Tokenized assets

Blockchains need an interoperable standard to evolve, say crypto execs

Blockchains will need interoperability like computers need an internet connection to transfer data and value, a Chainlink Labs executive says.

Blockchain technology needs a benchmark communications standard that can be easily integrated by every network in order for a complete transition from Web2 to Web3 to occur, industry commentators say.

Many expect there will be multiple blockchains and such an ecosystem requires communication protocols similar to the Transmission Control Protocol/Internet Protocol (TCP/IP) used on the internet.

Ryan Lovell, director of capital markets at crypto price oracle solutions firm Chainlink Labs, told Cointelegraph that blockchains will need interoperability similar to how computers need the internet to transfer data and value across networks:

“To realize a fully interoperable blockchain ecosystem at scale, there needs to be an open communication standard analogous to the TCP/IP, which currently serves as the internet’s de facto connection protocol.”

Lovell believed a similar standard for blockchain networks would “pave the way for a seamless, internet-like experience” for the platform and their applications.

This is particularly important given that the last bull market saw a host of new layer-1 blockchains make their mark. However, nearly all of them operate in isolation from one another.

Lovell stressed that blockchain interoperability is “crucial” for financial institutions looking to tokenize real-world assets because that would ensure that liquidity isn’t “stifled” by only existing in a “siloed ecosystem.”

Brent Xu, the founder and chief executive of Umee — a lending platform backed by Cosmos’ Inter-blockchain Communication Protocol (IBC) — told Cointelegraph that before real-world assets are brought on-chain, proper risk management systems need to be put in place to facilitate this interoperability.

Xu explained that financial institutions would need to tick off Know Your Client (KYC) credentials to ensure the authenticity of the real-world assets before being tokenized on-chain and then make sure that they can be identified by an on-chain proof-of-reserve audit.

In order to avoid an on-chain catastrophe, he stressed the risk of cutting corners simply isn’t worth it:

“Think of the ‘08 mortgage crisis. Tremendous financial value was lost due to a broken legacy system. Imagine if this value was ported into the blockchain ecosystem, we would see tremendous value loss due to the contagion.”

Cross-chain bridges, independent layer-2 sidechains and oracles are three of the most commonly used blockchain interoperability solutions to date. The first two operate solely on-chain, while the latter feeds off-chain data on-chain.

There have been issues with some of these solutions, however, most notably cross-chain bridges.

An October report highlighted that half of all exploits in decentralized finance (DeFi) took place on a cross-chain bridge, the most notable example being the $600 million Ronin bridge hack in March 2022.

Xu noted that many of these hacks have come from multi-signature security setups or proof-of-authority consensus mechanisms, which are considered to be centralized and much more vulnerable to attack.

He added that many of these interoperability solutions favored “speed of development” over security early on, which backfired.

The key, Xu said, is to incorporate interoperability within the platform, as that will result in a more secure end-to-end transaction than through the use of third-party bridges:

“Bridges are particularly susceptible because they provide two ends at which hackers can potentially infiltrate any vulnerabilities.”

Among the most commonly used blockchain interoperability protocols are Chainlink’s Cross-Chain Interoperability Protocol (CCIP); the IBC, which leverages the Cosmos ecosystem; Quant Network’s Overledger and Polkadot.

Update (April 17, 8:25 am UTC): This article has been updated to more accurately reflect an analogy from Ryan Lovell.

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Almost everything could be tokenized in 5-10 years — Matrixport co-founder

Cost efficiencies, improved liquidity, 24/7 market access and the removal of intermediaries were the main advantages cited that blockchain infrastructure has over current legacy systems.

In five to ten years, almost every “real world” asset class could be tokenized in the form of a nonfungible token (NFT) according to Cynthia Wu, co-founder of digital asset service platform Matrixport.

Speaking to Cointelegraph, Wu said the best case for NFTs would see the widespread representation of real-world assets to be stored and traded on-chain:

“Eventually, all the major financial asset classes are going to be represented on this new financial infrastructure [and] NFTs could be our instrument to represent off-chain assets like real estate deeds, equities or bonds.”

The move on-chain would make these real-world assets “more liquid and more tradable,” which would improve price discovery and transaction activity, Wu added.

But Wu said that while it’s great that we’ve created over two trillion worth of digital native assets on-chain from Bitcoin (BTC), Ether (ETH) and other tokens, the only niche to have generated NFT transaction activity has come from digital collectibles — which hasn’t really helped institutional adoption:

“We haven’t really been seeing off-chain assets being represented on-chain […] we’re now really only at the first 3-5% of it.”

But, nonetheless, Wu is confident that the tide will turn.

