How much does the Earth cost?
— Kanye West
Tokenization is the process of leveraging digital assets to represent ownership of real world assets (RWAs). Tokenized treasuries now represent a total value of over $691 million according to rwa.xyz data. To illustrate the potential market, the size of the U.S. bond market is $51 trillion, 39% of the global bond market.
RWAs have been an emerging sector of crypto that has had a lot of excitement around real estate; however, there are reasonable doubts in the broader digestibility of fractionalized ownership in real estate and similarly indivisible assets like fine art and luxury watches. The tokenization of treasuries presents an attractive and familiar gateway for institutions and enterprises to see the efficacy of on-chain representation, settlement, and enforcement of RWAs.
Ondo Finance
One of the most prominent projects building on Solana is Ondo Finance, which takes aim at providing institutional-grade treasury products to the blockchain, starting with the the interest-bearing stablecoin, USDY. Ondo is backed by Founders Fund and Pantera Capital, and incubated by Coinbase Ventures. On Solana, Ondo has partnered with Squads, the standard for multisig solutions to maintain a collaborative, transparent management authority over their deployment of USDY.
Ondo aims to create a “decentralized investment bank” and expand their range of products on-chain. With partners in major blockchains like Ethereum, Solana, Mantle, Sui, and Aptos, Ondo is positioned well to onboard large capital flows to tokenized assets.
On Ethereum, Ondo has OUSG, which is a tokenized U.S. Treasury that is backed by BlackRock’s iShares Short Treasury Bond ETF (SHV) and is the only collateral accepted on Flux Finance, Ondo’s lending platform. Ondo is the second largest on-chain treasury offering after Franklin Templeton.
Tackling institutional-grade finance is attractive in demonstrating the capabilities of tokenization on Solana while increasing the quality of assets and opportunities for businesses to migrate on-chain. Ondo is on its way to be a leader in RWA and bringing trusted tokenized financial assets to Solana.
Tokens and USDY
Tokens on Solana are created and managed through the Solana Program Library’s (SPL) Token Program, which recently got an upgrade with Token Extensions, also known as Token 2022.
The architecture of Ondo’s tokenization effort is an interest-bearing stablecoin product USDY backed by BlackRock ETFs. Users can swap USDC through a DEX to receive USDY. USDY is an interest-bearing token. In comparison, the top two stablecoins right now, USDT and USDC do not pay yields. USDC on Coinbase pays a 5% yield because they invest USDC for yield. Also currently paying around 5%, USDY is tackling the stablecoin market and providing a strong alternative to both traditional High-Yield Savings Accounts (HYSA) and getting the yield from Coinbase.
The important distinction between USDY and USDC on Coinbase is that USDY can earn yield even in your on-chain wallet, natively. Coinbase can decide to change the yield they pay out at any time and pocket the difference. Traditional banks have cut the rates they offer down simply because they can and the average consumer won’t leave. This has the benefit of putting more freedom in the user for self-custody of their assets.
Stablecoins tokenize fiat currency and have proven to be the most successful use-case for tokenized assets on-chain. According to rwa.xyz, the market capitalization of stablecoins is over $135 billion. The value of all U.S. Dollars in circulation is over $2.3 trillion. USDY emerges as a strong alternative to the stablecoin duopoly by putting yield back into the hands of the self-custodied user.
Only Possible on Solana
Solana is a strong candidate for Ondo to deploy USDY because of high performance made possible through intentional design of the blockchain. Network effects of high usage and liquidity on the chain makes Solana a strong candidate in the eyes of traditional institutions.
Low Fees: Compared to Ethereum and Bitcoin, Solana is one of the largest blockchains that has fees that are fractions of $0.01 thanks to local fee markets and parallelization of transaction processing.
High Transaction Speed: Solana is one of the fastest blockchains because of parallelized processing of non overlapping transactions.
DeFi Infrastructure: Low fees and high transaction speed inspire higher trading volumes and frequent transactions that fosters an environment for strong DeFi infrastructure to be built. Solana has large projects including Jupiter, Kamino, and Meteora that grow the DeFi pie and can generate more use cases for tokenized assets and results in higher capital efficiency.
Token Extensions: There are features including mint close authority, interest-bearing, permanent delegate, confidential transfers, and native metadata that are now possible natively at the token program level that used to be pulled and composed from other programs. Native features allows for a greater level of auditability, trust, and efficacy in the broader adoption of tokenized assets.
Why Tokenize Everything?
Tokenization is a natural use case for high performant blockchains like Solana. Low fees and high transaction speed both make it easy for users to transfer value in the form of digital assets that are backed by RWAs.
Institutions like McKinsey, Coinbase, the Federal Reserve and BlackRock, have all done extensive research into the possibilities of tokenization, with Larry Fink deeming the tokenization of financial assets as the next step, and the advantages are plenty:
Fast Transaction Settlement: Currently, most securities transactions have a T+2 timeframe for settlement, with T+1 aiming to be implemented later in 2024. With digital assets, settlement can occur nearly instantaneously.
Liquidity and Availability: Tokenization allows markets to operate 24/7, and provides access to financial operations from anywhere in the world. For the majority of people, it’s not even possible to move a large amount of money on the weekend. With tokenized assets, you can be your own bank. Putting assets on-chain creates markets where people can access liquidity.
Operational Cost Savings: For assets like precious metals, there are costs associated with storage, security, and transportation. When ownership is transferred, and thus value, it’s often done physically, with each transfer requiring storage, security, and transportation. Gold bars sold by Costco were vulnerably left in packages at customer doorsteps without any security. Tokenization removes the operational bloat and risk involved in transacting assets.
