#OnFi, or "On-Chain Finance," is the #Web3 vertical most likely to attract institutional attention in 2024.
But many people haven't heard of it.
Here's a quick crash course to help get up to speed on one the hottest upcoming narratives ⤵️
✍️ BACKGROUND
2023 wasn’t kind to crypto markets — it was a year marked by volatility sparked by regulatory crackdowns to volatile market conditions. Though many sectors of the Web3 industry faced challenges, one bucked the trends and promises to be a transformative force in 2024. That sector is RWAs.
The positive moves in #RWAs came from an unlikely source: TradFi itself. Many titans of the financial industry started to move toward tokenizing their assets or even issuing natively on-chain assets, including HSBC, J.P. Morgan, and Goldman Sachs were part of this trend, as was Larry Fink, Black Rock’s CEO.
Due to this trend, RWAs grew in 2023 from a market cap of $500 million to over $5 billion, despite headwinds, and the trend appears to be accelerating in 2024.
The pivot to #tokenization came in two forms: tokenizing existing assets (like bonds, real estate, and cash) and issuing on-chain tokens in lieu of using traditional methods. Let’s take a look at both below:
🏦 TOKENIZING TRADITIONAL ASSETS— #OnFi
Cash was one of the first assets to be tokenized, with USDT being the #4 tokens by market cap and USDC at #7 at the time of this writing. Coinbase has driven this point home recently, releasing an ad advocating for the tokenization of the penny.
😊 “MONEY IS HAPPIER WHEN IT'S DIGITIAL”
Pushing a centralized and censorship-enabled version, governments have proposed their own tokenized cash systems, CBDCs. While controversial, the move illustrates just how popular the tokenization of cash has become, with some in the US government arguing that even non-centralized, DeFi-based stablecoins are good for the dollar’s reserve currency status.
Banks and governments have also started to look seriously at tokenizing bonds and treasury bills. This move would tokenize assets traditionally confined to the ledgers of banks and investment firms — everything from sovereign bonds to the cash in your wallet. But it’s not just government entities getting in on the action.
TradFi giants like like Franklin Templeton, WisdomTree, and Arbdn are looking at offering tokenized bonds, with Web3 companies like Backed, Maple, and PropserEx following suit.
Tokenization extends beyond mere cash equivalents.
“Alternative assets,” or “alts,” are an asset class that encompasses real estate, private equity, and commodities. Alts are also being reimagined for a tokenized future. Traditionally, these assets have been characterized by their illiquidity and high barriers to entry. However, through tokenization, they are becoming more accessible, enabling a broader base of investors to diversify their portfolios with assets previously out of reach.
⛓️ NATIVELY ON CHAIN ASSETS
But the OnFi revolution doesn’t stop with the digital representation of traditional assets. It also includes the issuance of natively on-chain assets. These assets are not mere digital twins of physical securities; they are born on the blockchain and carry the legal recognition and benefits inherent to digital assets. This groundbreaking approach promises to streamline the issuance process, enhance market transparency, and reduce transaction costs.
Examples include Goldman Sach’s DAP, a tokenization platform that could issue digital bands on behalf of governments. HSBC has also created Orion, a tokenization platform working on a 50 million pound bond. Siemens, UBS, SBI, and DBS. All of these entities are not digitizing assets, but issue assets that only exist on-chain. Consequently, they will be able to fully enjoy the benefits of tokenization.
CONCLUSION
OnFi, or tokenization, is poised for acceleration in 2024.
The potential benefits are too significant to ignore: from disintermediation — cutting out the middlemen — to the democratization of investment opportunities.
Initiatives by Swift and innovations by industry giants like JPMorgan and DTCC underscore the momentum building behind this movement.
Often, many Web3 companies propose solutions where blockchains are the product i.e. where moving operations on-chain introduces an added overhead, but not this time — this time, blockchain is being applied in a way that makes existing processes more efficient and cost-effective. Web3 will transform not just how assets are traded but also how they are conceptualized.
No doubt there are many regulatory hurdles still to overcome. But increasingly, the hurdles are regulatory in nature, not technological. In 2017 there was no infrastructure capable of supporting #OnFi.
But thanks to huge leaps by chains like Avalanche, Hedera, and Solana, as well as easy-to-use portals like PropserEx, a more open and permissionless financial system may be about to dawn.
