Digital asset investment strategies by Keyrock

The world of market makers is one of great importance but is often overseen. We caught up with a close partner of ours, Keyrock, who have been very involved in the digital asset market making space over the last six years, to understand how they think about tokenization and the future of digital assets. In the blog below, Keyrock outlines their excitement as tokenized assets are picking up steam.

TL;DR:

• The growth in real-world asset tokenization is making new strategies possible for market makers
• Tokenized treasuries are a prime example, as they’ve quickly turned into a $600 million market
• Private credit is a new direction that’s proven effective through the tokenization of receivables pools

Tokenization use cases are booming in DeFi, presenting a boon for crypto market makers and a promising bridge to the traditional finance realm. Bernstein estimates that over 2% of the global money supply, a $3 trillion market, might be tokenized for enhanced liquidity and efficiencies over the next five years. These assets exist in native form outside the blockchain but are converted into digital tokens via this tokenization process. As more of these assets, by some termed Real World Assets (RWAs) in DeFi parlance, come on-chain, crypto market makers are developing new strategies and leveraging this opportunity to its fullest potential.

This exciting movement is not just limited to direct blockchain participants, as both TradFi and DeFi stand to benefit equally from this trend. Tokenization of traditional assets such as stocks, loans, or real estate can significantly improve the liquidity profile of these investments and reduce transaction costs compared to legacy financial models. This heightened liquidity is a marked improvement for the traditional finance investor and increases investment suitability for a broader capital provider base. In the DeFi space, low-risk tokenized assets such as T-Bills present a stable, known collateral source for lending and borrowing protocols. These platforms previously overemphasized the capital-inefficient lending process against overcollateralized buckets of digital assets such as Ethereum. Now, all else being equal, DeFi investors and crypto market markets have the opportunity to collateralize loans with low-risk government bonds at a lower LTV, thus generating higher investment returns — an actual win-win scenario for both sides of the tokenization table.

Tokenization has already unlocked a broad array of revolutionary use cases, even in its early growth stages. The space is just emerging, from tokenized art to watches to government debt to private credit. We’ll explore two of the strategies we find most exciting below.

Tokenized Treasuries

Tokenized U.S. Treasuries are having their moment in DeFi. This asset class quickly shot up to a $600 million market in just over a year as DeFi-native yields dwindled and the Federal Reserve increased interest rates to combat inflation. Platforms such as Ondo Finance quickly emerged to capitalize on this opportunity, buying Treasuries in the traditional finance space and then bringing their digital representations to the blockchain for a broad array of investors. Today, even a number of funds offer investors different ways to participate in this fast-growing market.

For the crypto market maker, this represents an accessible, potentially lower-risk yield source that can be used across DeFi to gain increased leverage and generate alpha. It is an exciting market and use case that is only just beginning.

Private Credit

Increased access to investments is a critical aspect of tokenization. Traditional private credit yields have been historically harder to access for many investors, especially if cross-border. Still, blockchain and the rise of tokenization have unlocked this new asset class to a broader array of capital providers. Through traditional securitization structures with digital representations and blockchain fractionalization, protocols like Credix are generating more capital for borrowers while providing yield and diversification for investors. All while expanding the use cases of this new blockchain technology.

One such example is the Receivables Factoring Pool recently announced by Credix. This vehicle offers an investment in tokenized invoice receivables with 45-day repayment cycles, insurance coverage, and a double-digit yield. For the crypto market maker, this attractive yield source meets much liquidity and downside protection thresholds making it a sought-after product. Capital moves through the Credix portal solely in USDC for this pool, making all transactions auditable, traceable, and fully transparent, increasing investor comfort.

Crypto Market Makers and Real Word Assets Tokenization

Sufficient liquidity is crucial for real-world assets thriving on decentralized exchanges (DEXs). As sophisticated financial entities in both traditional and decentralized finance, crypto market makers bridge these worlds by ensuring liquidity, easing asset and value transfer. Not only do they help discover the accurate price of assets and avoid slippage, but in a DeFi context, they also help match the value of real-world assets with their digital counterparts.

As a result, integrating market makers facilitates the development of increasingly complex financial products in DeFi, including tokenized treasuries. Because these products accurately represent real-world assets, they necessitate the ongoing participation of market makers to enable efficient trading, which is a critical factor in attracting traditional investors.

Successfully achieving this transition of tokenized assets requires stimulating greater adoption of blockchain and DeFi technologies, further integrating real-world assets into the decentralized space.

Finally, we must remember that such financial products require a rigorous risk management framework, which market makers are well-suited to meet. Market makers also play a role in maintaining regulatory compliance and risk management in the context of real-world assets.

By actively monitoring and participating in these markets, crypto market makers contribute to the overall stability and integrity of the system, a role Keyrock is successfully leading as a global liquidity and service provider.

Tokenization in 2023 and Beyond

These promising trends will continue to grow on the back of stablecoin technology, increasing regulatory clarity around them, and heightened investment in the blockchain sector. The flywheel will grow as more practical uses emerge, more investors join the space, and more capital flows on-chain. The tokenization of legacy financial instruments is the first step towards a mutually beneficial relationship between the world of brick-and-mortar finance and its dynamic digital counterparts.

Stay in the loop to learn more about Keyrock’s take on the latest trends in tokenizing real-world assets by following us on Twitter, LinkedIn, or Lens. You can also contact us today if you’re interested in market-making services.

To get more information on this subject, the Co-founder of Keyrock, Juan David Mendieta, and Chaim Finizola, Co-founder & CGO of Credix explored the evolution of digital assets and Keyrock’s evolving role as a digital asset market maker on a joint Webinar on August 16th. You can rewatch it here!

The information contained herein is provided as an informational overview only. Credix is not responsible for the accuracy or verification of the information herein. The information provided may change. Credix will update material information only as it becomes aware of the need to update such information. This information is not investment advice, and should not be relied upon in considering an investment. This does not constitute an offer to sell or a solicitation of interest to purchase any securities or investment advisory services in any country or jurisdiction in which such offer or solicitation is not permitted by law.