launching cryptocurrency trading pairs with BTC and DOGE.

Although the equity token market is still relatively small, with a single market daily trading volume of around $1 million, this new track has attracted the attention of other exchanges. On April 12, Binance announced the launch of an equity token product, also based on cooperation with CM-Equity. Currently, only two underlying stocks, Coinbase and Tesla, are listed. In the future, more exchanges are expected to participate in the equity token market.

After asset tokenization: derivatives will become an important incremental product

Asset tokens are only the first step in linking the crypto world to the real world. To make this link meaningful, it is more important to improve the liquidity of asset tokens after tokenization. At present, asset token products are still relatively simple. Taking equity tokens as an example, spot is the main trading product. Referring to the product development logic of the crypto world, derivatives will definitely become the next growth point.

FTX saw this opportunity before Binance and has launched quarterly futures on equity tokens, covering 44 underlying stocks, including Tesla June 2021 contract, Amazon June 2021 contract, Apple June 2021 contract, Alibaba June 2021 contract, Grayscale Ethereum Trust June 2021 contract, etc. FTX's innovation is also reflected in Pre IPO products. Before Coinbase was officially listed, FTX launched Pre IPO equity tokens, which provided investors with a new arbitrage window.

In the future, stock derivatives in the traditional financial market, such as convertible bonds, stock pledges, stock indexes, option contracts, etc., may extend deeper into the crypto world. When trading assets are rich enough, it will also be possible to combine derivatives. As an exchange focusing on derivatives trading, FTX has more advantages in the "Lego combination" of derivatives.

The successful launch of equity tokens and their derivatives also indicates the potential for more real-world assets to be tokenized. Connecting real-world assets such as commodities, real estate, and bonds to the crypto world is the key to ultimately realizing the vision of serving the world's unbanked population. Recently, Maker DAO has issued its first real-world asset loan, and there are currently six multi-asset initiators in the Maker DAO governance process. The assets provided by these initiators may include invoices, real estate, music royalties, etc. It can be seen that whether it is CeFi or DeFi, asset tokenization has become the next focus.