Tokenized real-world assets, such as homes and private credit, are a trending topic in the blockchain technology space and appear poised to become the next big story.
Earlier this month, a handful of companies in the sector joined together to form the Tokenized Asset Coalition (TAC), including Aave, Circle and Coinbase. In addition to creating educational content and building the necessary infrastructure to bring different types of assets into the chain, the coalition is also looking at developing relevant, compliant principles to drive the adoption of blockchain technology.
Blockworks spoke with Centrifuge founder Lucas Vogelsang at Permissionless II to learn about some of the necessary standards and regulatory hurdles, such as know-you-customer (KYC) laws that need to be developed to bring tokenized assets onto the blockchain .
Block works: Can you tell me a little about how the tokenized asset coalition came about and what it is trying to achieve?
Vogelsang: In 2018 there was a telegram group called ‘DeFi’, just decentralized finance, and it was really just a group of people looking at how to build financial products on-chain. At the time, we barely had any crypto infrastructure, but the idea was that if you could create a token, and that token could be used in your DeFi protocol, and it became composable, you were building this new financial system.
Those people coming together and working on it just really accelerated the industry. For example, one of the things that came out of that was DeFi Summits. I have seen firsthand how much the financial system is an ecosystem of many different participants and how if you improve collaboration you can make it so much faster.
With TAC we are trying to build a marketplace or an entire ecosystem. The more we can standardize and collaborate, the faster the entire industry will reach breakout velocity and actually compete.
Block works: What standards does the TAC look at?
Vogelsang: I think KYC will be one of the standardizations that will come sooner or later. KYC credentials aren’t really transferable these days, and real DeFi assets are going to have to be KYC-ed and we’re going to have to figure out how to actually work together on this.
Another project that I’m personally very interested in, and not really an active TAC project, is the 4626 tokenized vault standard. If you think about most of these real asset pools, the problem is that many of them are incompatible with 4626 because 4626 is atomic. So if you want to buy back shares in the same transaction, you will immediately get back the underlying collateral or pool assets, but this is not the case for RWAs. So we’re figuring out a way to see if we can come up with an extension that better aligns with RWA projects so that if you want to provide liquidity or invest in any of these types of things, you can do that.
Block works: What is the value of RWAs in the chain?
Vogelsang: The biggest value benefit of RWAs, I think there are two. Creating these assets becomes more efficient because you have instant settlement, a single source of truth in the chain that different service providers can use, and you don’t have to send spreadsheets back and forth.
The other thing that for me is part of this whole RWA story is creating a better market infrastructure. So once you have these assets on-chain, you can trade and borrow against them more efficiently in an automated manner. But you have to start with the tokenization part because without these assets there is nothing to do.
Where this journey goes now, and this is where it gets exciting, is when you’ve achieved a 10x improvement [traditional finance]. Ultimately, people don’t mind having these assets as a token if it doesn’t give them a better experience. If you save just a little bit of cost per year because the tokenization process is slightly cheaper than the [traditional finance] securitization process, that’s certainly cool, but it’s not nearly as cool as if you can take an asset today that’s illiquid, and you buy a tokenized version of it that’s liquid, because the market infrastructure is actually better on-chain and more efficient.
Block works: Can you tell me a little more about these illiquid assets in the real world that you think could be liquid on chain? Would it be something like properties or houses?
Vogelsang: There are many people in the crypto-native world experimenting with marketplaces for non-fungible assets, but liquidating a house requires the same thing: we have to figure out a way for a liquid market to exist for non-fungible assets , really and truly. -world assets, but I think that will come later, because it is still quite a difficult problem.
If you look at fungible assets, like private credit, the reason why it’s called private credit is because it’s not publicly traded. It is not an open public market because these assets are too difficult to liquidate on the New York Stock Exchange.
If we can build a more efficient market infrastructure for these assets, we can convert them from private credit assets to public credit assets. All of these assets currently have a huge illiquidity premium because they are more expensive to finance. So if you can take these assets that are too small or too complex to make liquid, and you move them to the right of the spectrum, then you start to build something very powerful, because now all these assets become liquid.
That’s why when I think about standardization efforts, focusing on creating the infrastructure needed to do that is really the biggest unlocker for real assets.
This interview has been edited for brevity and clarity.
