April 24, 2024

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Mehdi Brahimi, head of institutional business at L1, argues that the integration of wallet infrastructure in tokenized finance will replace intermediaries and become standard in the modern asset management lifecycle.

Then, Kelly Ye, head of research at Decentral Park Capital, says that Coinbase's Base L2 offers a model for crypto user adoption.

As always, get the latest crypto news and data from CoinDeskMarkets.com.

– Benjamin Schiller, head of opinion and features at CoinDesk

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From the Analyst

Why Asset Tokenization Is Inevitable

Financial markets are undergoing a transformative shift with the advent of tokenization. This movement is not merely a speculative trend among tech enthusiasts, but a fundamental shift in how assets are managed and transacted globally.

The tokenization of real-world assets (RWAs) is not just an emerging trend; it is setting the stage for a new era of asset management.

The distinction between crypto-native tokens and tokenized RWAs is crucial. Crypto-native tokens, such as bitcoin and ether, are purely digital and serve as both a speculative investment, store of value, and a utility within their own ecosystems. Tokenized RWAs, on the other hand, bridge the digital and traditional financial worlds, effectively bringing liquidity and fractionalization to improve the accessibility of assets that were previously "less liquid."

The March 20 launch of BlackRock's first tokenized fund, BUIDL, a private short-term treasury fund, marked a significant milestone for tokenization. Not only did BUIDL attract almost $300 million in assets in its first month, but BlackRock, the largest asset manager, is signaling that tokenization will be "the next generation for markets." Tokenized government treasuries are already a $1.2 billion category, with products like BENJI, issued by Franklin Templeton, BlackRock's BUIDL, and Ondo Finance's USDY which highlights a meteoric 10x growth since January of last year.

Currently, on-chain RWAs represent a $7.5 billion market. While this might seem marginal relative to the tens of trillions of dollars worth of assets managed traditionally, the pace of growth and the increasing range of assets being tokenized — including treasuries, commodities, private equity, real estate, private credit, and others — suggest a tipping point. A 2022 Boston Consulting Group report estimated that the market for tokenized assets could grow to $16 trillion by 2030, which would greatly enable DeFi protocols catering to these assets to develop entire new financial ecosystems across lending, liquidity pools, futures and derivatives, and other markets.

Trillions of dollars of new wealth has been created on-chain. This is a new investor demographic that expects to access and interact with financial products and services from their own wallets. These crypto-native investors have benefited from an ecosystem that operates 24/7, with lower barriers to entry than traditional financial gatekeepers, walled gardens, and business hours, and sometimes even front-running traditional markets.

A recent example that, X user @kaledora analyzed on April 13, 2024, as geopolitical tensions rose between Iran and Israel, PAXG, a version of tokenized gold, traded at a 20% premium to its closing price of April 12, with its volume peaking at end of day on Sunday, April 14. This coincided with gold's market open at 5pm ET and illustrates that the fundamental principles of asset safety, which are central to traditional markets, also apply to digital assets.

Graph Source: @kaledora on X

The concept of "Bring Your Own Wallet" (BYOW) encapsulates the autonomy and power shift that blockchain brings to individual investors. BYOW removes the dependency on intermediaries for asset custody, allowing investors to manage and access their assets without the constraints of traditional intermediaries and delayed settlement.

As more assets come on-chain, asset managers will likely incorporate strategies that will allow them to tap into new sources of liquidity, and arbitrage between on-chain and off-chain markets. This evolution brings familiar territories on-chain, providing asset managers with the traditional framework they are accustomed to, allowing them to apply fundamental portfolio construction principles and manage investment strategies within a digital asset context that will provide distribution opportunities into crypto-native investors.

As we look forward, the tokenization of asset classes and the integration of crypto-native investment principles will likely become a standard in the modern asset management lifecycle. The shift is not just inevitable; it is clearly underway. Asset managers and allocators who embrace this change will build new generational firms that align with a new generation of investors. A generation that brings their own wallet.

- Mehdi Brahimi, Head of Institutional Business, L1

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Institutional Outlook

Why Base Chain Has Potential to Lock the Next Generation of Crypto Users

As 2024 marks the 15th birthday for Bitcoin, we are at a stage similar to the 1990s, where crypto, like the internet, is crossing the chasm between early adoption to mainstream acceptance thanks to the improvements in blockchain performance.

We believe the critical next step to onboard the next billion users depends on blockchains' ability to attract and retain users. To this point: Base, the Ethereum Layer 2 developed by Coinbase, has emerged as a frontrunner with impressive growth this year.

