Escaping the Casino: How Tokenized Assets Will Save DeFi From Itself

He went on to note that “while defi may be great it’s fundamentally capped and can’t be _the_ thing that brings crypto to another 10-100x adoption burst.”

Vitalik isn’t wrong.

The ethos of decentralized finance (DeFi) is the belief that a blockchain-based financial system will free society from rent-seeking intermediaries and make financial services accessible to the globally unbanked.

It’s quite clear, though, that a significant portion of what we currently label as “Decentralized Finance” (DeFi) appears more like a continuous cycle of gambling, where the primary value of many tokens stems from speculating on their own price fluctuations, which in turn is driven by this very act of speculation.

It is not sacrilegious to acknowledge this fact, nor is it to accept that this current version of DeFi is clearly not sustainable. There is only so much demand for circular token speculation and there isn’t an infinite amount of retail capital to burn.

In its present form, Decentralized Finance (DeFi) may not be the driving force to propel cryptocurrency adoption beyond existing limits, but it doesn’t imply that building a decentralized gambling platform using blockchain technology was entirely futile.

In its present state, DeFi demonstrates the feasibility of building a financial system on the blockchain that offers essential foundational elements for a global, inclusive, and resilient financial network. This includes facilitating transactions, exchanges, loans, derivative products, insurance, and many additional features.

The foundational structures and rules (infrastructure and protocols) of Decentralized Finance (DeFi) undeniably minimize the chance of default by other parties (counterparty risk), decrease overall costs, and enhance transparency and accessibility. This is true, even if the initial combination of product and market doesn’t seem to offer much more than digital betting using tokens.

How might Decentralized Finance (DeFi) move beyond its excessive focus on circular token gaming and fulfill its intended purpose in accelerating the spread of cryptocurrency?

Tokenized assets

In simple terms, blockchains represent a cutting-edge approach to handling assets by creating digital tokens for issuance, transfer, and recording transactions. Given that finance primarily centers on managing assets, Decentralized Finance (DeFi) stands out as the most promising, evident area for growth within the crypto sphere.

To thrive, the Decentralized Finance (DeFi) economy requires access to a wider variety of assets convertible into tokens. Although cryptocurrencies have been instrumental in advancing DeFi up to its current state, progressing beyond the ‘casino-stage’ necessitates exploring where the majority of global capital is held. And it seems clear as daylight where that is.

Transforming and categorizing all conventional financial assets, such as bank accounts, corporate debt instruments, government securities, mutual funds, money market funds, equities, futures contracts, options, swap agreements, and so forth, could potentially move around $500 trillion in value onto blockchain technology.

One single firm, BlackRock, manages nearly five times more assets ($10.5 trillion) than the market capitalization of the entire crypto market ($2.2 trillion).

This asset can easily be integrated into current blockchain finance systems, effectively swapping token-based gambling for real-world funding. It’s not just an idea of the future, but a reality that many major financial institutions are actively preparing for, where tokenization becomes standard practice.

Within just about half a year, BlackRock’s Ethereum-based tokenized fund, BUIDL, has surpassed $500 million in assets under management (AUM), boosting the overall worth of tokenized government bonds on public blockchains to more than $1.5 billion. Although this sum represents only a tiny slice of the value found in traditional systems, the involvement of the world’s largest asset manager within a public blockchain infrastructure carries significant weight.

To add to this, it’s clear that the desire for digital assets represented by stablecoins is significant. With approximately $150 billion worth of U.S. dollars tokenized on blockchain networks and a monthly transfer volume reaching $1.4 trillion, the use of stablecoins is comparable to well-established payment systems like Visa. Although not typically considered as such, the primary distinction between Circle’s USDC and BlackRock’s BUIDL lies in who benefits from the returns.

Stablecoins highlight the core value of tokenization as they allow anyone to transfer dollars to anyone else in the world with just an internet connection. Transactions are settled in under a second and for less than a penny in fees. For anyone in a country with a hyper-inflating currency, who has tried to make a cross-border remittance payment, or simply wants to make a financial transaction on a weekend or holiday, the benefits of stablecoins are immediately obvious.

In simpler terms, though DeFi’s token-based gambling may persist, it’s evident that the underlying technology powering DeFi will shape how global economies function in the future. This is because tokenized assets offer a more efficient method for representing financial assets.

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