Broader Access and Transparency: Government issued I-Bonds, intended to be inflation resistant, require a separate account to be made with the Central Bank and moving money to that account to buy a product that was not known broadly. With tokenization, everyone would be able to seamlessly gain exposure to tokenized assets through their wallet.
Higher Capital Efficiency: A common theme in crypto, the pursuit of higher capital efficiency is an incentive for everyone to participate in new protocols and seek higher returns while contributing to an ecosystem that builds a decentralized future. With tokenized assets, people could earn yield through existing DeFi protocols. For example, someone that owns tokenized gold can go and lend it directly on a DeFi protocol. In real life, there are no convenient avenues to earn yield on gold.
Verifiable Authenticity: Continuing with the tokenized gold example, a token would represent share of real gold, verified by a standard. If you tried to sell a large amount of real gold, there would be many processes of drilling and testing the metal for purity.
Self-Custody: When everything is tokenized, you have the choice of what to do with your assets. You are free to store it wherever you want, take it anywhere in the world, send it to anyone, whenever, wherever. No more waiting for a business day to contact your bank.
Creating and Managing a Token with Squads
Squads is the premier multisig solution for Solana, targeting teams who want to collaborate and manage programs and treasuries securely. The latest protocol, Squads v4, has undergone four independent audits as well as two formal verifications that mathematically validate the correctness of the protocol.
The execution and management of a token are crucial for widespread adoption of tokenized assets. As the scale and scope of tokenized projects grow, more support and confidence is needed for people to feel secure that their assets are safe.
For a token that represents exposure to U.S. treasuries, regulation and compliance are paramount. A multisig solution allows Ondo to require multiple signatures when executing mint and freeze transactions, distributing authority among multiple trusted parties. Minting new tokens adds to the outstanding supply of USDY, and freeze allows Ondo to prevent the token from being transferred or sold. To protect against malicious actors or to sanction funds, mint and freeze authority are crucial features in tokenizing RWAs. A multisig wallet on Squads can ensure that the authority over a token is not concentrated in a single point of failure.
If your token does not require token extensions, you can even use Squads to create the SPL token. With Squads’ Token Manager, it’s easy to create a token with associated metadata and be able to mint, burn, freeze and manage the relevant authorities.
On Team and Treasury
Back to Ondo, recall that the token USDY is backed by holdings of BlackRock ETFs. Custody of these ETFs are not on-chain. Specifically, there are two forms of USDY, one that generates token yield as interest, and another that appreciates in value to reflect a yield similar to a liquid staking token. To build these two tokens, Ondo has to be able to collaborate with a team, maintain a treasury, and develop programs that facilitate the yield on-chain.
All of these aspects of running a company require coordination within the team and can be facilitated through Squads. Managing the outstanding supply, freezing assets, and controlling on-chain assets requires a high degree of trust that can be remedied with a multisig authority.
Token Extensions
For the new developer, Solana is a blockchain written in Rust with a suite of CLI tools and programs that can help make your life a lot easier. The most relevant tool will be the SPL Token Program. Token Extensions build on top of the current SPL Token standard and provide a superset of additional native functionality that is crucial for new developers to know and be familiar with.
Functions like transfer hooks, interest-bearing tokens, non-transferrable tokens, permanent delegates are all relevant to tokenization. In the past, some of these features were available to developers through open source programs that would require piecing together and has risk of version deprecation, security issues, and cumbersome buggy code. With Token Extensions, many powerful tools for tokenization are now built into the native Token Program itself, allowing for faster development and auditability.
A Vision of a Tokenized Future
Solana provides sufficient and growing DeFi infrastructure, a robust native extended Token Program, a highly performant and cheap settlement layer, as well as a secure, reliable multisig solution for teams to secure their treasury and manage their tokens.
The list of possible targets of tokenization are nearly endless, including but not limited to:
Fiat Currency (stablecoins are crypto’s most successful endeavor to date)
Equities
Commodities (precious metals, agricultural products, equity indices)
Carbon credits
Intellectual Property (patents)
Fine Art
Real Estate (see Parcl real estate indices)
Debt
Collectibles
Licenses/Certificates
Natural Resources/Water
Energy
Loyalty Programs (hotel/airline rewards points, restaurant loyalty)
Estate Planning
Luxury goods (watches, handbags)
Event tickets
On the infrastructure side, we’ve seen emerging projects like Render, Helium, Filecoin, and Grass who are tokenizing things like GPU compute, mobile networks, internet bandwidth, and data storage. The opportunities far outnumber the entrepreneurs we need to be tokenizing things.
Aside: Even crypto assets can be tokenized as a possible meta-tokenization. The basis for liquid staking is to tokenize validator stake. Users receive a token that represents their stake that they give to the validator. This token is collateralized by that stake and provides the user flexibility and freedom to trade, swap, and send ownership of their validator stake.
Almost everything can be tokenized, and almost everything will benefit from being available 24/7, secured by blockchain settlement, more transparent, cheaper to operate, and transfer at the speed of light. It’s on each one of us to help build the future we want to see.
Conclusion
Ondo is just the beginning for RWAs on-chain and presents an exciting glimpse into how tokenization provides freedom and flexibility for everyone. It’s up to developers and founders to start bringing assets on-chain so we can use, test, and learn how to operate in a tokenized economy. With a thriving user base, extensive DeFi ecosystem, Token Extensions, and Squads multisig solution, there is no better place than Solana to be building the tokenized future.