Blockchain Should Go Back to Basics Before Leaping Forward (Opinion)

The cryptocurrency and blockchain industry begs for innovation to advance. As new trends continually arrive in the digital asset landscape, a hidden gem that uses a core blockchain mechanic may become a key driver in linking cryptocurrencies to the real world.

By Asif Kamal, founder of Artfi

The crypto ecosystem is on the verge of its next big breakthrough, and blockchain is the key to driving the industry forward. Tokenization, a core feature of blockchain, will play an important role in uniting traditional finance with DeFi while building an intersection between the crypto industry and a trillion-dollar market.

Let's take a quick step back and put the evolution of the ecosystem in chronological order:

It seems like an eternity ago when the total market capitalization of cryptocurrencies was approaching $3 trillion. The crypto ecosystem focused on the price action of coins and tokens rather than building the next big thing, with double-digit gains occurring daily across the digital asset market.

Then came the infamous “crypto winter.” Triggered by the collapse of a major stablecoin (a special type of cryptocurrency that is supposed to remain valued at $1), the market decline only accelerated when FTX, the largest US cryptocurrency exchange, folded. fire.

At its lowest point, over $2 trillion was wiped from the crypto space. The interest coming from traditional finance has disappeared (along with the influx of capital), and newborn trends like non-fungible tokens (NFTs) have basically become an internet joke. It was at that point that the industry realized it needed more than price action to thrive once again.

Decentralized finance craves innovation, development, and uninterrupted construction, and this is especially true when prices are no longer the focus. Fortunately, the crypto ecosystem has a solid foundation. With its transparency, immutability and traceability, blockchain provides the necessary infrastructure to build the best option. Its core functionality, the ability to demonstrate digital ownership, has become vital in the pursuit of innovation.

Important realization

Another realization that occurred to DeFi during the long crypto winter was the fact that, one way or another, DeFi needs traditional finance to survive. A decentralized financial system completely disconnected from the rest of the world is a utopia. There is no real value in trying to prevent established governments and laws from creating a new market in uncharted territory. The sooner cryptocurrencies and DeFi find a way to work together with TradFi, the better.

The search for DeFi use cases that have their roots in traditional finance gave rise to a new trend called asset tokenization. Basically it is about creating a digital twin of a traditional asset in a blockchain environment. However, unlike standard digitization, tokenizing an asset allows for true digital ownership, a verifiable privilege that can be transferred or fractionated.

It soon became clear that most assets in traditional finance, including real estate, fine arts, and even intellectual property, can be considered “real-world assets” (RWA) that can be tokenized on the blockchain.

Enabled by the basic principles of blockchain (tokenization), this new form of ownership has the potential to become the most active bridge between traditional finance and the crypto ecosystem. It already shows that the RWA category has the fastest growth in decentralized finance in 2023, with the total value locked in RWA-related DeFi platforms increasing by 1000% in one year and surpassing $5 billion.

It's a win-win situation

For traditional finance, asset tokenization dramatically lowers the barrier to entry into markets that were previously impossible for the general population to be a part of. Just as anyone can own or trade a small fraction of a bitcoin, they can now do the same with a fraction of a million-dollar building or an object of art tokenized on the blockchain.

For the crypto ecosystem, RWA tokenization can return much-needed capital to the market. As of November 2023, it is safe to say that the cryptocurrency market has already started to dust itself off. With its capitalization advancing towards $1.5 trillion, the crypto industry has doubled in value from its lowest point in less than a year. However, it is also clear that the next $1.5 trillion will not be achieved without innovation. Connecting the digital asset market with real-world assets through tokenization may become the catalyst we are looking for.

Author biography

Asif Kamal is the founder of artfian art technology company that harnesses the power of NFTs and blockchain to allow collectors to own a stake in works of art.

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