Escaping the Casino: How Tokenized Assets Will Save DeFi From Itself

Vitalik Buterin is right: DeFi today is a circular speculative economy. The bigger opportunity lies in bringing traditional capital markets on-chain, so that crypto reaches the mainstream, says Zach Rynes (aka ChainLinkGod), who serves as a Chainlink Community Liaison.

Ethereum Co-Founder Vitalik Buterin’s recent observation that DeFi “feels like an ouroboros [a snake eating its own tail]” has sparked a lively discussion about the future of decentralized finance (DeFi).

In a CoinDesk column, Zach Rynes (aka ChainLinkGod) argues that DeFi’s current incarnation as a “circular casino” is unsustainable and will ultimately hit a wall. However, he believes that DeFi can still play a crucial role in scaling crypto adoption by focusing on tokenizing traditional capital markets.

According to Rynes, DeFi’s strength lies in its ability to create an on-chain financial system that provides the core primitives for an open, globally accessible and robust financial system, including payments, swaps, lending, derivatives, insurance and more.

Despite the initial product-market fit being largely limited to token gambling, the infrastructure and protocols that underpin DeFi are capable of handling a much wider range of assets.

To move beyond the casino stage, DeFi needs access to more assets that can be represented as tokens. While cryptocurrencies have brought DeFi this far, evolving past the casino stage requires seeking out where most of the capital in the world resides. And the answer is obvious.

Tokenizing all the assets within the traditional financial system — bank deposits, commercial paper, treasuries, mutual funds, money market funds, stocks, futures, options, swaps, etcetera — would bring hundreds of trillions of dollars worth of capital on-chain.

One single firm, BlackRock, manages nearly five times more assets ($10.5 trillion) than the market capitalization of the entire crypto market ($2.2 trillion).

This capital could then be seamlessly integrated with existing on-chain finance protocols, effectively replacing token gambling with real-world financing.

Far from being a distant dream, many of the world’s largest financial institutions are actively preparing for a future where tokenization is the norm.

In less than half a year, BlackRock’s tokenized fund on Ethereum, BUIDL, has surpassed $500 million in AUM, bringing the total value of tokenized government securities on public blockchains to over $1.5 billion.

While this amount is still a small fraction of the value locked in the traditional system, the active participation of the world’s largest asset manager in a public blockchain ecosystem is highly significant.

Furthermore, stablecoins have demonstrated the genuine demand for tokenized assets. With over $150 billion of U.S. dollars tokenized on-chain and a monthly transfer volume of $1.4 trillion, stablecoin usage now rivals that of established payments networks like Visa.

While not often considered a tokenized asset, the only distinction between Circle’s USDC and BlackRock’s BUIDL is who collects the yield.

Stablecoins highlight the fundamental value of tokenization as they enable anyone to transfer dollars to anyone else in the world with just an internet connection. Transactions are settled in under a second and for less than a penny in fees.

Anyone in a country with a hyper-inflating currency who has attempted to make a cross-border remittance payment or simply wants to conduct a financial transaction on a weekend or holiday will immediately recognize the advantages of stablecoins.

Although DeFi’s token gambling will never fully vanish, it is evident that the underlying infrastructure that presently enables DeFi will come to define the functioning of the world economy.

The path forward is paved by embracing a simple truth: tokenized assets are a superior method of representing financial assets.