Building Markets Surrounding Tokenized Assets that Can Reach Enterprise Scale.

Transcript

Everyone, fantastic meeting you all this morning. My name is Sherwin Dow McCain. I'm one of the co-founders of one of the newest initiatives out of the Paxos ecosystem, Paxos Labs. Um, and we're here today to talk a little bit about a few things, but specifically I want at the end of this presentation to get to a resolution around what does it take to build markets that can scale to enterprises around tokenized assets. And before we get ahead of ourselves and jump into any of the details here, I want to first start with a definition of tokenized assets cuz I think it's a very broad term and it can cover things such as endogenously created assets in crypto that are special to crypto only like

Bitcoin, but can also extend out to things like tokenized equities. And so when I talk about tokenized assets within this context, I'm primarily talking about tokenized representations of off-chain assets. Specifically three core verticals tokenized T-bills, you know, stablecoins. Tokenized equities as well as other types of tokenized securities such as private equity funds and things of that nature. But before I jump into any of that, I want to talk a little bit more about ourselves.

So you have a little bit of context of understanding why we see the world this way. So Paxos has been around for the greater part of 13 years when it comes to the crypto ecosystem and really we see ourselves as the leading digital asset infrastructure provider across the entirety of crypto. And that journey really started with what we call the first step. And this is a first step that expands across all enterprises, which is asking and answering the question, what is the first thing that an enterprise will want to do when they build out crypto capabilities right?

And really you see that distilled into three core use cases, right? One is, hey, I want to buy a hold or sell digital assets. The second is I want to accept stablecoins, move from fiat to stablecoins. And the third is I want to issue or embed a stablecoin on my platform, right? And so our product suite has reflected that over the course of the years. And so the Paxos product suite focuses on these three verticals. Most people know Paxos within the context of asset issuance with things like the PayPal's native stablecoin, which is issued by Paxos I believe about three or four

years ago. Paxos Gold, one of the largest tokenized gold products in the market. And then the Global Dollar, which is a stablecoin that's embedded into over 130 enterprises as of today. Additionally, crypto brokerage. If you pull out your phone today and you buy Bitcoin on PayPal or Venmo, that's powered by Paxos rails. If you're a small business and you accept stablecoins on Stripe, that's powered by Paxos rails. And so we've really spent the time at Paxos focusing on working with the largest enterprises in the world and asking, how can we get them to take that first step into crypto, right? And so it's a long time to be looking at the

enterprise market and to be kind of sitting there and understanding what it takes for them to really put time, effort, and energy at scale into crypto initiatives. But the thing that we've realized more and more throughout the years and the reason why Paxos Labs this initiative exists today as well is because we realize that enterprises care more about just the first step. And I think a lot of times when we think about things like tokenized assets, it's really just the first step.

Technology and a capability is just the first step for an enterprise. And unfortunately, I think when it comes to driving I think really deep outcomes within enterprises that actually transform business models, transforms the way they can serve their clients, it really isn't enough. And so what we've realized is that what you should be asking is two questions. Not only what is the first thing I want to do, but secondly, what am I going to do with that outcome once it's on the platform? What am I going to do with digital assets once I bring them on my platform? What am I going to do with stablecoins once I bring them on my platform? And really that's embedded into another three things.

Generate yield on these assets, borrow against these assets and access credit markets, or move these assets around in on-chain environments. And so we've come to the conclusion that when it comes to building out crypto capabilities for the enterprise market, it isn't just enough to start with even this set of capabilities. The most important piece is how do you connect all these capabilities together to generate solutions that actually drive impacts right? >> [snorts] >> And so we want work under a core assumption, which is that all financial enterprises will eventually set on digital asset rails because it's simply cheaper, it's more scalable, and there's more margins

to be generated for those who are actually doing the hard work of generating the distribution and capturing that end user. But in tandem, we believe that in order for digital asset rails to succeed, capabilities aren't enough. Instead, we must think about full-scale solutions right? And we'll do a little thought experiment and walk through what one of these full-scale solutions looks like and and how many pieces it requires and what it really takes to do that. And we're going to use tokenized assets as kind of the baseline for that example. But before I go into that, I want to first talk a little bit about tokenized assets specifically.

