As blockchain technology continues to disrupt the traditional financial market, tokenization stands as the single greatest opportunity to replace the archaic systems we have in place today. At its most basic level, tokenization is the process of bringing Real World Assets (RWAs), both tangible and intangible, on-chain. However, the impact that tokenization has on financial markets is far more reaching than just “things on chain.”
When assessing the impact, the Stellar network is one of the earliest examples of the true impact of tokenized RWAs and their potential for the future. Stellar has already been collaborating with industry-leading financial institutions for several years to bring RWAs on-chain, and just recently released Protocol 20 to bring Soroban smart contract functionality to the network.
In turn, Stellar has become the preferred platform of major financial institutions like WisdomTree, Franklin Templeton and Circle, who have had their Stellar digital assets approved by regulatory agencies such as the SEC and NYDFS. Stellar has additionally gained popularity outside of the United States, with other key players adopting the technology including ABN Amro and the Bank for International Settlements (BIS) Innovation Hub.
Situated as an early leader in tokenization, the Stellar network wasn’t improved on to support tokenization, but was primed for this use case from its inception. As other networks look to get up to speed with tokenizations, Stellar’s native network features have continued to drive adoption from global financial institutions and support a strong conviction for the potential of on-chain RWAs.
In this article, we’re going to look at why tokenized RWAs present such an opportunity to disrupt traditional finance and why major institutions are upgrading their processes with Stellar.
Tokenized opportunity
One of the key differentiators between tokenization and other blockchain innovations is that tokenization provides a bilateral benefit to both the individuals who interact with tokenized RWAs and the institutions tokenizing the RWAs.
During a recent fireside chat, Denelle Dixon, the CEO of the Stellar Development Foundation, stated that one of the biggest impacts of tokenization for individuals is its ability to create financial access: “Financial access is the tool that we’re seeing now. Not only does it save value for the entities who are tokenizing, but [RWAs] bring opportunity for those who haven’t had the opportunity to grasp it.”
Products like WisdomTree Prime are creating a unified save, spend and invest experience for individuals to generate yield that would otherwise be inaccessible through traditional means like a checking account. Stablecoins like USDC also provide far-reaching financial access around the world by giving anyone the opportunity to gain USD exposure regardless of where they are.
For institutions, tokenization is an opportunity to drive cost savings and maximize efficiency. In terms of savings, asset issuers can realize operational efficiencies and reduce backend costs by removing manual processes and intermediaries. For a product like a money market, tokenization can increase liquidity while reducing intermediary fees for compliance reporting, monitoring, management and third-party brokerage.
Tokenization also offers a massive boost in efficiency. Today’s financial system is often weighed down with physical documents being transferred, and long settlement periods often as the result of bureaucracy. With tokenization, settlement is immediate and final, nearly eliminating the information gap between transaction and settlement. The impact can be significant, like with Liquid Mortgage, where tokenization reduced Mortgage-Backed Securities (MBS) reporting from 55 days to 30 minutes.
Related: 7 Real World Asset Trends in 2024 That Will Unlock the Future of Finance
Stellar benefits
From stablecoin issuance to tokenized treasuries, Stellar is a leader in tokenized real-world assets. According to data from the RWA.xyz, Stellar-based RWAs make up about 40% of the tokenized treasury market, making it the second largest blockchain by TVL.
For many global financial institutions today, the Stellar blockchain is the ideal platform for asset tokenization. Why? For Franklin Templeton, it was the network's low-cost, built-in asset controls and compliance features, and a simple, streamlined developer experience. While major decisions like this are typically made through partnership, Franklin Templeton’s decision simply came down to the benefits of the network and its accessibility as an open-source project.
During a panel discussion at the World Economic Forum, Dixon said that she first learned of Franklin Templeton’s use of Stellar when she saw its SEC filing in 2019 signaling that it had started work on its money market. “It’s been really wonderful to work with them to understand why they did it and also the value that it's bringing to their new customers on the Benji app,” Dixon continued.
As Franklin Templeton was working to bring its mutual market fund to the network and showcasing the potential of integration of traditional finance with blockchain technology, other financial institutions started to take on experiments of their own. With Stellar, asset issuers benefit from powerful built-in features, enabling businesses to tokenize real world-assets quickly with limited expertise needed, low development costs and strong asset issuer controls.
Support for asset issuers doesn’t just stop at the network level. To facilitate easy and low-cost asset tokenization, Stellar has worked with Fireblocks, Bitgo, Copper and other asset issuance service providers to support a range of services like custody and analytics. The Stellar ecosystem also hosts a variety of platforms, wallets and on- and off-ramps to support newly minted assets. This expansive ecosystem allows asset issuers to grow their addressable markets by making assets available through the many companies building on Stellar.
Conclusion
Tokenizing assets on Stellar is user-friendly and efficient, with the ability to issue any asset in only four steps, without a smart contract needed. Now, with the launch of smart contracts on Stellar, the use of asset tokenization will continue to expand further into everyday financial products like lending, borrowing, savings and automatic yield calculations.
Learn more about tokenization on Stellar and try out its sandbox environment to explore the tokenization process on the Stellar Testnet with no code required.
The tokenization of RWAs will undoubtedly be one of the biggest innovations the modern financial industry has ever experienced. As both individuals and institutions are beginning to discover the opportunities presented by tokenization, Stellar continues to break down barriers to entry and support the next generation of finance.
