Infrastructure and Compliance Will Play a Vital Role in Shaping Tokenized Markets
By Rachid Ajaja
Complex regulations and liquidity are seen as the main limiting factor for the growth of tokenized assets. However, the blockchain industry also needs to come up with a reliable infrastructure, better data governance and management as well as secure trading platforms to develop new asset markets via decentralization.
With impossibly high entry barriers, slow and expensive transactions, an opaque environment, and geographical restrictions, traditional capital markets set the perfect example of how finance used to work. While tokenization has been around for a long time as a concept, the lack of liquidity posed a barrier. Finally, the liquidity and accessibility barriers were tackled with the introduction of blockchain technology and smart contracts, paving the way for the digitization of all types of assets, be they real or digital, tangible or intangible.
Powered by blockchain technology, decentralized finance -- simply known as DeFi -- provided liquidity by attracting more users and injecting money flow into the ecosystem. DeFi, combined with tokenization, created decentralized tokenized markets, which took the best features of the capital market and the money market without the drawbacks.
Holding the potential to shape the future of finance, decentralized tokenized markets solve traditional issues like legacy infrastructures, limited market access, and cross-border restrictions by applying the core features of blockchain to capital markets. Without a series of intermediaries, transactions become faster and cost less. An always-on, scalable, and efficient decentralized infrastructure that can hold the weight of a multi-billion dollar market helps establish a global, 24/7 accessible asset market.
All in all, decentralized tokenized markets give us a picture of how blockchain can truly revolutionize the financial landscape and unite the capital market with the money market. However, the transition from today to the reality where everyone on the planet can immediately tap into decentralized asset markets using digital platforms in a transparent, efficient and innovative way can not be achieved instantly.
Friendly regulations are just the beginning
The complex regulatory environment of the current capital markets is the usual suspect as the main roadblock to blockchain innovation. It’s understandably hard to attract new investors, especially of the institutional scale, when the rules regarding tokenized markets are not clear or change from one jurisdiction to another.
Friendly regulations are a top priority to achieve mainstream adoption for decentralized tokenized markets. However, it doesn’t stop there: If we want to decentralize the capital markets with blockchain, the whole industry needs to be prepared for the time when regulations become favorable —all the while working towards bringing that regulatory clarity as well.
Once the regulatory framework is established, where decentralized tokenized markets lack will be immediately visible to a much wider audience. First and foremost, a reliable infrastructure will be needed so that a multi-billion dollar market can efficiently operate. This way, the market can welcome the next wave of users, companies and institutions looking to reap the benefits of a decentralized infrastructure. We also need great data management and governance so new users can easily hop in, knowing that their data is safe and well-preserved. Then, we need effective funding mechanisms to welcome new market participants from any geography. And, of course, no decentralized market would be complete without a user-friendly trading platform.
Below are the vital aspects of a fully-developed decentralized tokenized market.
Reliable infrastructure for tokenization
The ever-evolving financial space brings the need for up-to-date infrastructure, which serves as the backbone for any thriving market. Having a solid infrastructure means having the capability to handle a high volume of transactions with low latency, which is a necessity in a market with so many competitors. Scalability and interoperability are also pivotal in hosting a diverse range of assets and different blockchain protocols.
The financial infrastructure benefits from DeFi-powered tokenization as it allows fractional ownership and expands market accessibility. Once the infrastructure is established, a broad range of new use cases becomes available. From next-gen, composable NFTs to other smart and flexible digital assets, the market grows alongside new use cases that can only be made possible by blockchain.
Decentralized tokenized markets can solve inefficiencies of the current financial systems that plague the capital market and the money market, automate and streamline the process and bring transparency by leveraging the futuristic power of blockchain technology.
Data management and governance for efficiency and security
In the digital age, where everything is data, it is safe to say any tokenized market -or any market for that matter- without a robust data management system is bound to fail. Customers make transactions every day, and each transaction generates new data. They trust the platforms they trade with private information, and it's crucial homework for the whole industry to protect that sensitive information. Failure leads to devastating damage to users’ trust, which then leads to diminishing market activity.
A cutting-edge blockchain solution to data management and governance that provides advanced encryption will mitigate the risks of data breaches and foster trust among investors. This goes a long way in helping maintain credible records of asset ownership, transaction history and other vital information, which increases transparency. Streamlining the data-sharing process is also very important in providing a seamless experience.
Data management by itself is not enough in a decentralized environment. As there is no central authority, any good tokenized market requires powerful governance mechanisms to resolve disputes, implement updates and shape the platform’s future. Governance allows communities to take responsibility and make decisions for the market in a transparent manner, increasing market stability and bolstering trust and confidence.
Financing for sustainability
Tokenized markets were made to remove colossal entry barriers and give promising projects with tiny resources a fighting chance. Tokenized markets enable investors to buy small portions of digital tokens belonging to Web3 projects via fractional ownership, bringing capital to promising projects and reducing the minimum investment requirement as assets are divided into tokens. Providing a diverse range of financing options will encourage broader involvement, captivating investors, small and large, all over the world with blockchain technology, removing any geographical boundaries.
In decentralized tokenized markets, good investments have a habit of paying back. Project creators usually hold a significant share of their projects' tokens, ensuring investors are not the only ones with something to lose. Promoting venture capital investment in blockchain projects will catalyze innovation and sustainable development within the tokenized ecosystem, as projects with better ideas and transformative potential are more likely to get funding.
Decentralized platform for seamless trading
Say regulations have become friendly, and we have built a reliable infrastructure with top-notch data management while introducing next-gen funding mechanisms to foster inclusivity. Now we need a place where the actual trading happens. It should be fast, it should be low cost, and it should minimize any third-party mediators. Decentralized exchanges (DEXs), which are built on blockchain and operate through smart contracts, provide the perfect trading platform for tokenized markets.
With a strong DEX that operates on a distributed network, tokenized markets can mitigate single points of failure and gain resistance against censorship and regulatory interference. It is also much easier to start trading in a DEX as they do not require extensive identification and verification processes. On the other hand, since most DEXs use self-custody, actual assets are held by users and not the platform —mitigating the risk of hacks and breaches.
Road to the decentralized tokenized markets
The asset market houses a myriad of different parties, including banks, regulatory bodies, clearinghouses and mutual funds. To revolutionize the billion-dollar tokenized market ecosystem, support from market participants is crucial. However, a clear regulatory framework is only one part of the puzzle: Decentralized tokenized markets need robust infrastructure, data management, funding and trading solutions alongside identity and compliance controls to be considered as a replacement for the traditional asset markets.
Rachid Ajaja is a serial entrepreneur and expert in the fields of DeFi, quantitative analysis, and data science. As the Co-founder and CEO of AllianceBlock, he drives the development of decentralized infrastructure for major blockchain networks, web3 builders, and financial institutions, enabling them seamless access to new opportunities in DeFi. Rachid's expertise also extends to his role as the Founder and CEO of Nuant, a digital asset intelligence software provider.
With over 15 years of financial sector experience, Rachid has made invaluable contributions to the development of the DeFi industry. This has included his thought leadership at prestigious events, including the Plug & Play Silicon Valley Summit and Consensus. His deep knowledge and insights into the ever-evolving DeFi landscape, combined with his commitment to democratizing access to opportunities in the sector, continue to define the new financial industry and a decentralized, tokenized market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.