Investing for the Tokenization Vision

Transcript

[applause] Uh terrific to be here with all of you. Um it's uh it's uh day three. It's the afternoon. It's a bare market. I think uh if you're here to listen to this on the side stage, you are really dedicated to learn something about uh tokenization and investing in Ethereum. So, thank you for all for being here. I'm delighted to have the opportunity to share our uh our views. Um, as Cardik said, I'm Zach Pendle. I run research at uh Gayscale. You may know uh Gayscale uh but we are uh the uh largest digital assets focused fund manager uh in the world. And our job is basically

to help uh investors effectively allocate capital to the crypto asset class to Ethereum to Bitcoin uh to everything else. So that means designing a great products as well as all the education that goes along with this helping us helping investors understand the technology uh how the use cases acrue value to the tokens and all that uh uh good stuff and Gayscale has a long history of uh first achievements uh as it relates to Ethereum. We one of the first Ethereum investment products our ETH uh product we were one of the first Ethereum ETFs. uh we were the very first to stake tokens in our Ethereum ETF. We were the first to pay out staking rewards uh from our ETF. So uh deeply

integrated into the Ethereum uh ecosystem. We hope to be good stewards uh of uh of ETH to the extent that we can contribute as a node uh in the network over time. Um, we're in a moment of uh kind of uncertainty and some despair about the price of Ethereum. And I find this uh uh somewhat uh surprising and sometimes amusing uh because I I think Ethereum is just an incredible place uh to capture what I see as one of the most transformative things happening uh in the financial system which is tokenization. So, I'm going to talk about how basically myself and the Grayscale research team think about tokenization and how Ethereum fits into that story. And I think for many of you,

this is going to be obvious information. Uh maybe maybe for some of you, if you're newer to some of this topic, it'll be new. But I think if you've been following the Ethereum story for a long time, uh some of these points may be obvious. Uh but maybe I'm just here to remind you uh of these important obvious points and and uh and tell you why Ethereum in my view is in such a great place uh and such a great position to capture this tokenization mega trend. Okay, let's uh get into it. Oh, quick quick reminder. What is tokenization? Well, uh, we all know that the kind of premise of of public blockchain technology is to transform digital finance and to move it away from a world of intermediaries and credits and debits and more to a world of peer-to-peer

transaction. So, on the on the Ethereum blockchain, we can send Ethereum, Ether, uh, back and forth to each other uh, without an intermediary directly between each other's addresses. We can send stable coins uh, peer-to-peer uh, between each other without an intermediary. These are, of course, the uses of public blockchain technology. And tokenization just means taking that same concept, peer-to-peer digital finance, and applying it to the world of capital markets. Uh, and so instead of exchanging ether or exchanging a stable coin, we can exchange assets uh between each other on a peer-to-peer basis. Uh, in the same sort of fashion, this differs from how uh capital markets work today. If we want to trade a security uh in traditional markets, how it works is

essentially I call up my broker, the broker calls an exchange, the exchange calls a clearing house, the clearing house calls a custodian, the custodian calls a transfer agent, and after all those intermediaries have updated their books and records, we have traded uh security on the blockchain. Uh how it works is you have cash, I have a security, and this is single smart contract transaction. we we exchange those two things on a peer-to-peer basis without the same role of all these intermediaries. So tokenization is this simple concept is using public blockchain infrastructure to do uh to move uh digital finance in capital markets in a different way removing the centralized role for intermediaries and gaining benefits for users and new

efficiencies. Uh you already know uh all of that uh probably uh where are we today? Of course, the the tokenization vision is starting to to play out and we are off to a great uh start. This is growth in the stock of tokenized assets over time. It started from a tiny number uh just a couple of years ago, now reaching in the 20 to30 billion uh range and it's becoming increasingly diverse. Tokenized treasuries, a kind of extension of the stable coin um uh application are the biggest category today. But we have other types of public fixed income. We have public equity stocks tokenized on chain. We have uh private alternatives. These are things like private credit, private equity uh

funds. We have tokenized commodities, tokenized gold has been a huge category this year and other things. Real estate, active funds, a whole uh diverse set of assets now tokenized on chain. So off to a good uh start. But maybe what's more important is that uh while it's a it's a good start and and 2030 billion it sounds like a a big number when you say billion uh but this 2030 billion is just a tiny little peanut when you compare it to the size of capital markets when you compare tokenized assets to the size of tokenizable uh assets. It's really a tiny uh number.

