The Trillion-Dollar Question: What Actually Belongs Onchain? — Brandon Kazakoff | Real Finance

Hi everybody. Um again, I'm Brandon, the chief commercial officer from Real Finance. We are an institutional grade, purpose-built blockchain for real-world assets. Now, you know, pretty much uh across a lot of the events that we've been to um recently, you hear that RWAs and tokenization is an incredibly strong narrative. Almost every RWA talk that I've listened to drops at some point the predictions, the metrics of tens of trillions of dollars that are going to be coming on chain.

So, we keep hearing that it is a multi-trillion-dollar opportunity. Now, for this talk, I'm going to be a little bit contrarian and um try to offer a bit of a reality check. Uh despite these incredible metrics and uh predictions of tens of trillions of dollars coming on chain, I think that there's potentially some more important things to be looking at. And that kind of comes down to the usability of these assets that are being brought on chain. So, you know, only pretty much any asset can be tokenized.

So, the question that I kind of want to look at here is what actually becomes more valuable by being tokenized. So, I want to try and give you a bit of a practical filter to look at to see what actually maybe has an opportunity to win in this ever-evolving transition that we're about to see uh for financial infrastructure and what might be, you know, false promises or doesn't actually have a use case. So, at Real, we have an answer to this question in practice. You know, if an asset doesn't gain utility or functionality by coming on chain, um it might not actually belong there. So, you know, crypto um this industry as a whole at this point in time especially, they've never really met an asset that they don't want to tokenize.

Money, um, with stable coins, bonds, equities, private credit, um, commodities, art, collectibles, sneakers, like, you name it, somebody, you know, my blade of grass, there's millions of them, right? Like, I I could probably tokenize every single one. Or at least that's the way that some people might want to look at it, right? You can bring everything on chain. But should you?

I've got a little bit of a story for you. Um, you know, as mentioned, I've been in the Web3 industry for 10 years at this point. Uh, I've spoken with, no exaggeration, hundreds of different projects, uh, helped in the GTM strategy of bringing tens of different projects to market. And I've I'm very lucky that I've got a lot of sample data, um, and a lot of exposure as to the different ideas that people have had, um, and I've got, again, data in terms of what potentially works and what potentially doesn't. Um, I'm going to give you an example of a project that came to me.

This was 5 years ago. Hopefully it doesn't make it back to him that I'm speaking about it. But it's an example of what shouldn't be brought on chain. This guy came to me with a a concept for Coral Coin. And so I asked him basically the fundamentals of how it works, right?

Well, he said he wants to tokenize coral. There are viable projects, by the way, tokenizing coral for, um, restructuring and for environmental, um, you know, uh, work at this point and and they have validity. But the way that this guy wanted to structure his business model was by basically sharing the narrative that they were going to tokenize coral and have it base basically be fully for the purpose of charity. Um, the question I asked him was, why would people invest in the coin? And he said, well, to support the regrowth of damaged coral reefs, right?

And I said, okay, so this is going to directly go into regrowing and repopulating coral. And he's like, well, yeah, yeah, we'll we'll build a factory. You can actually propagate coral in a factory. Um and then, you know, what we'll tell the people is that we're going to be growing the coral reefs and supporting them. But I want to tell you a piece of coral the size of my thumb can go for hundreds of dollars for the purpose of, you know, putting them in your aquarium as decorations.

And I said, okay, is there a split between um the environmental goals and then the business goals of trying to make profit off of it? Is there profit that's going to be running back into the token economy? And he's like, well, no. As we tell them it's a charity, then we sell the coral for the purpose of decoration. And for me right there, that's an example of like the disconnect between what people are trying to bring on chain.

Is it an actual viable business? Does it have a viable use case? And that's a that's a basically an outlier or stretch goal, right? It it completely deviates from the financial instruments, potentially, that we're we're talking about. Um you know, digitizing an asset itself, um that's been proven to be very, very easy.

But giving giving it a reason to exist on chain, that's what's a little bit more complicated. Effectively, a lot more complicated. So, the distinction matters because the industry's largest numbers, um rounding back to that multi-10 trillion-dollar projection, these largest numbers often measure um what's been represented and what could be brought on chain, but not what actually is being used. So, tokenized credit gives us a really clean example of the delta between what is being represented on chain versus what is being used, right? You know, there's uh and these numbers are fluctuating all the time, but 35 billion dollars of tokenized credit that is represented on chain.

However, less than 8 billion dollars is actually distributed to holders. So, 21% of all credit that's, you know, private credit, public credit that's been brought on chain is distributed to holders. So, the represented value can, you know, be tied to an asset that is mirrored um or just recorded on chain, but the distributed value, it shows assets that are um you know, actually being held by holders. The one thing with this though, it doesn't actually prove liquidity or repeat usage yet. So, the first step is to go beyond just tokenizing something.

