Now that the tokenization industry is seeing investor demand, particularly for U.S. Treasury and money market products, on-chain issuers can start moving up the risk curve in the name of diversification.

Tokenized short-term liquidity funds have found product-market fit across institutions, Web 3.0 investment firms, blockchain foundations, and other crypto-native organizations this year. Six products each reached $100-plus million and one reached the $500 million mark in July 2024, eclipsing $2 billion in collective flows.

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Protocols are electing to diversify their own treasury holdings into real-world assets, with Ethereum Layer-2 Arbitrumdeploying $27 million in ARB tokens into BlackRock’s BUIDL, Ondo Finance’s USDY, and products offered by Superstate, OpenEden, Backed Finance, and Mountain Protocol. MakerDAO opened theSpark Tokenization Grand Prix competition to tokenize and integrate $1 billion in real-world assets. Meanwhile, synthetic dollar protocol developerEthena Labs is exploring allocating a portion of its $280 million stablecoin holdings and reserve fund to yield-generating real-world assets.

Prime brokers, market makers, and custodians have also been enjoying the benefits of professionally-managed liquidity products providing pass-through yield where existing stablecoins would not. One good example is prime brokerFalconX accepting BlackRock’s USD Institutional Digital Liquidty Fund (BUIDL) as collateral for trading and swap positions from clients. That’s an immediate value-add for FalconX, its clients, and Securitize as the tokenized fund issuance platform alike. More FalconX clients will likely elect to swap stablecoin and cash holdings into BUIDL for the on-chain yield, which will drive additional capital and participants from the digital asset realm towards the Securitize ecosystem. As detailed inApril 2024, onboarding capital to tokenization platforms through short-term liquidity funds is paramount to tokenized alternative assets seeing success.

Web 3.0 organizations and asset managers will begin shifting up the risk curve and building out diversified books after finding some level of comfort with tokenized liquidity funds. Private investment funds are ripe for an unlock. Singular commercial real estate and residential real estate assets have proven to be tough sells; they concentrate risk, are not very differentiated, and generally have less velocity than investment funds geared towards the same asset class.

Contrast that with the $14 trillion residential mortgage space and associated Mortgage Servicing Rights (MSR). Residential MSR have clocked an estimated $1 trillion in annual secondary trading volume during each of the last four years running through venues like Blue Water. Token-focused investors are typically seeking two-sided liquidity, an active market, and underlying asset velocity. Bringing an existing two-sided market to the tokenization space will alleviate current industry pain points, offering something attractive to the nearly $2 billion in liquidity fund capital that resides on-chain. As such, Blue Water sits as that bridge between digital asset capital markets and the ever-active mortgage industry.

Disclosures: Disclosure - Blue Water Financial Technologies (bluewater-fintech.com)

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Opinion Crypto Long & Short Tokenization Funds

Peter Gaffney

Peter Gaffney is Vice President of Business Development & Strategy at Blue Water Financial Technologies, a mortgage asset trade and transfer platform integrated with buy-side, sell-side, and origination partners. Peter is leading Blue Water’s tokenization initiatives to enable digital asset capital markets participation in the mortgage industry. Prior to Blue Water, Peter led 40+ client engagements as Head of Research at Security Token Advisors, an advisory group constructing tokenization strategies and implementation for asset managers and infrastructure providers. He authored ‘Blockchain Explained: Your Ultimate Guide to the Tokenization of Finance’ and built up the ‘State of Security Tokens’ institutional-grade research series. Peter also leverages experiences at Global X ETFs and a boutique private equity firm in his work to bring public and private markets under one roof via tokenization.