Source: Token Terminal, April 2024

What Factors are Driving Base's Success?

Leveraging Coinbase for user acquisition: Base is developed by Coinbase to seamlessly bridge their users to the crypto economy. It is integrated into the Coinbase mobile and web applications, with easy fiat on and off ramps from the exchange. With 110 million users at Coinbase and 7 million on Base, there is much room to grow.
User experience: Coinbase is launching major UI improvements addressing the biggest hurdles for mainstream adoption. The Smart wallet simplifies the login process without the need to remember lengthy recovery phrases while Magic Spend uses smart contracts to abstract away the complications of gas payments, allowing dApps to pay gas fees on behalf of their users. Furthermore, Coinbase is going to store more customer USDC balances on Base, making it easy to deploy cash on-chain.
Strong community: Jesse Pollack, the creator of Base is also the biggest influencer within the Base community. We have also seen early success in social dApps building on Base such as Friend.Tech and Farcaster, demonstrating the benefits of Web3 social and building a loyal community.

Although Base does not have its own token, it uses ETH for gas, OP for governance, and AEVO, the token of the largest DEX on Base, functions as the Base ecosystem's incentive token through its vote escrow mechanism. The Base ecosystem fund is acquiring AERO to give out as incentives to projects so they can lock up AERO to incentivize liquidity.

While several established DeFi projects have deployed on Base, the native projects on Base have garnered a significant market share. Aerodrome, the largest DEX on Base by TVL, has generated almost the same amount of fees as Uniswap recently, a notable achievement considering Uniswap is deployed on 16 chains.

Source: Token Terminal, April 2024

Moonwell, the leading borrowing and lending protocol on Base, boasts a TVL that nearly matches those of AAVE and Compound on Base combined and has seen 4X user growth since the beginning of the year. Through the USDC Anywhere program, Moonwell can tap into USDC stored on any chains supported by Circle, in addition to the USDC stored on Coinbase.

Source: Gauntlet, April 2024

Degen, initially a meme token but now utilized by Farcaster as the de facto in-app currency, has experienced a five-times increase in users within a month, exceeding the growth record set by BONK, the famous Solana meme coin.

Source: Dune Analytics, April 2024

With Coinbase's support and the rapid development of its ecosystem and community, Base is poised to be forebear to bring blockchain technology closer to mainstream adoption.

- Kelly Ye, Portfolio Manager, Decentral Park Capital

Takeaways

From Nick Baker, CoinDesk's deputy editor-in-chief, here is some news worth reading:

THE HALVING: I would wager that many bitcoin (BTC) newbies and a whole lot of the conventional investors now roaming cryptocurrencies don't care much about the inner workings of the Bitcoin blockchain. Maybe they got lured into this kooky crypto thing by bitcoin ETFs. Or maybe the oft-repeated line about bitcoin being digital gold got them obsessed. As I picture these folks in my mind, I can tell some have heard the phrase "the halving." But that imagined crowd isn't dripping with halving expertise, so they've missed out on a potentially giant thing it triggered. The halving – the once-every-four-years event that cuts the reward for mining new bitcoin in half, shaking up the economics of running the blockchain – happened without incident early Saturday (UTC time). Miners now get paid 3.125 BTC when conjuring a bitcoin. But the first block processed under the new rules was a doozy. The winning miner got 3.125 BTC, but that block also featured 37.6 BTC of transaction fees (about $2.4 million at the time), orders of magnitude more than is typical. That was ushered in by a new protocol called Runes launching at the instant the halving took place. Runes effectively brings meme coins to Bitcoin, thanks to the same person who last year brought the equivalent of NFTs to Bitcoin via the Ordinals protocol. People minted new meme coins on the Bitcoin blockchain like crazy in the aftermath, generating all those fees. That lasted a while, but fees have since cooled down a lot – though they're still higher than before the halving. And this brings a different kind of development to the Bitcoin ecosystem, and the possibility that miners will do just fine with the lower mining reward – more than making up the lost revenue with transaction fees. Should bitcoin-investing normies care? It's way too early to tell how this might change how the Bitcoin landscape looks. Does it herald even further advancements in what Bitcoin can do, making it more akin to the DeFi ecosystem seen on Ethereum, Solana and elsewhere? Does that affect bitcoin's price? These are questions that might be worth pondering.

Want more? For the latest news affecting the crypto markets, listen to CoinDesk's Markets Daily podcast.