Tokenized asset market sizing and analysis
This is part of our December 2020 report into:
How value is created
Our methodology for calculating the value of this market includes tokenized commodity, energy, currency (i.e., stablecoins), gold and real estate projects. Calculations include publicly listed projects found via Blockexplorers.
It excludes cryptocurrency, as it’s a native digital asset, as well as DeFi projects because of their extreme volatility.
All tokenized assets
Total market size:
Our research shows that the total share of tokenized assets compared to the total assets of select commodities worldwide is currently immaterially small and represents an insignificant percentage of the world’s total assets. However, that’s simply because the market itself is far from mature and is only in its first stages of development. Should the regulatory, institutional and educational barriers be lifted, we believe that this market has the potential for significant growth.
Based on our findings, the current market size as of Q4 2020 of the tokenized asset market is US$18.1 billion. In comparison, the total digital asset market size is approximately US$350 billion
Given the popularity of stablecoins, we find that the majority of digital assets exist as stablecoins, which is expected considering the demand and practicality of the asset.
Gold is next, for reasons similar to currency, followed by real estate and commodities. The latter two have regulatory concerns that prevent their respective expansion, which will be addressed in the deep dive below.
According to publicly available data from CoinMarketCap, the majority of AAX’s current trade volume is dominated by traditional cryptocurrencies and DeFi tokens. Should AAX invest more in prominently listing these tokens, it would present a new growth story for the exchange.
TOKENIZED ASSETS MARKET
|Asset Type||Project Count||Market Size||Daily Volume|
|Tokenized Fiat Money||1||50,150,013.00||0.00|
|Tokenized Real Estate||9||128,056,795.90||187,697.19|
Notes: Currencies are by far the highest traded. Gold – sometimes considered a currency – is the next followed closely by energy commodities
TOKENIZED ASSETS WITHIN THE WHOLE DIGITAL ASSET MARKET
|Asset||Total Global Value||Total Tokenized Value|
|Real Estate||$10 trillion||128,056,795.90|
|Total||$46.2 trillion||$18.1 billion|
|Total Digital Asset Market||$350 billion|
Market size: less than
The big opportunity of a tokenized commodity market – There are many reasons for tokenizing commodities, and these benefit existing players in the industry and democratize access for retail investors, drastically increasing the total addressable market. In fact, as cited earlier in the report, Robert Greifeld, former chairman and CEO of NASDAQ, has a bullish view that non-tokenized commodities only have a five-year lifespan.
By tokenizing commodities, more people have access to the global trade in a way that serves a broader range of wealth. Because of this, there will be more activity in the markets, which creates greater liquidity and market depth with better price discovery. The commodities market would not only become more efficient, but for the first time in its long history, it would be open every single hour of each day.
Both traders and the overall industry stand to benefit greatly from tokenized commodities being available on crypto exchanges. Alex Mashinsky, the chief executive of the decentralized finance (or DeFi) platform Celsius and the inventor of the voice-over-internet protocol (or VOIP) discussed the platform’s recent introduction of support for Tether Gold (or XAUT).
Mashinksy described the platform’s support for tokenized gold as offering a bridge for users from fiat currency to non-correlated and decentralized assets. “Every time you have bought gold, you’ve had expenses, storage fees and insurance fees. Or perhaps there was a funds fee—fees upon fees upon fees. We have a positive yield of three or four percent per year,” he said.
With the addition of gold, Machinsky stated that that Celsius now provides support for a non-correlated asset that is stable, allowing users who may not yet be interested in crypto assets to explore the possibility of moving out of fiat currency and non-correlated assets.
Aside from the general regulatory uncertainty that prevents the market from thriving, tokenized commodities have not taken off – and are the laggard in the sector – because of the perceived usefulness of fiat and gold-backed tokens. For this to take off, the market would need to see the adoption of a stablecoin backed by a basket of commodities and currencies.
More on tokenization from this report:
“A digital age requires digital assets. If we were to invent money today, we wouldn’t invent paper money, coins and credit cards. We’d be smart enough to create a digital ecosystem of assets that allows us to tokenize anything of value in the real world”
Tokenized currency (Stablecoins)
By far the most liquid tokenized asset class, fiat-backed stablecoins’ explosive growth is due to its role as an on-ramp and off-ramp for crypto, and a hedge against the crypto market’s fluctuations, as discussed earlier in the report. According to data sourced from Bitstamp, the market capitalization of stablecoins grew 40% between March and August in 2020.
The inherent problem with fiat-collateralized stablecoins, such as Tether, is that they require a certain level of trust in the issuer. This level of trust has been called into question with Tether, which has attracted interest from industry stakeholders and regulators for understating the collateralization of Tether and how the tokens are structured. Although each Tether is pegged 1:1 to the USD, news that the stablecoin was undercollateralized has occasionally driven the value of 1 Tether to below US$1. Conversely, heightened demand for stablecoins as a crypto on-ramp and off-ramp has driven the value of Tether to above US$1.
Tokenized currency should not be confused with central bank digital currency. Tokenized currencies are simply tokens representing currencies stored in a vault, whereas CBDCs are currencies issued by a central bank natively on a digital ledger. The market size of tokenized currency continues to increase dramatically as more tokenized currency is minted. Thus, while the market was valued at US$17 billion at time of measurement, it continues to expand thus we are pegging it at “over US$17 billion”.
In theory, the stablecoins market should have the least regulatory concerns as each issued token is simply representative of cash, not a regulated commodity. All of this ensures that every stablecoin is collateralized 1:1 with a dollar.
