Tokenization and bringing institutions to DeFi Panel

Transcript

so to Dive Right In we can do a quick round of introdution introductions and then we'll jump in uh we're covering tokenization and uh institutional investors in defi I'm Gare from our Ventures I'm also a defi architect and a former lawyer turned onchain Deen uh so yeah hey guys Ben Lake off um partner at bank list Ventures so you've heard of the podcast we also launched a fund last year hey I'm Sean martinac I work at coinbase asset management and I uh I run a tokenization platform called project Diamond hi I'm Jes from comp and we have the design the first real world asset

back by 100% uh gold which is highest purity of four mil hello hello uh my name is m I've been with I ventur since 2020 uh IRG is a crypto investment firm we've been in the space since 2017 uh did a lot of stuff around ethereum over the past five years and yeah happy to be here so tokenization we've been hearing about it since the days of security token offerings and all the stto infrastructure but never materialized last cycle we started to see the likes of centrifuge and gold f bringing some assets on chain uh I don't think it's

quite there yet in terms of institutional adoption so how have we progressed since then where are we now how do you see this path towards tokenization of real world assets on chain I can lead off I mean how many people in here own stable coins just by show of hands uh how many have tokenized treasuries or something like that what about any other kind of rwa I mean yeah pretty good so I think like remembering that stable coins are still like um tokenized real world assets and they probably have the best product Market fit of anything within

crypto so where we were 7 years ago versus now like tremendous adoption from a stable coin perspective but that's kind of like the softball answer to this whole thing I think uh like in the past uh couple years the tokenized treasuries I guess whenever treasury uh rate in uh increased I mean there's like 1 Point one1 1.2 billion dollar of tokenized treasuries now you have somebody like Black Rock coming in and tokenizing um treasuries and putting $300 million of assets on chain so we're making progress but um a lot of times with especially within crypto the the timeline is the the Miss expectation versus reality so

we're we're making making some progress but these guys can probably talk a little bit better on it so basically the evaluation of real world oranization as said have been you know taking various factors into consideration so basically uh a lot of changes have been happening in in the regulatory Landscapes where a lot of regulators are now looking into it in more detail and more specific uh requirements that they are coming up with and there are is uh tokenization platform the selection of the asset class that we need to actually go into rwa and then what kind of a fractional ownership that the uh asset will give

you and based on all these things then what are the compliances governance framework has has evolved over a period of time and with this all these expects you know it's giving the stakeholder a lot of opportunities to you know taking the risk risk appetite and selecting the assets that they need to take their bet on I can give a brief history uh we invested first time in a sand fuge in 2020 and we doubled down last year uh but to be honest back then it was a little bit too early for what centri was doing centrifuge I think they the first

project kind of together with maker Dow coin the the AWA acronym and U early on it was they were trying to kind of classify this non- crypto collateral in maker and choose this uh term right uh but back then um obviously it was totally different environment we had almost zero interest rate environment and uh crypto yield was accelerating very high so we had defi summer in 2020 we have double digit uh crypto native yield so iwa wasn't the hottest product U especially because they were offering private credit that also introduced some uh offchain trfi infrar risk and uh also

lack of transparency uh but I guess uh last or actually this bare Market that we just came out from uh kind of opened the opportunity for rwa um firstly we had interest rates in traditional markets um getting to 5% level and secondly crypto yield was close to nothing uh so project started to look how to basically uh get access to this offchain yield maker again was the the first one to kind of start this shift uh they basically converted uh their balance sheet uh from nonproductive uh usdt that also has some

underlying risk as we were able to see in March last year uh to prod active T bills uh so they were basically uh real asset protocol in the bare Market having most of their revenue generate from there now we are again back to crypto yield uh being the major point of discussion obviously you probably all heard about Tina and what they've been doing with basis trade and stuff uh so rwa might not be the hottest thing at the moment but um it's definitely not going anyway I think first uh interest rates are not going back to zero uh project realized that why don't we do the same thing as maker so there is so much interest now from large treasuries to convert to uh TS and uh since they

already have this offchain risk of usdc like why don't we earn anything or something on it and I think the last component of it is that there is now like um so much Val that has been generated on chain over the past decade and and a little bit more right and um eventually this man is going to look to diversify slightly citing from that angle um also is not going anywhere yeah I might um I guess I'll frame it a different way which is I think that tokenization as a whole can be kind of broken down into a couple of categories one of them are the digital twins that we're seeing today right and and digital twins existing in two infrastructures at once can be very

useful because it unlocks certain features but it also comes with the cost of having to manage both environments so you look at where there's some adoption for that I mean Ben was pointing to uh stable coin point because it had tremendous utility and it also really gained that initial adoption at a time when cap capturing 100% of the net interest margin from the yield underly the collateral underlying these assets was not a big deal because interest rates were zero and then as soon as interest rates went up you saw the onchain world be restricted from capturing those interest rates so there was demand for tokenized money market fund and wrapped vehicles that were going to import that that yield so that's digital twins work in that case when you're restricted and you need to make two copies to get access um I would argue in this is kind of our Focus as a

