For much of the past decade, the cryptocurrency industry has focused on tokenizing niche, often illiquid, assets in an attempt to reinvent finance. However, this approach has largely overlooked a core economic principle: tokenization creates the most value when applied to assets with high demand and established frameworks.

The Miscalculation of Illiquid Assets

The initial instinct to tokenize illiquid assets proved to be a miscalculation. While creative, these efforts failed to recognize that tokenization’s power is maximized when applied to assets already experiencing significant demand. Today, companies are piloting tokenized versions of highly liquid assets like Treasury bills, smaller currencies, and stocks.

Liquidity as a Precondition

Liquidity is the essential precondition for tokenization to transition from a novelty to a foundational infrastructure. Tokenization works best when upgrading the existing rails on which trillions of dollars already move, rather than attempting to create demand from scratch.

Focusing on Core Financial Instruments

Money, sovereign debt, and major financial instruments form the base layer of the global economy, utilized daily by governments, corporations, and individuals. Tokenizing these assets doesn’t necessitate creating new demand; it enhances existing systems.

Stablecoins as a Success Story

Stablecoins have demonstrated this principle, successfully mapping onto an existing, massive use case. They facilitate the global movement of dollars quickly and cheaply. Tokenization adds the most value where frictions are large and expensive, compressing settlement times from days to minutes.

Benefits of Tokenizing Liquid Assets

Tokenization allows assets and cash to move together in real-time, bypassing intermediaries and altering the cost and risk profiles of financial operations. Network effects flourish around high-demand assets like money and sovereign debt, fostering immediate interoperability and enabling a shared unit of account.

Why Illiquid Assets Fall Short

Illiquid assets, while potentially possessing cultural or speculative value, struggle to anchor broad financial network effects due to their difficulty in standardization. Adding programmability to these assets allows for fractionalization or automation, but doesn’t unlock new economic coordination.

Collateralization and Capital Efficiency

The ability to use a tokenized asset as collateral is crucial, and this largely depends on its liquidity. Liquid assets can be safely integrated into automated systems due to their transparent, real-time valuations, significantly improving capital efficiency. Tokenized liquid instruments can be rehypothecated, fractionally deployed, and programmatically allocated in real-time.

Regulatory Considerations

Dollars, government bonds, and large corporate debt benefit from well-established legal status, issuer accountability, and regulatory frameworks, making institutional adoption of tokenization more straightforward. In contrast, NFTs face challenges related to ownership, custody, and investor protection.

The future of tokenization will be defined by assets that are economically central. While early experiments with NFTs were understandable, they focused on the wrong type of asset. Tokenized government bonds and equities represent the logical next step in blockchain’s evolution from experimental technology to foundational financial infrastructure.