So for tokenized assets to scale, there are three core properties that matter when it comes to the fundamentals around tokenized assets in and of themselves. I think you know, our last speaker was just talking a little bit about tokenized real estate. And I think you know, you in that conversation, there were a few things that were brought up that you'll see here on this slide as well. Which is the three core pieces are around this concept of one, how do you on-ramp into these tokenized assets specifically through interoperability with stablecoins? Two, how do you facilitate robust secondary markets and liquidity around these assets? And then the third, how do you enable these assets to be activated to do something?

And really that is focused on and that's predicated on access to on-chain credit rails or credit rails holistically. Right? And so we'll we'll go into each of these three verticals in a little bit more depth cuz I actually really want to spend time to make sure this this really resonates. So in the first piece, why is interoperability with stablecoins so important for tokenized assets? Well, in order to have anyone access any enterprise or even any on-chain user to access a novel tokenized asset, say you're bringing a tokenized equity on-chain, you're bringing a tokenized private credit fund, um, what is the conduit for anyone to access anything on-chain?

It's a stablecoin, right? It's that unit of account that matters first. And so for some tokenized assets, there are limitations to accessing them that are constrained into things like you can only on-ramp onto them with fiat flows. And so you limit the the TAM that you can actually capture when it comes to issuance of a tokenized asset if you're not starting with that first building block of interoperability with stablecoins. Secondly, in order to support robust secondary markets, what is the asset everyone's going to be trading into? It's going to be stablecoins. So this acts as the base foundation and then secondary markets acts as the conduit to enable the exchange of these assets of these tokenized

assets with others, right? In order for an enterprise to integrate a tokenized asset or to use it in any form of solution or use case, you need to be able to trust that you can enter and exit those assets, right? And in traditional markets with traditional assets like real estate with commonly illiquid or as unfortunately we're all seeing now certain private credit vehicles which are becoming more and more illiquid by the day, it is difficult to spin these up in traditional markets. Which means it's not going to be an exception in on-chain markets as well.

And so it's really important to internalize the idiosyncrasies of these various different types of tokenized assets when it comes to creating secondary markets and focusing on not only those idiosyncrasies, but how do we enable those idiosyncrasies to be compatible with stablecoins and the on-chain rails that exist in order to enable secondary markets these assets. And thirdly, on-chain credit rails. When it comes to making assets active, credit is the bedrock for making anything more active than its baseline use case or value.

And I put this as the third one because if you notice, it requires and is predicated by the first two capabilities as well. You need to be able to on-ramp with stablecoins, you need to be able to have a robust secondary market to move in and out of these assets in order to access on-chain credit rails. And when you do access on-chain credit rails, we can start answering the question, what do we do after we get access, right? And so let's walk through one of those examples. So I've been driving this point this entire conversation about we need end-to-end solutions. So let's talk about one.

Let's say if you're a consumer interface or let's say you possess a consumer interface. Let's say you're we could call it an exchange, right? Whether it's a traditional exchange or a brokerage or um, uh, even a crypto-based exchange. And let's say you want to enable an end-to-end tokenized equity-backed credit solution. So, you want to enable users on your platform to be able to purchase tokenized equities first, and then you want them to be able to access credit against those assets. So, what does that look like, right? Well, first you need to answer the question, all right, how do your users get access to tokenized um, equities? Well, first they're going to need custody, right? So, you're going to start with wallets, right? You're

going to start with the the baseline is you're you're going to need a wallet to be able to enable your users to custody that asset. Either you, in the case of uh, potentially custodial uh, solution, or you're going to have a non-custodial wallet as a service solution um, that your clients can use. Or your users. Secondly, you're going to need liquidity. And I I put liquidity here because liquidity is a is a few different pieces. It's a few of the pieces we talked about before. You're going to need access to a secondary market to trade in and out of those assets, right? And in case they need to get liquidated, you're going to need the ability for your users to be able to trade into that asset, right? Uh, utilizing their stablecoins.

