BlackRock (BLK -0.21%), the company that led the push for the first spot ETF for Bitcoin, is back at it again, this time with an entirely new investment product for the Ethereum (ETH -4.07%) blockchain. If all goes according to plan, this new product could revolutionize the way Wall Street does business.
That's a lot to ask, of course, but I think Ethereum could be ready to take full advantage of this potential new trillion-dollar market opportunity. With that in mind, let's take a closer look at what this new product is, why it launched on Ethereum, and how it could transform the world of finance.
What is a tokenized asset fund?
The new product, called the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), is a tokenized asset fund, and it's part of a long-term trend on Wall Street called asset tokenization. While the term "asset tokenization" might sound a bit intimidating, it simply refers to the process of transforming a real-world financial asset into a blockchain-based digital asset.
In this case, BlackRock is "tokenizing" nearly $100 million worth of cash, T-bills, and repos. When institutional investors buy into the fund, they receive a crypto token on the Ethereum blockchain that has several unique properties. For example, it behaves much like a stablecoin, except that it also has the potential to pay out a daily yield. Stablecoins, which are usually pegged 1:1 to the U.S. dollar, aren't supposed to be able to do that! The reason BlackRock's crypto token can do this is the result of the efficiencies made possible by blockchain technology.
That's why this product -- even though it might be a bit difficult to fully wrap one's head around it -- could be so revolutionary. In theory, blockchain-based digital assets should be superior to traditional, real-world assets. And thus, by extension, they should be more attractive to investors. According to BlackRock, the new tokenized asset fund boasts several key advantages for institutional investors when it comes to transparency, liquidity, and settlement time.
Looking long term, a number of very smart people think asset tokenization could be a huge, multitrillion-dollar trend. Citigroup, for example, recently called asset tokenization a $4 trillion market opportunity. And the Boston Consulting Group has been even more bullish, calling it a potential $16 trillion dollar opportunity.
Why Ethereum?
So you can see where I'm going with this, right? Any blockchain that is leading this new multitrillion-dollar trend could see a huge spike in valuation, once investors realize what's happening and how significant it could be.
Image source: Getty Images.
That's why it's so significant that BlackRock chose Ethereum for its first-ever tokenized asset fund. The Wall Street giant could have picked any other blockchain, but it picked Ethereum. And that's clearly due to the fact that Ethereum is the 800-pound gorilla of the decentralized finance (DeFi) world. According to the total value locked metric (TVL), which measures how much DeFi activity is taking place on a particular blockchain, Ethereum currently accounts for a whopping 57% of all DeFi activity in the blockchain world.
Of course, it's fair to push back and say: Hey, this is just one product. So what? Well, the bigger context is that BlackRock is the largest asset manager in the world, with nearly $10 trillion in assets under management. Moreover, BlackRock CEO Larry Fink is on record as saying that asset tokenization is an absolute megatrend for Wall Street. As soon as the new Bitcoin ETFs launched, he told CNBC that asset tokenization was coming next. So there's clearly more to come.
Potential impact on valuation
If you agree that asset tokenization is the future of finance, and if you think that Ethereum will remain the DeFi leader, then it makes sense that Ethereum could soar in value as this trend gains legs. But by just how much?
One approach might be to track the TVL metric for Ethereum over time, to see if it is moving upward as expected. As more tokenized asset funds launch, and as Ethereum gets more and more involved with the asset tokenization trend, it should start showing up in the numbers. Currently, Ethereum has a TVL of $52 billion and a market cap of $425 billion. Roughly speaking, every $1 billion gain in TVL is worth an additional $8 billion in market cap.
Of course, it's not a slam dunk that Ethereum will be able to get in front of this trend. After all, blockchains are by their very nature decentralized. There's no CEO at company headquarters running the numbers, demanding Ethereum leap headfirst into this market opportunity.
Instead, it's much more the case of thousands of Ethereum developers around the world steadily making new improvements to the Ethereum blockchain, which in turn, make the blockchain more attractive to companies like BlackRock when they launch new products. So, while you should definitely keep your expectations for Ethereum in check, this could very much be a trend worth monitoring.
