Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
TL;DR
Introduction
Our last few posts have introduced blockchains as internet native value transfer platforms and made clear that to understand digital assets as productive assets in digital economies, one’s perspective must be from a digital-first point of view. We build off that grounding and explore how blockchain technology is increasingly proving its value in traditional or ‘real world’ applications. Importantly, we stress that much of this technology is still very early in its development and there will assuredly be significant volatility. But given how quickly the industry is iterating and innovating, we are optimistic about what the next several years will bring.
Trading – Spot, Derivatives and Tokenization
It’s easy to miss the forest for the trees when looking at the state of digital assets today. A significant share of commentary – much of it true and much deserved – focuses on the warts of the digital asset industry. Much like viruses, phishing and scams riddle the internet broadly, there is a proliferation of frequent exploits and scams plaguing the industry. Open and permissionless networks are a double-edged sword: while they enable unbounded innovation, that often comes with malicious actors looking to exploit the new technology and its users. Much like most didn’t write off the potential of the internet when viruses predated search engines by 12 years (as my Nobel Prize-winning former professor did), one needs to separate the value of digital asset technology from how it is being used in its “pre-AOL” phase.
Because at the same time, even if used frivolously, capriciously or maliciously, much of the underlying technology that has been built is incredibly powerful. Decentralized exchanges, many built off forking the open Uniswap protocol code, enable the permissionless exchange of digital assets onchain. Uniswap itself has facilitated almost $2T in trading volume on its own since going live in 2020, while DEXs in aggregate often facilitate over $100B in trustless, programmatic trading every month. The composable nature of these open protocols means that any developers building apps can seamlessly integrate the functionality of these exchanges directly into their platforms. For example, a new payment app tapping into the $2.5T monthly stablecoin volume could embed a decentralized forex exchange directly in-app, allowing cheap, instant and automatic cross-border payments for its users.
Source: Artemis.xyz
Decentralized exchanges can similarly facilitate more complex markets than simple spot trading. Perpetual futures, similar to traditional futures contracts but with no expiry date and tethered to spot via funding rates, have quickly gained incredible product-market fit following the launch of DyDx in 2020. In aggregate, volumes facilitated by the top perps decentralized exchanges eclipse even those of spot DEXs, recently seeing almost $225B in volume in March 2024. Put together, open permissionless decentralized exchanges are facilitating trillions of dollars in trading volume. Whether that consists of memecoins or other digital assets is somewhat moot at this point – the technology, still very much in its infancy, is incredibly powerful. Once tokenized, any traditional asset can similarly be traded as easily as memecoins with the exact same infrastructure.
Source: Artemis.xyz
Even if the present application of blockchain technology remains somewhat fuzzy to many, the future is becoming increasingly clear. Tokenization of ‘real world’ assets is one of the largest potential use cases for the industry, and there have been major developments towards making this a reality (Blackrock’s goal to tokenize $10T in assets is an oft-cited example of this). However, the digital asset industry has been quietly developing this technology for years. In 2018, Synthetix introduced ‘Synths’ (synthetic assets) that allowed for trading of synthetic commodities and currencies such as sUSD or sAUD, and the Mirror Protocol allowed for trading of ‘mirrored’ assets, such as mTSLA. At the highest level, these are simply tokenized representations of real-world assets, enabled by real-time price feeds from data oracles such as Pyth, Stork and Chainlink. These were all developed years ago, but global regulatory clarity (or the lack thereof), has severely restricted the expansion of these types of technologies to more broad-based use cases and many teams are wary of building anything touching this space.
Despite this, the infrastructure clearly exists today to enable custody, trading and settlement via blockchain at an institutional level. Blackrock’s BUIDL fund, now up to $382M verifiably onchain, is the highest-profile example of the intersection of TradFi with DeFi, and it is only a matter of time before the exact same model is applied to equities and commodities more broadly. The benefits of 24/7 trading and instant settlement are just too large for traditional market participants to ignore. Companies such as Ondo and OpenTrade and protocols such as Centrifuge and Midas continue to push tokenization and onchain institutional finance forward. Blackrock just led a $47M round in Securitize, the digital securities platform that it partnered with to launch its tokenized BUIDL fund on Ethereum.
Source: Etherscan
Other platforms, such as Nayms, are using blockchain technology and tokenized liquidity to transform insurance into a highly liquid investment class. The fully regulated and licensed marketplace, effectively a blockchain-enabled Lloyds of London, already has sizeable commitments from some of the top brokers in the world including Aon, GuyCarpenter and Howden, and sources additional capital for its 3rd party program sponsors to access through tokenized liquidity pools.
Ethena, a newly launched dollar-pegged yield protocol, tokenizes the funding rates available from ETH and BTC perpetual futures trading. That is, they capture the historical 5-20% funding rates available to shorts on the trade while holding the offsetting spot asset in custody, bringing market exposure theoretically to zero while collecting the interest payments. The product has attracted over $2.3B in flows since going live in early 2024. The jury is still out on how sustainable this product is (e.g. appears to be highly pro-cyclical and somewhat self-cannibalizing at scale), but nevertheless provides a textbook example of the type of products that blockchain infrastructure can enable that are impossible through traditional vehicles.
Source: Ethena
CTA feeds - Tapes A, B and C – are fundamentally important infrastructure to US equities markets, bringing together data from multiple exchanges into accessible pricing feeds so traders can access real-time market wide data. Blockchain oracles are decentralized infrastructure that provide this exact functionality, aggregating market information from both onchain and offchain sources and providing composable data feeds to any app that wants access. Decentralized exchanges can programmatically feed this pricing to their users, allowing them to trade directly in response to fast-changing market conditions, 24/7. Oracles are not just limited to financial data, however, and can provide feeds for infrastructure metrics, proof of offchain reserves, responses to offchain events (e.g. prediction markets), or even enable validation of parametric insurance claims.
Moby, a decentralized options protocol relies on these feeds to enable 0DTE and 1DTE options trading for BTC and ETH, tapping into one of the increasingly hottest instruments for Wall Street: 0DTE options on S&P500 account for over $1T in daily notional volume, almost half of total daily options volume, up from just 19% in 2022. Specifically, Moby pulls real time pricing from the largest centralized exchanges such as Binance and guarantees best-pricing for traders from those aggregations. Tokenization of these positions unlocks incredible new opportunities, such as single click execution of institutional grade structured and other exotic products. Just 1 month old, Moby has already facilitated almost $600M in notional volume while generating almost $3M in premiums. It would be trivial for the platform to support S&P500 and other equity products once tokenized.
Conclusion
While much of the onchain trading activity today remains endogenous to crypto markets, it is only a matter of time before the regulatory frameworks are in place to open tokenization to the vast array of traditional “real world” assets. It is hard to pin down an exact timeline, but with spot ETP approvals around the world (e.g. US, UK, HK, Canada, EU, and likely Singapore, South Korea and Japan soon) and the move of financial giants (Blackrock, Franklin Templeton, Fidelity, Morgan Stanley, etc.) towards more active digital asset participation, the path to “real world” adoption is becoming increasingly clear.
Source: Dune Analytics, courtesy of 21.co
