If you thought Web3 or the metaverse were going to spark the next big crypto rally, think again. According to Citigroup (C 3.06%), the next major wave of crypto market adoption will be led by asset tokenization, which is the process of transforming real-world assets into digital assets that can be stored, accessed, and traded via the blockchain.
Citigroup predicts that asset tokenization could become a $5 trillion market opportunity by 2030. As Wall Street gets behind this trend, says Citigroup, the popularity of asset tokenization will explode in areas from real estate to private equity and venture capital. Because asset tokenization relies on blockchain-based technology to work, it's only natural to ask: Which coins or tokens could benefit from what Citigroup is calling a "killer use case" for crypto?
It won't be Bitcoin
Although Bitcoin is the one cryptocurrency that is most often associated with Wall Street and financial markets, it will likely play little or no role in asset tokenization. There are several reasons for this, with the most obvious one being that Bitcoin was not designed to support smart contracts. These smart contracts are small pieces of executable computer code, and they are the reason why some people refer to cryptos with these capabilities as "programmable money."
To tokenize an asset and put it on a blockchain, you need smart contracts. These contracts can be written in such a way as to define ownership rights, as well as the rules of how assets are transferred between different owners. Given this complexity, you likely wouldn't even be able to include all the terms of a financial instrument within a block on the Bitcoin blockchain, which is optimized for holding basic transaction data only. Thus, the real beneficiaries of any asset tokenization trend will be blockchains that support smart contracts.
It won't be Ethereum
This brings us to Ethereum, the blockchain that is credited with launching the concept of the smart contract back in 2015. And, indeed, a number of Wall Street giants have experimented with the Ethereum blockchain for pilot projects. In November 2022, JPMorgan Chase (JPM 1.94%) made headlines with the trade of tokenized cash deposits using Polygon, a Layer 2 scaling solution for Ethereum.
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But Ethereum is simply too slow and expensive to use for the scale and scope of asset tokenization that Citigroup has in mind. Even after The Merge, Ethereum can only process 15 to 30 transactions per second, and its transaction fees are still too high to be practical for asset tokenization. What Wall Street needs and wants is a super-fast, near-zero-fee blockchain capable of instantaneous settlement of transactions.
Solana and Avalanche
And that leads me to think either Solana or Avalanche could emerge as beneficiaries of the asset tokenization trend. Both are high-throughput, extremely fast blockchains with near-zero fees. And both have extensive experience with decentralized finance (DeFi), including the creation of decentralized exchanges capable of trading tokenized assets.
Citigroup specifically mentions real estate and private equity as two of the most promising areas for asset tokenization, and these are two areas where Solana and Avalanche have real-world use cases. For example, in 2022, Avalanche helped to tokenize a $4 billion healthcare fund from private equity giant KKR (KKR 2.00%). Tokenized stocks have existed on Solana since 2021. And, last month, Solana announced that one of the projects within its ecosystem had successfully tokenized a single-family home in Texas.
How big is this market opportunity?
Of course, there are a number of issues that will have to be addressed first if asset tokenization is going to take off. As Citigroup mentions in its report, there are legal and regulatory issues to consider. There is also the question of interoperability. It could get really messy, really fast, if every Wall Street bank is using its own proprietary blockchain infrastructure. That's why I think using a "public" blockchain like Solana or Avalanche makes the most sense.
It's impossible not to hear about a potential $5 trillion market opportunity and not be impressed. There are even some who think the market opportunity could be much larger. For example, Boston Consulting Group has suggested the size of the asset tokenization market might be $16 trillion by 2030.
Right now, the size of the total crypto market is $1.2 trillion, so Citigroup's "killer use case" could lead to a huge increase in the valuation of any crypto that gets ahead of the asset tokenization trend. While the rest of the crypto world is focused on NFTs and the metaverse, I'm going to be taking a much closer look at which cryptos could skyrocket in value as a result of asset tokenization. For now, my best picks are Solana and Avalanche.
