Digital Asset Markets: 5 Essential Themes

Digital property have had a wild experience during the last yr. A number of centralized crypto corporations, from the hedge fund Three Arrows Capital to the crypto trade FTX, have failed, whereas the SEC, the Commodities Futures Buying and selling Fee (CFTC), and different US businesses have initiated a regulatory onslaught towards crypto-related companies. Additional, amid excessive inflation, a banking disaster, and a possible recession, all threat property face an unsure macro future. 

However we are able to’t neglect the long-term uneven alternative that digital property could supply. Basic traders are looking for the digital tasks that stand the most effective likelihood for mass adoption regardless of the destructive overhang. With that in thoughts, 5 essential themes have emerged in digital asset markets that might result in wider blockchain adoption within the medium to long run.

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1. The Large Gamers Are Right here: Web2 Partnerships and the Subsequent Wave of Web3 Customers

Thus far, digital asset adoption has been principally the area of native Web3 innovators. To proceed alongside this curve, extra early adopters want to return onboard. A number of corporations with pre-crypto origins made vital progress in 2021 and 2022 by initiatives that helped broaden Web3’s consumer base past crypto natives.

4 tasks particularly have leveraged Polygon, an Ethereum-based scaling answer, to facilitate these efforts.

Polygon + Initiatives

In lots of of those circumstances, prospects don’t even know they’re interacting with blockchain expertise. Web2 corporations have successfully abstracted the blockchain away. Thus far, Web3 onboarding has been pretty technical; by making it much less so, manufacturers might help encourage mass adoption.

Google and Amazon have additionally seen the worth of partnering with blockchains for node operation. Amazon Web Services has paired up with Avalanche and Google with Solana

Why are all these manufacturers implementing Web3 plans? To enhance their consumer expertise and buyer relationships, entice Gen-Z digital natives, and unlock different sources of income, amongst different causes.

Amid continued optimistic momentum in 2023, we anticipate extra large manufacturers to observe their lead and develop their very own blockchain initiatives.

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2. Ethereum Dominates, However Should Scale to Service Mass Adoption

With 60% of decentralized finance (DeFi) complete worth locked (TVL) and 85% of NFT transaction quantity, Ethereum is the clear chief amongst good contract platforms. Nonetheless, ought to thousands and thousands of individuals stampede to Web3, the Ethereum community may very well be overwhelmed and the value to transact on its blockchain may turn into prohibitively costly. So, how can blockchains scale up? We see three doable approaches.

Three Blockchain Varieties

Chart visualizing three blockchain types

  1. Monolithic blockchains like Solana supply execution, settlement, consensus, and information availability multi functional. Apps are constructed instantly on high of the blockchain. However this may create scalability points — the so-called blockchain trilemma — if the blockchain is each decentralized and extremely safe.
  2. Modular blockchains like Ethereum 2.0 separate the execution, settlement and consensus, and information availability layers. “Layer 2s,” within the type of sidechains and rollups, assist the unique “Layer 1” blockchain scale with out sacrificing decentralization or safety. Functions are constructed on high of each Layer 1s and Layer 2s.
  3. Universes of interconnected blockchains like Cosmos are ecosystems with comparatively safe inter-blockchain communication protocols, so totally different blockchains can trade information and worth between them.

Because of the Lindy effect and the present dominance of Ethereum and its Layer 2s in new venture launches, we anticipate modular blockchains to prevail. Although smaller positions within the different blockchain-scaling fashions, particularly these with strong tokenomics and engaging relative valuations, could also be a very good hedge. 

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3. Tokenization Will Deliver Numerous Exogenous Belongings On-Chain

Tokenization creates digital representations of varied property, from securities and funds to paintings and different collectibles, and is among the many most essential present Web3 narratives. The advantages of tokenizing property clarify why this theme is gaining such traction.

The Advantages of Tokenization

Tokenized Actual
Property, Artwork, and
Different Collectibles
Opens up
securities markets
to a worldwide pool
of traders
Makes institutional
non-public market methods
extra accessible to
particular person traders
with decrease funding
minimums, improved
onboarding, and
probably higher liquidity
Permits for
Elevated liquidity,
sooner settlement,
and decrease prices
Transforms comparatively
liquid assets
into simply tradable items

The chance is very large. According to HSBC estimates, tokenized market quantity will attain $24 trillion by 2027.

How is that this theme expressed in liquid token portfolios or non-fungible property (NFAs)? By good contract platforms that present the general public blockchain and settlement infrastructure for these tokenized property. KKR tokenized its health care fund and Hamilton Lane its $2.1B flagship fund by Avalanche and Polygon, respectively. Decentralized functions (DApps) — Maker, Centrifuge, Maple Finance, and Ondo Finance, for instance — assist customers bridge actual world property (RWAs) to DeFi.

4. RWAs Can Assist Counter DeFi’s Circularity

DeFi’s “self-reference” has been a perceived shortcoming of the sector. For instance, a DeFi consumer could take out a mortgage on lending protocol Aave for leveraged buying and selling of property on the Uniswap decentralized trade.

