Ethereum is the most secure, decentralized and neutral, smart contract platform with the most regulatory clarity today. This makes Ethereum the tokenization platform of choice for institutional-grade assets.
The use case which has found the best institutional product-market fit with blockchains today is tokenization. The term "tokenization" has become so overused that its true potential can sometimes feel diluted. What is the simplest definition of tokenization?
Tokenization is the most efficient way to represent a physical object in the digital world.
As the global economy becomes increasingly digital, nearly every aspect of life has followed suit. E-commerce (Amazon, Shopify), social interactions (Meta), information (Google), and even money (Venmo, Stripe) have transitioned online. The rise of AI is accelerating this trend, making the digital economy more productive by the day.
It’s inevitable that every high-value physical asset will have a digital representation online, as transacting in the digital economy is much more efficient (cheaper, faster, and more globally accessible) than transacting in the physical realm. It is in every institution’s best interest to represent their offerings digitally to facilitate frictionless transactions. This is where tokenization comes into play, as blockchains provide a global platform to store digital assets and enable frictionless trade.
The world’s current financial infrastructure is archaic. Banks, funds, and institutions operate within walled gardens databases for their assets, many of which are still physically settled in bank back offices. This results in high friction, high costs, and slow transactions. Every financial institution can agree that the system will become more digital and more automated over time.
Public blockchains provide the ideal solution - a shared platform for all assets to be tokenized and exist in one place. If many asset classes were tokenized and issued on a public blockchain, it would unlock a world of new possibilities. These assets could be fractionalized, traded 24/7, and made accessible to a global audience. Public blockchains will democratize access to assets and create a global buyer base, resulting in both positive supply and demand shocks for financial markets. The net effect of this will be an increase in global wealth.
This results in a complementary use case for blockchains as public infrastructure for the existing banking system. Rather than replacing banks - which is zero-sum thinking - blockchains provide a digital “back office,” with a programmatic settlement and record keeping infrastructure layer that banks can easily integrate into their operations. Since blockchains like Ethereum provide a public, unified API and transaction settlement layer, these “back office” systems can seamlessly interoperate, reducing friction and costs across the financial system. Public blockchain innovation is a positive-sum game that complements the existing financial system rather than competing with it.
Since the birth of Bitcoin, institutions have been looking for a way to participate in “blockchain, not Bitcoin.” Tokenization is one way to facilitate this - and Ethereum is the institutional home for tokenization. Tokenization has not yet hit its “network effect” moment (due to regulatory overhang and the lack of technological advancement on public blockchains) but as of 2024, the landscape has changed. The following developments distinguish Ethereum from the rest of the smart contract chains and have de-risked Ethereum enough to place it front-and-center as the premier institutional tokenization platform:
Institutions have been sidelined from blockchains for long enough due to regulatory uncertainty. In the meantime, many of them experimented with tokenization and blockchain technology using permissioned private blockchains. Much as institutions used private intranets before converting to the public Internet, these private blockchains have mostly been sandboxes, waiting until there was enough regulatory clarity to plug into a global public blockchain network. The time is now - Ethereum finally has the regulatory blessing that TradFi institutions need to inject their liquidity, users, and assets into the ecosystem.
The main obstacles for tokenization on Ethereum (apart from needing regulatory clarity) were that Ethereum was (1) slow and (2) fully transparent, compromising user privacy. Banks need both speed and privacy to operate with their enormous user bases at a global scale. Ethereum’s recent upgrades in 2024 to facilitate customizable L2 architecture solves for both speed and privacy, while preserving Ethereum as the safest, most secure public blockchain for banks to integrate with.
In summary - we are ready for the institutional proliferation of tokenization, and Ethereum is the best positioned platform to capture this:
At the end of the day, institutions are profit-maximizing entities, and using public blockchains to tokenize assets for trade and commerce will reduce their costs and make their operations more efficient.
Tokenization started with stablecoins, which found immediate product market fit; stablecoins today are the 18th largest global holder of US debt, with over $170bn tokenized USD circulating on blockchain rails. Tokenization then moved toward the treasury market, as yield-bearing stablecoins were the next logical choice. Ultimately, tokenization will encapsulate all assets - from money market funds to mutual funds to stocks, bonds, commodities, real estate, and more. Every asset class can benefit from being represented in fractionalized form on a shared global platform with 24/7 liquidity, low fees, and instant settlement.
And Ethereum is the institutional tokenization platform to facilitate this movement.
Published 1/21/2025
This article is for informational purposes only and should not be considered as financial, investment, or trading advice. Etherealize does not guarantee the accuracy or completeness of the information provided. Investing in commodities carries risks, and readers should seek the advice of a qualified financial advisor before making investment decisions. Etherealize may have financial interests in the commodities discussed in this article.