Distribution is a major failure point that we're seeing with a lot of projects in the tokenization and RWA space. Um but there are points beyond just the distribution that I'll get into a little bit later. So, kind of one of the things that I want really want to drive home, like notional value and this rounds back to the reality check of these massive predictions, notional value is not adoption yet. AUM, that doesn't represent liquidity. Um and you know, I'm not mentioning this I guess as an area of criticism for this growing space.

It's actually the the purpose of kind of bringing this to everybody's attention here is that's where the opportunity lies, right? Um the opportunity lies in building out platforms that aid in this distribution, um the financing of particular assets that are being brought on chain, reliable data to actually make these financial instruments usable, which is tied into our core thesis at our blockchain. Um and then the secondary markets that make these things tradeable, the composability, the use cases, why would somebody actually buy one of these assets after it's been tokenized? Can you trade it? Can you send it uh with the right transfer restrictions depending on the jurisdictional frameworks and and laws that we're beholden to?

Can you borrow against it? Does it generate yield? All of these things are big questions as to why should something be tokenized? At the end of the day, it comes down to people get engaged with the crypto market or tokenized financial instruments because they want financial opportunity. If the financial opportunity doesn't exist, maybe it doesn't belong on chain.

So, kind of touching on the adoption going further than just the issuance side of things and then the next step, which is distribution, it's whether or not an instrument is actually used. Um and if it's economically active. So, if it's issued, again, this has been proven time and time again that this is possible, right? The technical and legal work, as well as the uh technological infrastructure, has been put in place to tokenize an asset. Great.

If it's distributed and used, that means that real users hold it. Um you know, and it's doing something if it's used, right? It is able to be settled. Um it is potentially earning yield. It's able to be transferred.

Um or it's able to be borrowed against. It's financing another position, right? Um and then the step beyond that, which is ultimately the stretch goal of, you know, creating usable financial products on chain, is if it's economically active, right? Like, is there credible liquidity? Can you buy in and out of this asset?

Um is there repeat demand for it? Is there a market for it, right? Is it able to be actually traded? Um so, you know, like a pilot of tokenization that answers can we bring it on chain? The market is ultimately what answers should we be bringing it on chain?

You know, just because you can tokenize something doesn't mean you've actually got a good business plan or a good business use case, right? Um the best evidence that I can give for this is some of the first tokenized real-world assets that uh effectively escaped just the you know, going beyond issuance trap. And that's that stablecoins very clearly had a market, right? They are the first RWAs. Um there's a lot of things that worked in their favor.

Simplicity of the asset, right? The there's a kind of a few key things. Do they accurately represent what the underlying asset is? Um can it be transferred? And can it be redeemed for real fiat money?

Can it be redeemed traded into another digital asset, right? Um you know, they gave users kind of an internet-native dollar that uh can move globally at any hour, settle trades, again, act as collateral, right? Um all of these points of that I've mentioned that make something attractive to actually put your money into. Um now, transfer volume, that's not really the same as retail payment volume. It still proves something important that uh these assets are actively moving on chain.

Um but there is still a lot of infrastructure work that needs to happen for real-world payment scenarios to actually be integrated with the blockchain. So, there's another area of opportunity, which I really want to try and weave in throughout this talk for you guys. Now, every RWA opportunity should ultimately face these questions, and I'm going to keep trying to drive them home repeatedly for you. Um is there demand? Right?

Is there genuine on-chain utility associated with the financial instrument? Can the asset and its rights be trusted? And, you know, as opposed to going straight into shilling the project, I want to talk about real finance and how this kind of works into our thesis. One of the gaps that we've noticed with a lot of the general purpose blockchains is that they've handled the issuance side of things. You can tokenize anything kind of on any blockchain, including the general purpose ones.

Um even some of the ones that are purpose-built for RWAs, there's still a bit of a gap in terms of whether or not an instrument can be trusted. And that comes down to the off-chain data reliably being translated on-chain. So, the traditional financial markets, I'm sure have proven to a lot of you where they don't work. That's why we're all interested in Web3 and crypto. However, there have been some areas where they prove that they they do work, right?

Risk scoring is a very important one. Um insurance capabilities, the actual legal rights and underlying information on the asset itself. There's a gap in the that information coming on-chain. So, one of our biggest differentiators at Real Finance is building out a dual validator architecture, which goes beyond just your technical validators that keep the network secure, but gets into uh business entity validators. So, these traditional off-chain entities like risk scoring agencies, insurance companies, the tokenization companies themselves, and the asset issuers all acting on the network and embedding all of that very valuable information into the tokens metadata.

To round back to can these become usable financial products once they're brought on chain. All of that information is incredibly important. Um you need to understand the the probability of default on a private credit fund, for instance, and that information has to come on chain for different borrowing rates, different yield rates to actually be able to be applied in a DeFi protocol, right? Um so yeah, in terms of the market uh going to that sort of end stage and we we've got luckily massive gaps between where we are and where we need to go, which again creates a lot of opportunity for folks. Um you know, the markets determine who distributes it, who finances it, the end users, right?

If it's uh financed on the on chain. Um who supports the redemption, um liquidity needs participants, and this is uh the same that you find with just crypto-native assets as well. It's all going to apply to these on-chain financial instruments. So one test is not enough. You know, again, demand without a market, that's uh supply that isn't going anywhere being used for anything.

