Happy New Year everyone! I hope everyone had enjoyed some quality time off.
I know I have been away for a while. I have been busy with go-to-market work behind the scenes, helping a number of tokenization teams with their projects, e.g. here. One particular challenge I realized crypto native asset allocators have is a lack of systematic allocation process. If you are a credit portfolio manager reading this. Please drop me a line. There are many productive conversations to be had!
I spent my holidays catching up on all the happenings across many crypto verticals. And what a start to the year we have! With the latest discourse centered around the imminent SEC approval of a dozen spot Bitcoin ETFs, James Seyffart and Eric Bachulnas of Bloomberg have been my go-to sources on the topic. Instead of rehashing their excellent coverage in the first newsletter of the year, I want to focus on a trend that has far reaching implications for the tokenization space.
Distribution Distribution Distribution
In one of my previous posts I talked about a lack of distribution mechanism as well as the still relatively small capital pool being two of the main bottlenecks for tokenized RWA growth. The recent Cambrian explosion in user and capital growth across the broader crypto ecosystem offers an opportunity to tackle these two issues.
A key benefit of having an SEC approved spot Bitcoin ETF is often touted as the opening of floodgates to trillions of capital held by millions of individuals in addition to institutional investors. In other words, such a development would increase Bitcoin’s distribution channel many times. If its analogue cousin, the gold, is any guide, the ensuing expansion of the asset class following the approval of the spot ETF in the US could be a telling sign of what is to come. See chart below.
In an ideal world, a % of the approximate $1 trillion and rapidly growing capital locked in Bitcoin gets released through a Bitcoin L2 and flows into RWA yields as holders diversify their portfolio. Unfortunately, technologically speaking we are not there. Bitcoin doesn’t yet have an L2. At best, it has a few sidechains such as Stack and Lightening.
However, if a rapidly growing AUM and user numbers plus a smart-contract enabled blockchain are key to a growing addressable market for tokenized products, then the recent explosive growth in the L1 and L2 ecosystems signals more capital sources.
Cambrian Explosion
Until now, Ethereum has largely been the only game in town. During the last cycle when RWA tokenization projects such as Centrifuge and Maple took off, most if not all capital came from Ethereum.
However a few recent trends may be signalling a different future that we have not seen before.
Solana resurgence
Emergence of modular vs integrated blockchain ecosystems
User migration to cheap and fast alternative blockchains
While different in nature, they all signal a world where the fastest growing AUM and user base are not on Ethereum. And this has significant implications for user acquisition and product strategy for RWA projects.
The chart above from Defillama shows the TVL changes of top 10 blockchains in the last month. Of particular interest are the 1 month change column. Although coming from smaller bases, Solana, Avalanche, Base, BSC, Arbitrum and Optimism all had a larger TVL growth than Ethereum in general. Of particular interest from a distribution perspective is that both Solana and Arbitrum lead the pack in stablecoin AUM growth.
While Ethereum still offers the largest sources of capital, such as MakerDAO, Frax and Aave, the emergence of new capital pools on other chains represent unexplored opportunities.
As the modular vs integrated debate heats up, the hotspots where users interact with blockchains will be the new battleground for user acquisition. For example, if Solana leads the race in winning over users and capital in payments, DeFi and gaming due to its cheap fees, fast transactions and easy composability, then RWA products with payment angle or short term financing feature would find more natural compatibility here than elsewhere. If, by contrast, Arbitrum/Base become the go-to destination for the DeFi crowd in a modular set up, where Ethereum becomes the settlement or data availability layer, the value capture of users and capital would shift to applications on Arbitrum.
As users move to other chains or as prominent projects with capital emerge on non-Ethereum chains, RWA project’s distribution strategy needs to be adjusted so it captures a % of the growing pie.
Some of the leading players in the RWA space are already adopting a multi-chain strategy.
Centrifuge is on Ethereum, Arbitrum, Base, Celo and Centrifuge
Maple is on Ethereum, Base and Solana
Ondo is on Ethereum, Solana and Mantle
Conclusion
The recent rapid growth of blockchain ecosystems outside the Ethereum may turn distribution bottleneck in the tokenization space from one where there is a limited number of allocators on a single blockchain to one where there are many emerging and growing allocators across a large number of networks.
Being able to meet this new emerging customer base may require not only a different BD focus and relationship network but also additional engineering resources.
Integrating multiple blockchain is no easy task given the resource constraint it demands of the engineering teams. The last thing you want to see is spending 6 months working on integrating technology but finding little or no capital from users on a new chain.
This challenge applies equally to crypto native as well as more institutional minded asset managers or issuers in the audience. The question of allocator mapping and technology integration is non-trivial to both in a future where digital assets make up a substantial part of asset management business.
Keeping a close eye on user growth across a myriad of blockchain ecosystems is no small task. Two key metrics I will be tracking in the next few months are active wallet numbers across different L1s and L2s and the breakdown of their usage. If you want to get the latest insights into the adoption trend, subscribe to the Crypto Adoption Curve newsletter.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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