We’re bullish on alternatives that break this circularity drawback by integrating exterior data and “actual world” use circumstances onto closed blockchain networks. There are lots of current examples of non crypto-native companies turning to DeFi.

By the lending protocol Maker, customers can borrow their DAI stablecoins by locking collateral in Maker’s good contracts. Constructed on Ethereum, Maker determines which collateral they settle for in addition to the collateralization ratios for every collateral kind. Most collateral on Maker at the moment is within the type of stablecoins, like USD Cash (USDCs) pegged to the US greenback, however RWAs are a fast-growing phase. At the start of This autumn 2022, RWAs made up solely 2% of the collateral on Maker, however that has grown to 13%, and RWA income currently accounts for over half of Maker’s revenue. Certainly, RWA collateral now consists of US Treasury bonds by MIP65, loans from Huntingdon Valley Bank in Pennsylvania, and funding grade asset-backed securities through BlockTower Capital.

RWA Exercise

Chart showing RWA Activity: Assets per type DAO
Chart showing RWA Activity by Maker

Constructed on the Ethereum and Solana blockchains, Maple Finance is one other lending protocol that gives infrastructure for credit score consultants to run on-chain lending companies. Earlier this yr, it introduced a $100 million receivables financing pool, enabling Intero Capital Options to borrow USDC towards receivables and investors to lend their USDC for a 10% targeted yield.

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5. NFTs: The Underappreciated Upside

NFT exercise boomed in 2021 with gross sales quantity and distinctive patrons rising 41,784% and 6,959%, respectively, according to CryptoSlam. In 2023, NFT exercise is on the upswing once more thanks to 2 essential occasions: the disruptive launch of Blur, an Ethereum NFT marketplace, and the explosive reputation of bitcoin ordinals, by which customers can inscribe textual content, photos, and different information on satoshis, or smaller bitcoin items. 

NFT Exercise

The 2021 growth remembers that of the preliminary coin choices (ICOs) in 2017 and serves as a DeFI proof of idea. “Profile image” NFTs of cartoon apes and pixelated punks however, we imagine a a lot bigger digital collectible market spans the next industries:

  • Gaming: By NFTs, avid gamers can extra absolutely personal their in-game land, avatars, and different property they’ve earned and invested in. Gaming NFTs may very well be offered, exchanged, and moved amongst totally different metaverses in order that customers can transport their digital property from Recreation A to Recreation B fairly than ranging from scratch. 
  • Music: Followers may spend money on and help their favourite musical artists by NFTs. For instance, they might buy a share of an artist’s track that entitles them to royalty rights at any time when that track is performed on streaming providers. NFTs may additionally unlock real-world experiences for followers, comparable to early entry to new monitor releases or meet-and-greets with the artist.
  • Ticketing: NFTs even have functions within the reside occasions business. Through Ticketmaster’s partnership with the blockchain Flow, occasion organizers can now situation NFTs round reside reveals. Much like music NFTs, these functions may improve followers’ experiences and function digital collectibles. Ticketmaster’s web site now contains a wallet and NFT market in order that collectors can share and commerce.
  • Social Media: The centralized Web2 social media giants revenue from content material that they don’t create. Due to social media’s present ad-driven enterprise mannequin, precise content material creators go underpaid or usually are not paid in any respect. By storing their social media on a public blockchain by NFTs that symbolize profiles, likes, feedback, and different exercise, content material creators can, by social tipping, secondary marketplaces for profiles, and different ideas, higher seize worth for his or her work.
  • Area Names in Web3, comparable to runa.eth, resemble their Web2 counterparts like They’ll function web sites and e-mail addresses. These domains are technically represented as NFTs on blockchains and supply extra use circumstances — for information storage, for instance, so customers can then give functions permission to entry sure data. On this manner, customers can carry their information across the net by way of NFTs and have fuller possession of their on-line identification.
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To make certain, the digital asset house remains to be early in its growth. Whereas now not in its infancy, it’s removed from a mature market. As such, it stays each extremely speculative and ripe with potential.

That’s the reason it’s value keeping track of — and approaching with warning.

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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

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Alex Botte, CFA

Alex Botte, CFA, CAIA, is the Head of Shopper and Portfolio Options at Runa Digital Belongings, an funding agency specializing in digital asset portfolios. On this function, she is answerable for the funding threat framework, chairs the Danger Committee, and contributes to content material, portfolio analytics, analysis, and shopper engagement. Botte was beforehand a Vice President at Two Sigma, the place she produced funding management-related content material and helped with the event of the agency’s factor-based threat analytics platform, Venn. Previous to Two Sigma, she was at AQR Capital Administration, the place she most lately served as a Product Specialist for the agency’s International Asset Allocation methods. Previous to AQR, she labored in Prime Providers at Barclays. Botte holds a bachelor’s of science in utilized economics and administration from Cornell College.

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