Tokenized Assets Are Coming, But Are We Ready?
The proliferation of cryptocurrencies over the past few years has been dramatic. CoinMarketCap now lists over 2,000 coins and tokens that can be publicly traded, with thousands of exchanges worldwide that have launched to facilitate that trading. However, these cryptocurrencies are just the beginning, as the trend toward tokenizing assets represents the possibility that millions of additional tokens will soon join the party. But how and where will these new tokens be bought and sold, and are they ready for that kind of scale?
Tokenizing assets is still in its infancy, with most of the current work focused on real estate (Slice, velox.RE) or unique collectibles, also known as non-fungible tokens or NFTs (think CryptoKitties). As asset owners get wiser to the opportunity that tokenization provides to increase the value of their investment, we will see more and more assets get tokenized. Why would asset owners want to do this?
Let’s use a simple example of a one-of-a-kind piece of art. A few years ago, Edvard Munch’s The Scream was sold by a Norwegian shipping magnate at auction for $119.9M. There are not that many people who have that kind of money lying around to buy a painting, even one as famous as The Scream. However, imagine that there were 10,000 Munch aficionados around the world who were willing to pay $20k to be a part-owner of The Scream. If that Norwegian shipping magnate who owned the painting was able to sell fractional ownership of the painting, he could have sold the painting for $200M — significantly more than the actual purchase price by one buyer. Tokenization allows that to happen, so that each token represents part ownership of the painting, verified and immutable on the blockchain. Now imagine that option for any building, song, collectible, trademark, or any asset, and you can begin to see a future in which millions of assets are tokenized.
In this tokenized world, marketplace fundamentals do not just disappear. Asset owners will still need to attract investors and liquidity. Prospective investors will still need to search through and evaluate asset investment opportunities. Marketplace creators will still need to hone the user experience and differentiate to find and maintain an audience. And incentives will have to be created and tested to drive transactions and provide asset owners with ongoing reasons to tokenize.
So who might step in to bridge between the current crypto world and this tokenized future?
Centralized Exchanges: Existing centralized exchanges like Binance, Huobi, and Bitfinex could add tokenized assets to their platforms. These exchanges have existing liquidity pools, which are attractive to tokenized asset owners, and have an online marketplace/mobile app experience that could handle additional token listings. However, centralized exchanges are not really incentivized to list huge numbers of tokenized assets, because:
- Many of the tokens will be thinly traded, so the revenue potential in a transaction fee model may not be huge and market makers who thrive off volume will not be as attracted to the asset class.
- It would be hard for the exchange to vet each tokenized asset, which creates risk
- Too many listed tokens can create confusion among investors, potentially driving away liquidity
- Price discovery — the bread and butter of most centralized exchanges — is not as necessary for tokenized assets as for other crypto trades.
Ecommerce Vendors: Ecommerce is defined by massive product selection, which seems to align well with a future in which millions of tokenized assets are trying to find buyers. As a result, it’s not hard to imagine an Amazon Marketplace or eBay of tokenized assets, bringing buyers and sellers together and taking a cut of the transaction. However, as it scales, ecommerce presents several challenges for the tokenized asset product category:
- Token sellers would still need to spend to find liquidity, either paying the ecommerce site to rank highly in search results or doing paid acquisition campaigns that bring prospective investors directly to their token page
- Ecommerce sites are set up for customers who already know what they are looking for, but tokenized assets likely benefit from a more curated or browse-based experience that can help prospective investors find the right token for them
- Massive product selection in ecommerce leads directly to a paradox of choice for consumers — a challenge that ecommerce vendors have not successfully solved through AI, recommendation engines, and UI/UX and one that is only exacerbated with the introduction of millions of tokens into the marketplace.
Decentralized Exchanges: Decentralized exchanges like IDEX, and especially those that have decentralized token listing mechanisms, would seem ideal to handle a massive influx of tokens. However, decentralized exchanges come with their own set of challenges for handling tokenized assets:
- Decentralized exchanges have not been successful thus far in creating sustainable liquidity and driving transactions, so token sellers would need to find their own investor audience
- Discoverability challenges that affect ecommerce vendors would only be worse on decentralized exchanges, which have a tiny fraction of the engineering and budget resources that companies like Amazon and Alibaba have applied without solving it yet
So where does that leave us as we start to see the proliferation of tokenized assets hitting the market? Centralized exchanges, ecommerce vendors, and decentralized exchanges don’t address the issues of discoverability, UI/UX, and incentives that scale will bring. Without solving those fundamental market challenges, the trillion dollar tokenized asset market simply doesn’t exist. There may be large numbers of listed tokenized assets, and there may even be some transactions, but lack of liquidity and incentives cuts off the market before it can really form.
The trend toward curation in ecommerce and investments gives us a roadmap of how we can solve this. As we have seen with Amazon’s entry into physical retail locations, the emergence of PinDuoDuo’s social selling model in China, and syndicate structures in venture and crypto investing, curation and decentralized storefronts provide solutions to bring buyers and sellers together more effectively.
By reducing the complexity of how tokenized assets are presented and by taking advantage of the knowledge that local representatives have about their audience, the marketplace challenges of discovery and user experience can be solved. Further, a decentralized, token-backed business model which shares ownership among buyers, sellers, and curators can provide the shared incentives necessary to attract liquidity, encourage transactions and keep the tokenized asset market healthy.
As we accelerate toward a world in which any asset can be tokenized, we need to ensure that the mechanisms are in place to develop strong incentives and provide discoverability within the marketplace. Decentralized curation will be the key. Without it, that tokenized asset market will never live up to its promise.
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