From Stocks to Security Tokens: The Next Lending Frontier
Onchain borrowing and lending for Security Tokens (STO) and Real World Asset Tokens (RWA) is the next major opportunity in finance, a market that will eclipse the trading volume for these same assets. InvestaX and IX Swap are pioneering new onchain lending models, if you are interested to learn more contact the team here Let […]
12 min read
CEO and Co-founder InvestaX and IX Swap. Host of the Infinity and Beyond Podcast.
Onchain borrowing and lending for Security Tokens (STO) and Real World Asset Tokens (RWA) is the next major opportunity in finance, a market that will eclipse the trading volume for these same assets.
Let us begin with a brief analysis of the lending, borrowing and staking markets in the cryptocurrency industry.
- In 2022, the total value locked (TVL) in decentralized finance (DeFi) lending and borrowing protocols was $13.7 billion. This is up from just $3.7 billion in 2020. A recent report by Grand View Research estimates that the market will reach $26.5 billion by 2028.
- The size of the private credit markets is estimated to be around $1.5 trillion in 2023.
- The size of the private debt markets is estimated to be $1.4 trillion in assets under management globally as of the end of 2022. This is up from about $250 billion in 2010. Preqin, a research firm that tracks private capital, expects private debt assets under management to increase at a compound annual growth rate of 10.8 percent, reaching an all-time high of $2.3 trillion in 2027.
In 2008, Satoshi Nakamoto launched Bitcoin, a peer-to-peer electronic cash system. The 8 page Bitcoin whitepaper is here. I read it every few months because it is beautiful in its simplicity and innovation, and because the traditional finance markets seem to break a little bit more each day, and Bitcoin is the genesis of the digital asset industry. When Bitcoin was launched, it could be argued that it was only being bought and traded by investors and speculators to begin with, and that its use as a form of money/payments was limited due to its price volatility and lack of network effects at launch.
Fast forward to 2017 and it took almost 10 years before holders of these digital assets could use them for more than just speculative investments or payments. The market started to introduce traditional financial services including lending, borrowing and “staking” into the industry, with the first staking platforms being launched in 2017. Staking allows users to earn rewards for locking up cryptocurrency on a blockchain network for a period of time as a way of contributing to proof-of-stake validation services. The rewards are typically paid out in the form of additional cryptocurrency.
The popularity of cryptocurrency lending, borrowing, and staking has grown significantly in recent years. This is due to a number of factors, including the rise of Decentralized Finance DeFi, the increasing adoption of cryptocurrency, and the high yields that can be earned through these activities.
Here is a short history of cryptocurrency lending, borrowing, and staking:
- 2015: The first cryptocurrency lending platform, BTCJam, is launched. BTCJam allows users to lend and borrow Bitcoin using a peer-to-peer marketplace.
- 2017: The first DeFi lending protocol, MakerDAO, is launched. MakerDAO allows users to lend and borrow DAI, a stablecoin pegged to the US dollar.
- 2018: The DeFi lending space explodes in popularity, with many new protocols being launched. The TVL in DeFi lending protocols reaches over $1 billion. 2018 was also the year of Uniswap.
- 2020: The DeFi lending space continues to grow, with the TVL in DeFi lending protocols reaching over $10 billion.
- 2021 and 2022: The DeFi lending space experiences explosive growth, with the TVL in DeFi lending protocols reaching over $100 billion. Also experiences a huge crash. The DeFi market peaked in November 2021 with a TVL of over $300 billion. However, the market began to decline in December 2021 and continued to fall throughout 2022. Several factors contributed to the market crash including major fraud and cybersecurity issues, as well as a lack of risk management from key players in the space.
- 2023: As of August 2023, the TVL in DeFi is about $115 billion and momentum is picking up again.
Example of this model:
So in a few short years, we have seen explosive growth in the usability of cryptocurrency measured by the sharp increase in volumes highlighted above, and we reference the above market example because we predict a faster and larger market when security tokens and RWA are used alongside cryptocurrency, in lending, borrowing and staking activities.
Security tokens are a type of digital asset that are backed by real assets, such as a company or a bond, that is issued on a blockchain platform and can be traded on security token platforms.
The security token market is a relatively new one, having emerged in the wake of the initial coin offering (ICO) boom of 2017. ICOs were a way for startups to raise capital by issuing digital tokens (not asset backed) to investors. However, many ICOs were scams or failed to deliver on their promises, leading to a loss of investor confidence. However, almost all cryptocurrency projects (Bitcoin excluded) were and continue to raise funds with some form of ICO and there are many examples of innovative working protocols and the like that use the funds raised to build and develop groundbreaking technologies and products.
