As the tokenized economy continues to unfold, the incredible potential it holds for businesses and financial institutions is clear. But for organizations exploring tokenization, liquidity can pose a major challenge.
In this final installment in our three-part series on tokenization (Part 1, Part 2), we explore these liquidity challenges and how businesses can bridge the gaps to realize the full benefits of the technology.
Two Sides to the Liquidity Coin
Liquidity has been referenced repeatedly in this series as a potential benefit of tokenization. But how can it be both a challenge and an opportunity?
Put simply, digital asset liquidity measures the ease with which businesses and individuals can buy or sell digital assets. This depends on three fundamental aspects: the demand for tokenized assets, the market interoperability between those assets (i.e. on/off ramps), and the marketplace's ability to match demand with supply.
Additionally, a vibrant, liquid secondary marketplace that is easily accessible — currently, secondary market liquidity aggregation is lacking — will be critical for the tokenized economy to thrive. There is little benefit to holding a tokenized asset if you can’t find a buyer when you’re ready to sell.
The fact of the matter is, the demand for blockchain will inevitably catch up to technological developments—similar to the advent of the internet. Brad Chase, Head of Liquidity Products at Ripple, remarked in an interview with PYMNTS, “When you have this technology that’s shown its promise and now you’ve taken the rough edges off of the first version, that’s when enterprises can lean in and adopt it … the same way that no one asks if you are an internet company now, because everyone is…”
Thus, the opportunity of tokenization lies in increased liquidity, and the challenge lies in ensuring demand exists and connecting digital asset holders to sophisticated on/off ramps.
Solving the Challenge of On/Off Ramps
Tokenization is rapidly evolving, with a growing number of projects from banks, governments and corporations aiming to tokenize a diverse range of assets. As the adoption of tokenization grows and more asset classes, such as RWAs, are moved digital, the need for liquidity will expand.
Key features of tokenization include — among others — an ability to source liquidity across multiple assets and marketplaces, compliance with high-level security and regulatory standards, simple integration, and superior uptime.
Crypto liquidity providers may carry out most of their work behind the scenes, but they’ll need to establish trustworthy, reliable reputations across traditional enterprises and crypto-native companies alike. Developing sound market interoperability between web2 and web3 economies will take some time, but the blockchain industry moves fast and the merging of traditional finance with crypto and digital asset technology is inevitable.
Strategies for a Liquid Future
The road to a tokenized economy is one of dynamic transformation, propelled by technology and a commitment to progress. With Ripple at the forefront, businesses can benefit from a future that transcends boundaries, empowers growth and realizes the full potential of financial innovation.