platform that that's a first step in the tokenization path but the next step is to create digitally Native Instruments because what the broader Capital markets need and keep in mind they're at least 200 times larger than the current total Capital base inside crypto maybe 500 times larger what that Capital Market needs to really enter this infrastructure is they need an efficiency gain and it's not going to show up in terms of massive you know uh we were talking about this earlier 100x returns it's going to show up in terms of an extra 10 basis points on your yield because the margins of improved and the operational efficiency has improved and that comes from creating instruments from their birth through their entire life cycle as highly automated as possible and maturing them on a blockchain and that's where those property rights live so it's about

migrating from the old infrastructure actually natively into the new infrastructure for the broad Capital markets that often come with that regulatory umbrella as a necessity so we need a regulatory unlock we need to take the next step in building that technology um our team is pushing on that and there's plenty of others that are pushing on it as well and I think that that that will be the next phase that we can build on top of what's already been established with things like stable coin yeah I think that's a really interesting point and as we've seen it evolve over time it's gone from stable coins backed by onchain assets then you started to see the uh yield in real world assets higher than being the defi yield so we shifted to stable coins back by real world Assets Now it's

shifting back a little bit to uh onchain yields but actually we're moving more towards centralized structures on that even with things like a FEA which is more a kind of SE centralized defi play um and probably more akin to tokenization so I I think yeah we have seen a lot of what you're calling digital twins um and it's an interesting point that it it's probably going to be new products but in the next wave of tokenization what do you see is the future of tokenization of uh assets on chain uh what have we not seen yet what do you want to see I I can just quickly I mean I I think uh you mentioned it it's not going

to be like this crazy token that 100x is it's going to be these tiny like efficiency gains that are very very profound with large amounts of capital but they're incredibly not sexy it's but maybe for institutions yeah the the other thing you will see is as that infrastructure gets built in it proves that there are efficiency gains available the thing about this new infrastructure is it's much more widely applicable so I think about Capital markets today as like an iceberg and really as big as they are we only see what's above the surface under the surface when you lower activation frictions and you expand access and you get more of a common Global public infrastructure for finance you're going to start to see intellectual property rights all sorts of different categories

and smaller packages of assets start to be able to be turned into products that fit into you know different business and so like we could unlock a tremendous amount of capital markets activity just by applying new tools to a wider set of things and I think that's one of the most interesting aspects of it that we discussed that yeah the products themselves might not be as interesting for onchain Natives and that side of things but you're still going to get exposure to that if you're suddenly having trillions of dollars of assets secured on a chain in TBL a lot of activity there millions of transactions that's going to flow through to the l1's and L2 Network that these a built on top of so basically for the future of the

onchain tokenization basically the the asset tokenization needs to expand and we see is lot of increasing in the liquidity and then introduction to the D5 Network these are the major you know aspects which needs to be looked upon and I I think Sean is probably best to comment comment on this one um I'm not sure what's going to be possible because of the regulatory hurdle uh but I definitely can um be very uh creative with the ways how traditional infrastructure interacts with defi uh but for instance we had this um uh Pro actually we have this project called

backed Finance um last year at least I remember that they were talking about tokenizing any asset like not just T bills but also bringing to stocks so you can trade ideally token as coinbase on on UNICEF or something like that right but then there is always this issue who is going to take this risk of offering non kyc users this this asset they had the idea that U they attract some institutions market makers to basically uh uh mine these uh token standers that represent traditional um uh stocks but and then uh expect that them to bring it on chain but obviously these are all

institutions that are not willing and to accept this risk and it's very hard to bootstrap these new new markets U I think coinbase is definitely actually base chain is in a unique position over here everybody's now trying to find some comfort over there like uh being in close proximity to coinbase which is a industry Giant and uh like just doing everything according to regulations so there is this idea that uh uh we would be able to onboard some of the coinbase kyc users to tokenize products where they don't have to have this friction of like doing uh kyc whenever they want to interact with some products I think think that's interesting and overall I

feel longterm future we build so many interesting Financial products around it uh we can use this like Financial Innovation uh this defi composability also around re assets eventually when there is liquidity right but how do we get there um that's uh that's something that is still not clear so at least Sean's building for them but these institutional investors in defi are they in the room with us right now a great question where are they and what do we need to do to bring them on chain yeah I think uh sorry u m just made a great point one thing I

think is really important we're trying to focus on it but it takes a lot of um it takes excellent partners and and kind of honestly service providers to be wrapped around the table I think one thing you're going to need is you need to be able to backward integrate with the installed base of SAS that runs traditional Finance if you want to bring those institutions in and that's their EMS and you know their execution and op and Order Management Systems it's the general ledger that the entire company across all these asset classes puts all of their instruments on it's the compliance systems that have to be satisfied before they can do anything so building something lightweight that works for unrestricted individuals who are technologically native is great for experimentation but it doesn't it isn't