However, regulators in New York have taken some interest in whether stablecoins should be categorized as a “deposit”, thus triggering banking regulations. Section 131 of the New York banking law prohibits “unauthorized persons from issuing notes or other evidences of debts to be loaned or put in circulation as money or receiving deposits.” Aside from a broad investigation into Tether and BitFinex, regulators have not taken any significant action against stablecoins. Their efforts seem to be focused on products that may be considered securities (although Tether’s fluctuation in price is due to under-collateralization), which has made some regulators question whether or not it is a security.
Forkast’s view is that the most interesting growth story will be from non-USD denominated stablecoins. As cryptocurrency becomes a tool for worldwide remittances, stablecoins denominated in localized currencies are likely to become more common. For instance, Binance’s Project Venus seeks to create stablecoins denominated in regionalized currencies on the Binance chain to compete with USD-denominated stablecoins like Tether. Since the 2019 blog post that made the announcement, it does not appear that further progress has been made. The Indonesian Rupiah-pegged RupiahToken (not affiliated with Binance’s Project Venus) is an attempt at this. However, the token appears to trade in low volume.
Because of the popularity of roof-mounted solar cells, more homes are becoming less dependent on the grid. At the same time, “feed-in tariffs”, where the local utility company pays for excess energy generated by solar panels, is declining in value, creating a demand for alternative energy markets.
Projects like Cenfura, PowerLedger and WePower allow users on the same grid to trade power so that some users can offset their use of grid power (which might be from carbon-intensive sources) with green power derived from solar panels or small wind turbines. In many ways, this is similar to a carbon offset.
The majority of the tokenized energy projects out there have had their tokens classified by the SEC as utility tokens, and as a utility token, the token itself is not sold as an investment contract. It is therefore not considered a regulated security, which in practice means that renewable energy transactions are done in the form of pre-payment.
Although the idea of trading tokenized energy on alternative markets sounds enticing, these projects are wholly dependent on the grid being brought on as a stakeholder. This means that such projects could only be developed in regions that have invested in smart grid technology, which excludes much of the United States or residential complexes that have their own power grid.
Power Ledger has had some success with onboarding residential developments and regional power grids in Australia, Southeast Asia, and Europe.
But tokenized energy projects tend to trade in low volume. This is because in order for such projects to truly take off, they would need much more scale and buy-in from a regional government. In addition, the market might be confused as to exactly why tokenized energy trading is advantageous, so a broader educational campaign is needed. Ideal customers might not be retail users but rather residential or commercial developments.
Like stablecoins that are collateralized 1:1 with currency, tokenized gold projects issue tokens that are backed by gold. Brisbane-based Meld partnered with Algorand and the Australian gold industry to integrate the supply chain of gold on the blockchain. Paxos has created stablecoins that are pegged to gold bars (each token is pegged to “one fine troy ounce of a 400 oz” gold bar), allowing for both a form of collateral-backed crypto and also a method for P2P gold trading. Using the Algoran blockchain, gold brokers can meet sellers with the transaction secured by the blockchain.
Given the renewed interest in gold as a commodity to hedge against current economic conditions, tokens that allow for fractionalized ownership of gold show considerable growth potential due to both the lower cost of ownership, thanks to the efficiency of blockchain technology, and the lower threshold for ownership. While there are ETFs and other securities available that allow for the purchase of gold, market-listed products would have much higher buy-in thresholds than tokens.
AurusGold is an interesting case study in this: the platform offers the ability to purchase tokenized fractions of gold bars, with revenue sharing for those that offer to tokenize their own holdings, distributed at vaults around the world. AurusGold plans to issue debit cards so you can access cash equivalents to your holdings. Unfortunately, the AurusGold token trades in low volume compared to other gold-backed tokens, so it is unclear if the market is receptive to this project’s proposition.
Furthermore, many market-listed products do not actually physically own the gold. Instead, they track the value of the market, whereas gold tokens are tied to physical bullion. This, along with the lower buy-in costs, are a very attractive proposition to investors.
Tokenized real estate
Real estate tokenization refers to recording and transacting the underlying title as well as the relevant conveyance (transfer) notices. Digital tokens can be used for signifying proof of ownership, transferring fractional rights of the land, receiving interest or paying debt on the structure or to holding equity or shares of a physical property, all to build liquidity for the title owner. Any interaction or transaction made on the token is then permanently stored on the blockchain ledger.
Given that any individual can own a fraction of the property through tokens, this eliminates the access barrier present in the expensive real estate industry, which is normally a great class divider. The presence of real estate tokens on exchanges ensures that liquidity is available to title owners, and with much more competitive rates than a home equity line of credit or other similar mechanisms. Theoretically, an investor could hold a portfolio of different real estate classes from a broad geographic spectrum at costs lower than a REIT.
Although tokenization of real estate shows a lot of potential, there are significant legal challenges to overcome if this segment is going to take off.
Real estate securitization has been traditionally done through special purpose vehicles (SPV), and the chances are that tokenization will go in the same direction. SPVs are legal entities designed for a single purpose, like managing or holding a real estate title. An SPV can represent limited partnerships, trusts, corporations, and other entities, all of which have their own pros and cons. If used in the right way, SPVs can be separate from the developer for liabilities and assets, which allows tokens to exist as independent investments without considering the developer’s creditworthiness. Still, this is a very complex process of structuring SPVs, and it will require the knowledge of experienced professionals.
This legal barrier is an important one. If the property title or fractionalized ownership structure falls into dispute, the courts may not recognize the rights of token holders. Furthermore, without an SPV in place, title insurance policies may no longer be valid.
All this considered, there are a lot of legal barriers that need to be addressed before tokenized real estate takes off. Groups like the American Land Title Association,the national trade association in the United States, and other equivalent bodies worldwide will need to write best practices guides to address these issues before the market can really grow.