In fact, all of tokenized assets today represent about 0.01% 01% or one basis point of global equity and uh bond market cap. So a tiny number compared to the tokenizable uh assets. And this is why uh this concept is likely to be a mega trend. We have a new piece of technology. It's getting started. We see uh this encouraging durable trend uh taking off. But we're only at the very beginning. The tokenization of capital markets is something that's going to play out over all of our uh careers. It's a 10, 20, 30 year transformation of how capital markets work. Okay. What does this have to do with the underlying blockchain infrastructure and how you invest in these types of uh things? Um,

we think at Grayscale Research that you need to start this conversation by talking about different network architectures. Now let me say that I am not a computer scientist and uh there are lots of different perspectives on this topic and we have lots of different partners in the industry and they don't hesitate to grace me with their feedback uh about about these types of frameworks and so there's definitely room to disagree uh with this type of framing but this is uh my best uh attempt at a very simple way to make some comparisons across these uh different types of technologies. How I think about it is that you have a spectrum of things. At one extreme, you have uh networks like Canton uh network which I would consider an institution ccentric blockchain

network architecture. So essentially what Canton does is it looks a lot like the financial system today. You have institutions each of them have their own blockchain instance and these things speak to each other over a kind of messaging platform. It looks a lot like the financial system looks uh today and that has some advantages. It may reduce onboarding frictions for this tokenization uh vision because these institutions are taking care of things like identity. They're taking care of things like privacy. They already work with the users of these assets. So they may have some near-term advantages these institution centric architectures because they're more ready to go uh and mirror uh the way that the financial system looks today. So we actually our

view would be and not everybody loves this story but our view would be that you will see a fair amount of success from things like Canton network for those reasons. At the other extreme you have what we think of as open architecture uh blockchain uh networks. This is like the Ethereum design structure that we all know and love and this is closer to the ideal of peer-to-peer decentralized smart contractbased uh finance. We think that these types of networks will have bigger onboarding frictions. I personally think that there is more to do to fully articulate the privacy solutions, the identity solutions that are going to be required on the Ethereum layer 1 over time. However, these networks are more general purpose and they are also global. Ethereum is not an American

project uh or a Chinese project or a Russian project or Europe project. It's a global decentralized everybody uh project. And for me, this ultimately means that it has more potential upside over the longer term. So, more near-term onboarding frictions for tokenization, but more longer term uh upside. Of course, there are things in the middle as well, hybrid architectures that combine these ideas, things like Avalanche, things like the Ethereum L2 ecosystem. Anyway, this is how we think about this uh spectrum. And what I'm here to tell you is that Ethereum, the first reason that is in a good place, it is the right type of network architecture. It is designed in such a way that it's positioned to capture the more complete vision of what public blockchain technology can do and it's

not just an incremental step from how uh the um financial system looks today. Okay, let's take these concepts to the numbers. What do the data uh tell us? Who is in the leadership position if we're thinking about growth in tokenized assets in these use cases of onchain finance? Who is in a good position today? Uh this chart is a way to kind of compare some of the key uh data, three different dimensions, tokenized assets, the stable coin economy, and then a couple features of decentralized uh finance. And the first thing that stands out from this chart is that Ethereum is in the leadership uh position. It is the fundamental leader on most of these uh categories. It is the biggest uh blockchain in terms of tokenized assets, fully distributed onchain. It has the

most stable coin supply. It has the most uh stable coin transactions. It has the biggest uh defy TVL. So, Ethereum is strong. Ethereum is in the leadership position today. Now, there are some other networks with different design choices and they have strengths in certain other ways. As we talked about, Canton network is a completely different network architecture. It's hard to make an applesto apples comparison between Ethereum and Canton because they're so different, but it is the case that Canton leads in this one in, you know, some measures of uh of of onchain uh finance. And I think that that's important to recognize. And then some other open architecture networks like Salana, like B&B chain, they make different design choices. They lead in some other aspects. As everybody knows,

Salana is optimized for performance and it leads in some of those categories like DEX uh trading volume. So, Ethereum in a leadership position in a strong uh spot. Of course, there are other uh networks here as well. Okay, that's a kind of sketch of the fundamentals. What does this have to do with the price of the thing? Okay. So, uh, Grayscale is not in the business of, you know, uh, creating a blockchain. We're in the business of investing in the assets. You know, we are trying to teach investors if you think the tokenization mega trend is coming and it's going to happen on a public blockchain, what does this mean about the price of the asset? Okay, that is the the the challenging question. And what I'm going to do here is I'm not going to answer every possible element of the ether value acrruel story. This

