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What are the next scale-up use cases for digital assets?

I recently wrote a post about the 3 proven product market fit areas when it comes to digital asset adoption. One of them is tokenization. Another one is trading. And the last but not least is payment.

While the trading business is essentially a commission business dependent on the overall crypto market activity, tokenization and payment are independent from the overall crypto market and have much bigger potential to become foundational building blocks in our financial markets and everyday commerce.

Since we are in the business of covering and analysing adoption trends, let's look into that potential via scale-up use cases of both tokenization and payment that are seeing significant traction in the institutional space.

Let’s dive in.

Tokenization: from niche assets to foundation building blocks

Back in 2020, tokenization started off as a way to bring financing to small businesses across the globe using crypto payment rail. Most of these businesses have less than $5 million annual revenue. 

Given the brand new nature of the asset class, the first use case was tokenizing small and exotic private credit. They were used as diversification plays for big crypto project’s multi-billion reserve asset portfolio. An ill-fitting combination of asset class and capital allocation. Nevertheless, an imperfect but workable legal and operational process was discovered and established.

However, it was very difficult to scale these small niche credit products. There was no natural capital source onchain for these assets and the alternative option was liquid 5% US Treasuries. While the market for these assets faced a difficult climb, the legal structure and distribution logic made sense for onchain capital.

There was a need for a liquid and attractive risk-adjusted tokenized product. 

By 2023, onchain capital was tired of defaults and inadequate risk-adjusted return found in tokenized private credit. So when an access to the traditional fixed-income market through the tokenization of US TBills was introduced, a floodgate was opened. 

Bear in mind, all of these developments described so far happened in the insular crypto world as opposed to the traditional finance world via institutions’ digital asset arms. 

By 2024, tokenization had evolved from niche EM SME credit to mainstream US MMF and TBills; it is now the hottest headline news item. Big traditional names such as BlackRock and Franklin Templeton are anchor players in this market.

What’s the point of this overview of tokenization’s history?

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