Escape from the Casino: How Tokenized Assets Will Save DeFi

Author: Chainlink Community Liaison Zach Rynes, Coindesk; Translator: Baishui, Golden Finance

Ethereum co-founder Vitalik Buterin recently created a thread on cryptocurrency Twitter, in which he wrote that DeFi "feels like an Ouroboros [a snake biting its own tail]: the value of crypto tokens is that you can use them to earn returns, and these returns are paid by the people who trade crypto tokens."

He went on to point out that "While DeFi may be great, it is fundamentally capped and cannot be the factor that brings another 10-100x adoption boom to cryptocurrencies."

Vitalik is right.

The ethos of decentralized finance (DeFi) is the belief that a blockchain-based financial system will free society from rent-seeking intermediaries and make financial services accessible to the world’s unbanked.

However, it’s easy to overlook that much of what is considered “DeFi” today is really just a circular casino that facilitates speculation in tokens whose value is primarily derived from the monetization of that token speculation.

The demand for circular token speculation is finite, and retail capital is not infinite.

DeFi in its current state is not the catalyst that has expanded cryptocurrency adoption to current levels, but that doesn’t mean creating an on-chain token casino is a futile exercise.

DeFi in its current form has proven that it is possible to create an on-chain financial system that provides all the core primitives needed for an open, globally accessible, and robust financial system: payments, swaps, lending, derivatives, insurance, and more.

The infrastructure and protocols that DeFi relies on do indeed reduce counterparty risk and costs while increasing transparency and accessibility — even if the initial product-market fit is nothing more than token gambling.

So how can DeFi overcome its cyclical obsession with token gambling and play its rightful role in expanding cryptocurrency adoption?

Tokenized Assets

At its most basic level, blockchain is the best way to issue, transfer, and track assets through the creation of digital tokens. Finance revolves around asset management, which makes DeFi the most tangible and obvious growth opportunity for crypto.

However, to grow, the DeFi economy needs access to more assets that can be represented as tokens. While cryptocurrencies have propelled DeFi to where it is today, evolving beyond the casino stage means looking for where most of the world’s capital is. The answer is obvious. Tokenizing all assets within the traditional financial system (bank deposits, commercial paper, treasuries, mutual funds, money market funds, stocks, futures, options, swaps, etc.) would bring hundreds of trillions of dollars worth of on-chain capital. A single firm called BlackRock manages nearly five times as much assets ($10.5 trillion) as the entire crypto market cap ($2.2 trillion). This capital could be seamlessly plugged into existing on-chain financial protocols, effectively hot-swapping token gambling with real-world financing. This is no pipe dream, and many of the world’s largest financial institutions are actively preparing for a future where tokenization becomes the status quo.

In less than half a year, BlackRock’s tokenized fund on Ethereum, BUIDL, has surpassed $500 million in AUM, bringing the total value of tokenized government securities on public blockchains to over $1.5 billion. While this figure is a fraction of the value contained in traditional systems, the active involvement of the world’s largest asset manager in the public blockchain ecosystem speaks volumes.

In addition, stablecoins have proven that demand for tokenized assets is overwhelming.With over $150 billion of USD tokenized on-chain and $1.4 trillion in monthly transfers, stablecoin usage is now comparable to established payment networks like Visa. While Circle’s USDC and BlackRock’s BUIDL are not typically considered tokenized assets, the only difference between the two is who gets the yield.

Stablecoins highlight the core value of tokenization, as they allow anyone to transfer USD to anyone in the world with just an internet connection. Transactions are completed in less than a second and cost less than a penny. The benefits of stablecoins are obvious to anyone who has been in a currency-smooth country, tried to make a cross-border remittance, or simply wants to conduct financial transactions over the weekend or vacation.

While DeFi's token gambling will never completely disappear, it is clear that the underlying infrastructure that currently supports DeFi will determine how the world economy works. The path forward stems from a simple fact: Tokenized assets are a superior way to represent financial assets.