Ethereum: The Tollbooth of Tokenisation?

In the future, I believe virtually every asset will be tokenised. That means stocks, bonds, titles of ownership, music rights — everything of value — will have their ownership rights secured by a blockchain. This is simply because tokenisation on the blockchain offers significant efficiency and liquidity benefits.

You have probably heard of Web3. Some people call the adoption of Crypto ‘Web3’ simply because it explains the prospect of a newer and better version of the internet. The hope is that decentralised blockchain technology will evolve into the third generation of the internet by combining the power of blockchain applications (like Bitcoin, Ethereum, and many others), artificial intelligence, and cutting-edge computer technology into a better system than we currently have today for sending not just data but also for sending value. All with the click of a mouse and without needing a third party to manage the transaction.

We’ll be able to do things like lend or borrow money, transfer real estate, and even auction fractions of the value of famous paintings… and it will affect nearly all of the $844 trillion in assets worldwide.

To be clear: these transactions will still be secured, verified, and tracked. But instead of passing through a bank or lender, nearly every transaction that flows on Web 3 will go through a tamper-proof blockchain application.

As we all probably know first-hand, financial services companies are the ultimate middlemen. They borrow money cheaply from one party and lend it to another for a handsome profit. Or they buy stock from one group of investors, with a view to selling it on at a higher price to another. All the while, they catch a middleman spread (the difference between the buy and sell prices).

Given the size of the financial markets, this is a very attractive, sizable, and lucrative business. According to estimates, the financial services sector extracts over $9 trillion annually from the global economy. That’s more money than the utilities, communication services, and real estate sectors combined.

This is the opportunity for DeFi: blockchain technology allows for the replacement of high-cost middlemen with not only a lower cost but a more transparent and secure solution.

But high-priced middlemen aren’t just the preserve of banking. Take the real estate sector, for example: a typical real estate transaction involves agents, brokers, lawyers, and insurers. But large blockchain networks like Ethereum now have the capability to replace each of those middlemen with “smart contracts.”

Source: CB Insights

As the graphic above illustrates, a smart contract will automatically execute the deal if it meets all the sale’s conditions — at a fraction of the cost of a traditional real estate transaction.

How NFTs Fit into the Picture

The benefits of tokenising high-priced art to make it more accessible and liquid are clear enough. The key to tokenising these assets is actually NFT technology (non-fungible tokens). But before you roll your eyes when you think of the multimillion-pound monkey pictures sold as NFTs, you need to understand that there’s far more to NFT technology than the creation of digital artwork collections like “CryptoPunks’’ or “Bored Apes.”

What I think many people don’t understand is that using NFT technology to secure ownership rights to digital art was only the first use case — similar to how the first widespread use case for the internet was email. And like we use the internet for much more than sending emails today, the same will hold true for NFT technology in the future. That’s because you can tokenise and trade nearly any asset class on a large network like Ethereum using NFT technology and smart contracts.

Ethereum Dominates Tokenisation

In my last article I highlighted how tokenisation of assets is already happening and has massive growth potential as a real-world use case of Crypto networks. So let’s look at which blockchains are already being used for tokenisation.

A cursory glance at the table below shows that the vast majority of tokenisation is currently happening on the largest smart contract enabled blockchain network: Ethereum. To be clear, every time a smart contract executes on Ethereum, the parties will pay a small fee in its native token, which obviously accrues value to Ethereum’s native token ETH.

Ownership Share of the Network

Owning the native crypto of any network means that investors share in the value creation arising from the growth in usage of that network. I believe what is attractive from an investor perspective is that large established networks like Ethereum will effectively act as “digital tollbooths”, whereby a fee is earned and therefore profits are generated every time a token changes hands (for whatever reason or application). I believe Ethereum will facilitate much of the transition from a largely “centralised middleman” economy to a more “decentralised service” economy.

In terms of tokenisation in particular, given the size and dominance of Ethereum as a network, I believe it is very likely that its network will continue to enjoy the lion’s share of the fees generated in this transformation. What’s more, usage of the Ethereum network will also continue to grow given DeFi is making banking, borrowing, lending, and investing cheaper and more accessible for billions of people. So by simply holding ETH, the average investor has a pretty good chance of benefiting from the network’s fast-growing tollbooth style fees.

I would even go as far as to say that Ethereum may eventually be the World’s most important global trade network. It is already at the heart of nearly every Web 3 transaction.

The “Tollbooth” of Tokenisation

If you’re not new to crypto, hearing “Ethereum” is like hearing Marks & Spencer or Walmart. Along with Bitcoin, it’s the “boring” blue-chip of the Crypto world. But you may note that the potential I am talking about is not boring at all in investment terms.

Ethereum is the world’s most widely used blockchain development platform and it hosts over 37,000 decentralised applications (called “dApps”) — the most of any blockchain. That’s a tenfold rise in applications since early 2020. On top of that, nearly 4,000 active developers are working on the Ethereum network — that’s a 74% jump in two years.

But Ethereum isn’t just an ecosystem for dApps. It’s also at the heart of decentralized finance (DeFi) and dominates the NFT space. As the digital tollbooth at the centre of Web 3.0, I believe it’s poised for incredible growth from current prices as network activity continues to rise. Earlier, the chart I shared showed estimates that the combined value of all global assets is about $844 trillion.

If just 1% of the World’s assets become tokenised on the Ethereum blockchain in the coming years, it would generate roughly $22.8 billion in network fees annually. If we put that on a multiple similar to a high-growth tech company like Amazon or T-Mobile, that puts Ethereum at roughly $20,505 per token. That’s more than a 10x increase from today’s price. And this is clearly a very small fraction of Ethereum’s potential share of asset tokenisation. What’s more, there are several other value cases for ETH tokens so prospects certainly remain pretty bright for this “boring” Crypto!

PTLIB is CIO of Dragonfly Asset Management.

DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.