Um, and you're going to need the ability for you to settle out of that asset into cash right? And so, now we're we're already stacking together about three or four capabilities, and we're not even finished yet. And then finally, we need access to credit right? And credit is a very, very complicated primitive, right? You need people who are willing to underwrite uh, this risk. Either you as an enterprise could do it, you could source it externally. Um, you're going to need a settlement engine in order to be able to facilitate the underlying collateralization of the assets, and then you're also going to need uh, to be able to facilitate liquidations at scale.

And source the counterparty liquidity for your clients to borrow from. And so, when we look at this concept of okay, let's just bring a use case of tokenized assets to a platform, we end up in this space where building this use case requires the conglomeration of about seven to nine independent capabilities that you could probably look in the enterprise market today, in the infrastructure enterprise market today, and find seven to nine different companies that offer each one of those solutions.

And where where I think we need to go, and where enterprises need to go, and our core philosophy um, within the scope of Paxos and Paxos Labs, is ideally more and more enterprises can take the position where instead of having to go to eight seven, nine vendors to find a solution, instead you can go to one, or two, or three, and you can cover the your capabilities on a use case by use case basis, on a solution by solution basis, instead of facilitating on an individualized basis. Because at the end of the day, in order to enable things that actually move the needle for enterprises, it requires all these capabilities to facilitate at

scale. And that's it. There's an initial slide on contacting us, so if you ever want to reach out and chat more about these things um you can find us uh, and myself uh, on Twitter through uh, Paxos Labs or my name, and similarly on LinkedIn. Thank you. I'd love to answer some questions from the crowd. Yes. All right. Thank you. Uh, regarding the the actual offering, do you see yourself more as an integrator and aggregator of like uh, existing platform like Aave, Nexus, and so on, or are you building them those primitives from from scratch?

I think uh, it depends on the the vertical. Um, I think there's a lot of places where you can uh, focus on driving value to primitives that exist. I think in other cases, for example, with the idiosyncrasies of certain types of tokenized assets, you may not be able to do things on chain. For example, if the I but if the redemption period on a private credit facility is a quarter, maybe an on-chain lending protocol's not the best way to actually construct a a liquid credit market around those types of assets. Um, and so you may have to build something bespoke for that.

Uh, you talked about uh, supporting secondary markets and also on chain. Could you explain a bit how you see the the DeFi landscape and the the DEXes that you guys interact with, how that's changing? Yeah, I think when it comes to on-chain markets, the the thing that I am realizing more and more is that when it comes to more novel tokenized assets outside of the scope of what we've historically been utilizing in crypto, uh, so endogenously digitalized endogenous digital assets and or stablecoins, um, most of the I'd say like dependency on atomicity uh, in platforms like Uniswap or um,

uh, Balancer and other such platforms, uh, really starts to break apart when you have assets that uh, you need one scale um, uh, scale of access. So, for example, if I'm integrating a tokenized equity solution into an exchange, they're going to need facilitate to facilitate trading at tens of millions, hundreds of millions of dollars of scale potentially in a single order, and a lot of on-chain architecture isn't really built for that. So, what we're thinking a lot about is, all right, what are some of the more new age uh, methods of accessing liquidity that are more tailored towards not only these assets, but also the enterprise profiles uh, that we're looking at, right? For

example, a lot of enterprises are very comfortable with asynchronous access to liquidity because very traditional uh, we're very used to traditional banking rails. Um, and asynchronous access to liquidity at scale and at uh, predictable costs matters a lot more than instant atomicity, right? And so, uh, platforms that can kind of internalize those different tradeoffs and and offer uh, kind of unique solutions that fit and tailored towards that demographic are are really what we're looking a lot more at uh, today. Anyone else?

Am I on time? Uh, 5 minutes left. Oh, cool. Perfect. Fantastic. Well, appreciate the time, everyone, and uh, looking forward to chatting to any folks after the presentation. Oh.