Utility without trust, you know, without the actual proper information, that is not going to be able to be used for these back-end composability use cases. They might not work with regulatory frameworks. You might not be able to collect yield on them. You might not be able to borrow against them with traditional financial institutions and their requirements. And then if a market doesn't have enforceable rights, right?

There's no actual uh legality tying the digital representation to the real underlying instrument, then it's liquidity, but potentially super risky. So, you need to have all of these variables tied together. Um so, you know, this might sound boring, but in our opinion, the strongest candidates are not exotic assets that are searching for some blockchain narrative. Um the things that need to be started on first are some of the ones that we interact with on a daily basis, right? That's why stable coins were so successful.

On our side, that's why we're going to focus on things like bonds, right? Because the regulatory frameworks actually have pretty good clarity on whether or not somebody can collect yield by investing in a bond. Um there's less variables in terms of an on-chain bond versus an on-chain security. However, those are coming on chain as well. Um So, you know, at the end of the day, the winners aren't an asset that are still searching for a use case.

Like, if you're going to tokenize something, it should already have demand. Um So, yeah, I'm I'm repeating myself a bit, but I still want to drive this home. Most RWA failures, they're not going to come from an inability to create the token or a technological gap. They're going to come from creating a token before a reason to own it exists, right? Before there is market demand, and it roots back to that.

People invest in things because there's financial opportunity. So, for the people How many of of you are builders in this space here? Yeah. So, you know, building infrastructure that can just go towards minting a token, that's something that's already been solved. One of the biggest failure points is how a token can be transferred.

Again, these back-end composability use cases. What is actually going to generate demand? Where are you going to create a community that is going to actually start to invest in these things. That's where a lot of the opportunity lies, where a lot of the institutions as well as a lot of the infrastructure companies are looking to cooperate with folks and and close the gap on that. Um So, as an example, right?

You know, two projects they can tokenize the same asset um and have completely different outcomes. The surrounding product and market determine whether the token matters, right? Uh it could have a contract address. There could be fractionalized ownership. Um everything important still, you know, if everything still uh important still happens off-chain, which kind of routes back to where we're trying to tie things in technologically, um then it doesn't necessarily give the on-chain interactor the trust to be working with it, the trust to put their money into it, and so therefore it may fail.

Um there's other variables involved, too, right? When you think about if something is tokenized, you think about the full life cycle of tokenization, and it doesn't just come down to the asset originator and the blockchain that it goes on. There's numerous other counterparties involved. There's the financial intermedi- intermediaries that deal with the legal requirements. There's banks holding custody of the underlying asset.

There's digital asset custodians holding custody of the uh digital representation of that asset. And then again, all of these back-end composability use cases. So, somewhere within this life cycle, if you're a builder, there's an opportunity to fit in that and enable it and make it work more smoothly, or again create more demand for the instrument. So, you know, the demand, I think it gets a lot bigger once we stop looking at the token as the finished project or a product, sorry. The largest value is going to be created by what these credible assets can enable once they're on chain.

So, I've talked about this numerous times. For the institutions, is it cheaper to interact with, right? Do they have less uh jurisdictional bottlenecks or friction doing cross-border payments and settlement? For the investor, right? Are they able to get access to assets that they might not be able to because of their jurisdiction?

Or are they able to make money off of it in a way that outpaces the traditional financial market? Right? These are kinds of the things that are going to make something incredibly attractive. Um So, I don't have too much time yet, so I'm going to riffle through some of this. I've touched on it.

The hard part is beyond after the token exists. It's the numerous counterparties that need to coordinate with each other so that a financial instrument can actually be usable once it's brought on chain, right? That's again the main argument of this this whole thing is just because you can tokenize something doesn't mean it's actually usable. Um so, yeah, uh you know, I've touched on that a little bit ago already. You know, we don't we shouldn't ask whether or not something can be tokenized.

We should ask you know, what uh becomes possible with it, right? At the end of the day, it comes down to the opportunity for potential gains, whether that be in yield. Um but it needs to work in uh regulatory environments. Or if it's a speculative asset, um accessibility is a big point. Um but again, all of this interoperability between uh different chains, different networks, the interacting financial institutions, and you or others potentially as the end retail user.

So, the winners, they're not going to probably be the projects that bring the most assets on chain. they're going to be the ones that end up having the biggest user base actually interacting with these assets and transitioning from their traditional financial infrastructure or their traditional banking over to this new wave banking, right? So, that's about it for me, my friends. Um you know, I again, I've been in this space for for 10 years. Um one of my strong points on, you know, beyond the the go-to-market strategy and tying in, I guess, institutional needs with retail demand and and bridging that gap is uh kind of working with with people who are building things in the space, hearing their ideas uh and helping them close the gap from ideation to go to market.

So, outside of the presentation that I just did, I'm curious if anybody has any questions for me relevant to something that they're actively doing in the space.

Let's see if you have a question.