Security token offerings (STOs) were designed to address some of the concerns raised by ICOs. Security tokens are securities, which means they are regulated by financial authorities. This provides investors with greater protection and makes it more difficult for scammers to launch fraudulent STOs. Being securities, security tokens are backed or represented by some form of underlying asset including real estate, private equity, company shares and more.
Here is a brief timeline of some of the key events in the history of the security token market:
- 2017: One of the first STO is conducted by Real Estate Market (REM).
- 2018: The security token market grows rapidly, with over $1 billion raised. Token issuance only (technology) companies were the main infrastructure available for issuers wanting to “tokenize” their assets and launch an STO. Openfinance also launches as the world’s first security token trading platform.
- 2019: The security token market matures, with more regulatory clarity and a growing number of security token platforms. tZero launches as one of the first security token exchanges in the world/USA. InvestaX built its first token issuance platform on top of its broker dealer license. The first security token custodians start to surface.
- 2020: The security token market continues to grow, with over $2 billion raised. The market starts to see more infrastructure come to market including broker-dealer and custodians for security tokens. JP Morgan builds its own token infrastructure called ONYX.
- 2021: The security token market sees a slowdown due to the COVID-19 pandemic but still raises over $1 billion, and infrastructure players continue to grow. Cryptocurrency titans Binance, Bitfinex and FTX launch the first security tokens, albeit improperly. DBS Bank in Singapore launches a cryptocurrency exchange, signaling that the DeFi players are coming for security tokens and the TradFi players are coming for crypto.
- 2021 IX Swap launches the world’s first automated market maker AMM for security tokens, launching the first liquidity pools for security tokens. This is the killer application solving the liquidity issues in the STO market.
- 2022: Security token market continues to grow, with over $1.5 billion raised and more platforms going live. All major financial institutions have launched security token projects. InvestaX secures one of the first Recognized Market Operators licenses in Singapore for a Security Token Exchange.
- 2023: “Tokenization” momentum is now exploding, so we summarized seven financial institution reports here, detailing security token projects across industries including those related to securities, transport, commodities, payments, financial services and more.
The security token market is still in its early stages but it is revolutionizing the way capital is raised and how value is held and exchanged between investors.
Now, looking past the basic value proposition of digital over paper, we highlight the value of tokenization far beyond fundraising here. We see tokenization 101 as being the value of digital over paper, but being able to use a security token or RWA token on an automated market maker creating liquidity pools or being able to lend, borrow or stake a security token for rewards or other benefits, creates a new world of investment opportunities. We highlight this is detail here “Tokenization: Exponential Value Beyond Fundraising”.
We believe that the size of this lending and borrowing market will far surpass the level of trading volume for security tokens, which is the main focus of the market today and is missing the forest from the trees. In the private credit and debt markets, there is no easily obtainable measurement of volumes but most assets are not traded because there is no defined system for this. Using blockchain technologies and smart contracts to issue securities digitally brings a new system for the trading of these assets in a transparent and efficient manner.
The security token model is making traditional securities more valuable and multi-dimensional in use, as being able to trade, lend, borrow or stake a security token is much more valuable than holding paper ownership of an illiquid asset that sits on the shelf for years, waiting for an exit or distribution.
Lending, borrowing, and staking are all ways to earn passive income from security tokens.
In lending, you lend your security tokens to a borrower who is willing to pay interest on the loan. This can be a good way to earn interest on your tokens without having to sell them.
If you need to borrow money, you can use your security tokens as collateral. This means that you will pledge your tokens to the lender as security for the loan. If you default on the loan, the lender can sell your tokens to recoup their losses.
Borrowing against your security tokens can be a good way to access liquidity without having to sell your tokens. However, it is important to be aware of the risks involved, such as the possibility of losing your tokens if you default on the loan.
Staking is a way to earn rewards for participating in the security token ecosystem. When you stake your security tokens, you are essentially locking them up to support the network. In return, you will receive rewards, such as interest payments or airdrops, in the form of additional security tokens.
Lending, borrowing, and staking are all ways to earn passive income from security tokens.
If you are looking for a safe and secure way to earn interest on your security tokens, then lending may be a good option for you. If you need to borrow money, then borrowing against your security tokens can be a good way to access liquidity without having to sell your tokens. And if you are looking to participate in the security token ecosystem and earn rewards, then staking may be a good option for you.
Here are some additional things to keep in mind when lending, borrowing or staking security tokens:
- The risks involved in each activity.
- The fees charged by the platform.
- The liquidity of the security token.
- The security of the platform.
- Your own investment goals.
It is important to always do your own research and understand the risks involved before engaging in any of these activities.
At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more. We also provide IX Swap, the first legal and compliant Automated Market Maker (AMM) for RWA and STO.
If you are interested to learn more about how you can build your business on top of our infrastructure and what we can offer you as your tokenization partner, then contact us here. Thank you.
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