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Is there enough onchain capital for tokenized assets?

Within the tokenization space, there exists a school of thought that any market can be recreated onchain but with better liquidity and lower cost of capital because of blockchain’s fast settlement and borderless distribution.

Real estate, auto financing, art, carbon credit etc. You name it. The list of potential onchain replications is endless with possibilities. As a result, I see startups sprung up with pitches that promise new financial paradigms.

However, why is there hardly any successful examples of entire value chain being recreated onchain?

Well it is probably because of difficulties associated with bootstrapping new markets. Data, processes, technologies and capital all have to be moved onchain in order for a vibrant onchain version of any vertical stack to exist. 

Of these factors, I want to focus particularly on the difficulties faced by new onchain markets when it comes to attracting capital. As they say, money makes the world go around.

Let’s dig into how much of this secret sauce is ready to flow into newly tokenized assets.

Background Context

First, let’s define what it means to put a market onchain? There are many ways to do this depending on legal and operational complexity. The simplest explanation involves building a smart contract that issues tokens to represent a particular offchain asset and then setting the conditions under which the tokens can be purchased and redeemed.

Take an example of real estate. Imagine a $100 million building gets put into a trust and that trust is tokenized where the minimum investment ticket is $10,000. The tokens representing the building can be created at a click of a button through the deployment of a smart contract and an offchain legal structure that links the tokens to the ownership shares of the trust holding the building. 

All of this is not rocket science. In fact it is rather trivial and commoditized. Just look at the number of tokenization projects. Since tokens are trivial and arbitrary to create, the most challenging part lies with the other side of that exchange.

There are over $600 trillion worth of real estate in the world and they can all be tokenized or put onchain in this way. How many $10,000 tickets are out there to fill the demand side of this exchange? Not enough.

Just because we can put something onchain, it doesn’t automatically guarantee magic new demand sources. The idea that increasing the number of distribution channels automatically leads to increased demand remains a logical and empirical fallacy. You can read more on this subject here.

Let’s separate the challenge into existing capital and new capital pools. 

The top 3 issues with attracting existing capital pools onchain include:

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