By Jason Jiang , OKG Research
Under the impact of the macroeconomic contraction environment and the collapse of large institutions, the crypto market has experienced a downturn for nearly two years. With the stabilization of policies, favorable news about spot ETFs for crypto assets continues to emerge. Coupled with the rise of encryption technology and the approaching halving cycle, the market’s interest in crypto assets continues to rise.
A new cycle seems to be on the horizon. But besides the recovery of the price, what else can we expect in 2024? At the end of the year and the beginning of the new year, OKG Research hopes to return to the essence of Web3 technology, without discussing market trends and regulations. Instead, we aim to explore the potential “iPhone moment” of Web3 technology in the next cycle from application perspective.
In early 1995, a new coffee shop opened at 12 St.Mark’s Square in New York. This coffee shop was not conspicuous but caused a sensation at the time because it offered a service that many people had never heard of — internet access. Back then, the internet was a niche product, attracting individuals who anticipated a new order brought about by the “cyber space”. It was only when more applications for real-life emerged that the internet became the medium for everything in reality, such as cafes, restaurants, libraries, schools, and even more. The internet eventually became the most important infrastructure of this era.
Today’s Web3 is like the internet in 1995, attractive but niche. However, with more and more businesses and governments choosing to embrace innovation, the Web3 market also urgently needs more applications and products closer to reality to break the barriers between technology and users and truly achieve mass adoption. Among various innovations, we believe that tokenization is the most potential driving force to promote the mass adoption of Web3, and it is also the most anticipated keyword in 2024.
The basic logic of the internet is to enhance connections: connections between people, between people and things, and between things. As the next generation of the internet, Web3 should follow the same logic. However, in the past decade, Web3, especially the cryptocurrency market, has remained relatively closed, and the narrative has been limited to on-chain activities. Despite experiencing exponential growth, it has been circulating within the cryptocurrency ecosystem, not truly connected to reality. It was not until the renewed attention to tokenization that the integration of Web3 with the real world began to experience unprecedented growth.
Tokenization brings not only on-chain innovation but also changes beyond the blockchain. Tokenization changes the way various real-world assets, such as real estate, art, or various financial instruments and products, transfer, settle, and store value. Unlike other cryptographic innovations, tokenization makes blockchain and Web3 more tangible because its underlying assets are at least perceptible and understandable to users.
Another feature of tokenization is its friendliness to regulation. The difficulty of regulating crypto assets lies in their detachment from the real world, without reference to regulatory rules. However, tokenization is more closely connected to reality and can be seen as an evolutionary form of asset digitization. As long as the real assets of tokenized products are grasped, regulatory measures can be found. Therefore, compared to other Web 3 innovations, tokenization is more friendly and acceptable to regulation. In addition, banks and financial institutions involved in tokenization practices at this stage will also bring their capabilities and experiences in compliance to the field of tokenization.
Note: In early November 2023, the Hong Kong SFC issued a circular on tokenized securities.
Blythe Masters, former head of commodity trading at JPMorgan, said in an interview with Bloomberg in 2015, “You should take this technology as seriously as the development of the internet in the early 1990s.” This statement is now timely — more user-friendly, more valuable to institutions, and more regulation-friendly, tokenization has become an important driving force to accelerate the adoption of Web3 technology.
Now there is still a long way to go before the full adoption of tokenization and Web3, but changes will continue to happen in 2024. Compared with 2023, OKG Research believes that tokenization will present the following characteristics:
(1) The blockchain and Web3 technology supporting tokenization will become more invisible in the backend, and innovation will focus more on the practical level of tokenized products oriented towards reality. Blockchain technology will also have a closer integration with existing information technology, accelerating the on-chain of more real assets and data.
(2) More countries and regions will not only recognize the development potential of tokenization but will also accelerate the formulation of rules to adapt to tokenization innovation. Hong Kong, Thailand, and Singapore have already laid the foundation for tokenization practices, and their initiatives will serve as references for other countries and regions.
(3) Although on-chain native tokenization projects may be more dynamic, the tokenization practices of traditional financial institutions will be more active in 2024. Tokenization can bring benefits to traditional financial markets, including improving capital efficiency, saving operating costs, enhancing transparency, and meeting diverse needs, but most of these advantages are still theoretical. In order to innovate more safely, we believe that financial institutions will continue to adopt a step-by-step strategy for tokenization practices in 2024, starting with the partial implementation of tokenization in financial product processes to gain some technical advantages and then gradually expanding to the entire process. One-step tokenization is currently unrealistic.
(4) Tokenization of deposits and funds will usher in more prosperous development in 2024. Deposit tokenization may be the asset closest to large-scale application at present, and the attitude of US regulation has turned towards the positive. JP Morgan’s tokenized deposit plan has also been approved, and we expect more banks to participate in 2024. As for tokenized funds, HGI launched the first tokenized fund for professional investors in Asia in November this year, and more Hong Kong funds are exploring the tokenization of public funds for retail investors. Hong Kong is expected to become a leader in the tokenized fund market.
(5) Financial institutions will choose more to carry out tokenization practices on public blockchains in 2024. Unlike the asset tokenization that occurred mostly in private or permissioned chains in 2017, financial institutions are increasingly exploring the tokenization of traditional financial instruments and products within decentralized frameworks. This trend indicates the rapid development of public blockchain technology over the past few years, has initially possessed the ability to support business applications, and also demonstrates the growing confidence of traditional financial institutions in the security and performance of public blockchain networks. This change is in sharp contrast to several years ago and will continue in 2024.
There are many things worth paying attention to in 2024: Bitcoin halving, Ethereum Cancun upgrade, spot ETFs for crypto assets, etc. These may take the scale of encryption to another level and set a new market value record. However, tokenization innovation is more exciting for us because it will not only bring more real assets into digital space but also truly bring Web3 technology into the real world, allowing technology to play a valuable role in real scenarios.
In 2024, perhaps it will be a turning point for tokenization and Web3 technology, and we look forward to the arrival of the “iPhone moment” for Web3.