Backward Compatible into what already Powers the global economy and I think as as we're seeing more startups that are focused on um you know web three native accounting but Translating that into a gap standard and being able to integrate with the MS that's the most popular OMS in the world and those types of things you're going to start to see digitally native instruments or RW show up on somebody's computer screen who's a Trader or making an Capital decision alongside the traditional instruments and when we start seeing that that's kind of the bridge that gets built that allows those those investors to show up in this room and say what's new what can we buy what should we be doing we're here for competitive reasons but In fairness it feels like we're at least three steps away from that and so we're just trying to make sure we're walking

in the right direction I think for for me personally like you guys mentioned thisin efficiency of using blockchain infrastructure for me personally it was funny like U when crypto ETFs launched like um how actually obsolete the financial infrastructure in traditional Finance is like we had to wait for about 24 hours in in first days to figure out what was actually the inflow what was actually the volume and apparently there's just a bunch of people doing Excel inputs and then kind of aggregating these tables and telling us the results the the next day I think we are just working much much better info

like uh we are used to getting real time info and verifying it on chain like it can D analytics and whatnot right I think there are so many of these inefficiencies in traditional Finance even studed from the the the core of the whole traditional Finance if you just look how treasury bills are issued by United States government it's a so many intermediary layers like um it's it's actually funny like for somebody who is Crypt and used to interact with Def and knows how defi Works to to look into this infrastructure but then again like um how this transition is going to happen it's still unsolved like we had this example of Black Rock launching ethereum fund uh and again funny things

happen like as soon as they uh people figure out what was their address they started spamming them with meme coins they they they they sent them the money that was washed in tornado cash like it was a true headache for anybody in Black Rock compliance team so I think there is still long long way to go for these infrastructures to converge to a point where actually TR f is comfortable obviously that will require some level of privacy and not getting spent by m coins uh but um overall like five to 10 years I there's no doubt in my mind that we are working with much much better infrastructure and that there is just so much efficiency to be gained by switching to onchain

yeah basically uh I agree to Sean and so so what what we have done is in the comptech gold what we have done is we have we have tried to merge between the web two and web 3 where what we do is we actually take the physical asset we take them then we keep it in the secur secured wult and once we have these things there are the transr receipts which are given by dmcc which is the Dubai government and those reips we tokenize it so when we are tokenizing those reips they have been tokenized on a multi wall so we have built the know you can say a regulatory framework over there where there is a proper governance by the

Govern govern where they verify the onchain transactions and once they are the tokens are minted and then all the transactions which are been taken place are been verified online maybe just a quick one to finish off as I think we have a few minutes uh so if we're building out these regulated platforms with restricted access to them but it's utilizing blockchain technology is this really bringing institutional investors to defi or is this something entirely different is it still defi yeah I'd say it's bringing onchain aspects to

institutional yeah these they're hybrid systems right um a truly decentralized Financial infrastructure that doesn't abide by any regulatory constraints I personally I kind of I almost see it as a new Academia it's like a it's a zone of experimentation it's really exciting and creative but it doesn't scale to the National level because sovereigns that set up Nations and create stability in a nation they require a sort of control over a rule set um and so you've got to figure out where you have that open environment of experimentation where you have the more closed environment for scaling Capital under a secur Paradigm and we're just we're we're flirting with the boundaries between these things we're probing at them trying to figure out how they're going to land it'll take probably decades yeah I think it's probably some sort of jeel system where

you have the regulatory side that's not really Defi and then what we call defi today is more a test bed for experimenting with the smart contract side the product side and building out but truly a live experiment because you're talking about billions of dollars in this test bet so you get real game theoretic outcomes you have true engagement from people that are dedicating careers and lives to building in that ecosystem because it's profitable for them but it's not the same thing as saying that's the scale of the global Capital markets Yeah so basically I would my view is that uh any institution to come into onchain and selecting the asset class they they they still rely on the banking core banking systems and the

best part is that recently with HSBC you know announcing their world organization platform which is now attracting a lot of interest for institution to actually come and participate in on on chain selecting the on chain investing into that probably if we look at the strictest definition of defi then the answer is no is Black Rock doing defi I don't think so it's some maybe transparent fight uh but there are many elements that are just not defi over there and I think tional money everywhere in crypto like from Venture funds hedge funds that are doing basis trading momentum trading or what not

right like uh to all these exchanges that are funded by institutional money now institutional money going to bitcoin ETFs institutional money trading CME Futures uh it's all over the place but uh can we say that institutional money is in def5 by the strict definition I don't think so yeah I agree I think similar to what we saw over the years with kind of Enterprise blockchain Solutions it's now being built on public blockchains there's transparency there there's uh openness in in that sense and I think Sean we discussed it a bit earlier but we're probably likely to see more retail

focused yet traditional Finance Solutions being built out on chain but I think in terms of decentralization it's probably not even the end goal for most of the institutions it's more towards transparency um I would say okay I think we're probably out of time so thank you thanks everyone thanks again thanks thanks J