Earlier this month, a report from Boston Consulting Group (BCG) estimated that the total size of tokenized illiquid assets could reach $16.1 trillion by 2030.

BCG predicted much of this tokenization to come from pre-initial public offering (IPO) stocks, real estate, private debt, and revenue generated from small to medium-sized businesses.

However, while the tokenization of real-world assets has piqued the interest of financial institutions, Wu said some have been a bit reluctant to move on from the legacy systems that have served them well over the years.

Wu pointed out the traditional financial system hasn’t accounted for the trading of nonfungible assets because they can’t easily be exchanged the same way a fungible or divisible asset can, but tokenization on the blockchain provides a solution for that.

She also argued that blockchain infrastructure is the superior option to legacy systems, citing cost efficiencies, improved liquidity, 24/7 market access and the removal of intermediaries as the main factors that would lead to a more streamlined financial system.

Matrixport was established in Feb. 2019, and currently manages between $3-4 billion in digital assets from a broad mix of retail and institutional clients.

Australian Securities Exchange takes step towards tokenized asset trading

“There’s a strong value proposition here that we can essentially tokenize any asset and bridge that into the ASX ecosystem,” said Zerocap CEO Ryan McCall.

Companies on the Australian Securities Exchange (ASX) could be able to trade tokenized bonds, equities, funds, or carbon credits after a successful proof-of-concept trial led by the digital asset investment platform Zerocap.

On Monday, Melbourne-based digital asset investment platform Zerocap told Cointelegraph it had successfully used Synfini to bridge over its custody infrastructure onto the platform as part of a trial program, allowing for the trading and clearing of Ethereum-based tokenized assets.

The trial is part of ASX’s distributed ledger technology (DLT)-based settlement project Synfini which was launched in November. The platform offers clients access to ASX’s DLT infrastructure, data hosting and ledger services, enabling them to build blockchain applications off of it.

Zerocap co-founder and CEO Ryan McCall stated that it occurred last year and that “it got a lot of interest” in the institutional sphere, particularly from companies that are exploring ways to tokenize and trade bonds, funds or carbon credits:

“Thinking beyond Bitcoin, Ethereum and other crypto assets, the tokenization of bonds, equities, property, carbon credits, private equity, and anything that’s essentially illiquid, there’s a strong value proposition here that we can essentially tokenize any asset and bridge that into the ASX ecosystem.”

McCall outlined that the companies dealing with especially “opaque and difficult to access markets” such as bonds and carbon credits are seeking out ways to efficiently cut costs, save time on issuance and open up broader investment access via tokenized offerings.

Questioned on whether the ASX would be able to offer crypto trading via Synfini, McCall stated “yes” but that he hasn’t seen any indicators of interest in this field, as the ASX and others are primarily focused on tokenizing traditional/real-world assets.

It is worth noting however that Synfini is a separate initiative from ASX’s blockchain-based CHESS system replacement that has yet to be implemented after facing years of technical issues.

McCall went on to suggest that Zerocap could be looking to officially launch asset tokenization and trading services via Synfini to institutions in the near future, as it has just cleared the necessary steps for legal approval.

“Since then we’ve been going through the certification process to get into the production environment, which as you can probably imagine, for any sort of enterprise software, but certainly for an exchange, it’s a fairly stringent process. So we’ve just cleared the production certification. So getting ready to deploy this now,” he said.

McCall also highlighted that with the ASX being a reputable source to host digital asset trading, doing so would likely dampen institutional concern over counterparty risk relating to the crypto sector.

Such risks have been thoroughly prevalent this year due to several major crypto firms either facing liquidity issues, or going completely bankrupt in the case of Celsius, Voyager Digital and Three Arrows Capital:

“So counterparty risk, you know, credit risk specifically I guess is the biggest talking point in crypto at the moment with the 3AC disaster. And I think that just demonstrates the use case for what the ASX is trying to do here.”

“You know, thinking about the ecosystem and investor protections and all the things that it offers, there’s definitely a need for something like that in digital assets,” he added.

The Zerocap CEO also suggested that Synfini will likely be utilized by a wide range of firms, as the platform is user-friendly and removes a lot of variables for companies.

“If a custodian or a fund manager or any application developer wants to come and build a blockchain application, they can do that on this Synfini platform without having to really worry about managing any of the infrastructure, which is pretty cool,” he said.

Zerocap recently had a hand in a tokenized carbon credit transaction in late June, with the firm providing market-making services and liquidity for an exchange between major Australian family office Victor Smorgon Group and BetaCarbon, a blockchain-based carbon trading platform.

The deal was also facilitated via A$DC, a fully AUD collateralized stablecoin developed by “big four bank” Australian bank ANZ.