is a a kind of complex and I think a somewhat challenging uh uh question but there are some things that are more straightforward and I'm going to try to show you in a couple of simple uh graphs some I think very simple uh data that demonstrate that bigger blockchains mean higher token value that bigger is better bigger network bigger blockchain network means higher value uh token and that data that seems very obvious to me uh in the data and I think is how I would encourage you to think about why the price of ETH should go up uh over time. Okay, there's two ways to measure finance. Okay, whether it's blockchains or it's traditional finance, you can measure finance in terms of how many transactions or how many assets. And that's exactly how we do it in

blockchains. This chart is a measure of transaction activity across all of the smart contracts that are out in the market that we have enough data for. There are 50 or so of these things in total. only some of them have uh sufficient data but we're looking at transactions and comparing that to market cap. Now our view is that fees transaction fees are the best measure of transactions uh because other types of measures are more gameable. If you're looking at uh blockchains you know users and number of transactions these are very gameable metrics fees harder to game that metric. So we think a better uh comparison across blockchains. Uh as you can see there is an upward sloping relationship meaning a positive

relationship between the size of a network and the price of the token. More network size means higher network value. Uh today there are four leaders uh dressed up in this way. Ethereum, BNB chain, Salana and Tron. Those networks uh stand apart from all the others. This is where there is lots of users making lots of transactions on those four networks. They are distinct from the rest of uh the industry uh in that way. So those are the leaders. that's why they have a value. The other thing that stands out on this chart is that there's a hint of a nonlinear relationship. All four of those dots uh the kind of leaders are above the uh regression line. That means that maybe there's nonlinearity. Maybe the tokens of the biggest projects actually get an additional uh value premium, a nonlinear

effect on value uh at at a certain scale, a kind of network effect happening in value. Okay, that's for transactions. What about for assets? This is the same chart but just for the assets that are on chain measured by TVL. Uh again you see upward sloping line. Bigger networks are more valuable. Bigger is better. Bigger blockchain means more valuable uh token. In this case you see a more single dominant uh category leader which is Ethereum. Uh so uh BNB, Salon, Tron, uh Salana and Tron also have a decent amount of onchain assets, but they are a kind of a second tier down from Ethereum when measured in the stock of assets. Once again, you see evidence of nonlinearity. All three all

four of those points are above the uh linear regression line, which tells you that maybe there's something nonlinear going on here as well. that as blockchains get bigger and bigger, maybe their token value increases faster and faster for the uh very uh most valuable uh tokens. So, uh Ethereum is in a pretty solid place uh today. It is uh the leading uh blockchain in terms of onchain finance fundamentals. It is right there at the heart of all the things that are happening. And there's a very obvious in my view very obvious uh message in the data uh that bigger is better when it comes to to blockchains.

higher bigger blockchains, more transactions, more assets means more token value and probably there is some nonlinearity uh to this uh thing that as these things get much much bigger potentially there is a nonlinear relationship to the price of that uh that asset. So no need to despair. Uh Ethereum is in a very good uh position today. So what is going to happen? I'm going to tell you what my best guess is uh is going to happen. I I think uh I think we're going to pass the Clarity Act. We we will see. That's my my guess. It is not a done deal, but I I think we're going to pass the the Clarity Act.

And this is going to be another important regulatory step uh forward to unlocking this tokenization vision. This tokenization vision, it's going to play out over the next 30 years regardless of what happens to the Clarity Act. But it can start going uh faster and more immediately if we get that legislation uh done. You should think of tokenization uh in terms of investing in blockchains as a rising tide that lifts all boats. You know, tokenized assets, stable coins, these are use cases of the technology that we're all working on and it will be a rising tide that lifts all boats. The investment uh thesis for Ethereum is that it is the biggest boat.

Okay. Uh this this rising tide will will lift lots of things. But when an institutional allocator is looking at this question of uh uh of uh uh tokenization and and how it it's going to guide their capital allocation decisions, I can assure you they are not going to skip the biggest boat. It is the anchor asset uh for this tokenization vision and any kind of uh sensible portfolio. And so that is the message that Gayscale uh sends. Uh tokenization is a mega trend. it will drive uh more size and therefore more value to many different types of blockchains. But your portfolio is supposed to start with the the the most obvious assets and the most obvious

asset for this thesis is Ethereum the number one uh leader uh in this uh in this category. Now the best approach may be to own a diversified portfolio of boats that includes some of the smaller ones. So we off also make those type of recommendations to our client but certainly it would be a mistake to build a portfolio around the tokenization vision that didn't include uh the big boat uh right in the middle. Okay, that's all I got. Thank you for uh listening uh and look forward to debating all that. Thank you.